Annual Report and Financial Statements
2018 Annual Report and Financial Statements 2018 Annual Report and Financial Statements BOARD OF DIRECTORS Chairman Marcos Marcelo Mindlin Index Vice-Chairman Gustavo Mariani
Director Ricardo Alejandro Torres Damián Miguel Mindlin Gabriel Cohen Diana Mondino Santiago Alberdi 01 02 Carlos Tovagliari Diego Martín Salaverri Annual Report Consolidated Miguel Bein Financial Statements Alternate Director José María Tenaillon Mariano Batistella Glossary of Terms 8 Glossary of Terms 164 Pablo Díaz Isaac Héctor Mochón Consolidated Statement 168 of Comprehensive Income Nicolás Mindlin Brian Henderson Consolidated Statement 170 Victoria Hitce of Financial Position Enrique Luján Benítez María Carolina Sigwald Consolidated Statement 172 Mauricio Penta of Changes In Equity Consolidated Statement 174 of Cash Flows SUPERVISORY COMMITTEE Notes to the Consolidated 175 Statutory Auditor Germán Wetzler Malbrán Financial Statements José Daniel Abelovich Martín Fernández Dussaut
Alternate Statutory Auditor Marcelo Héctor Fuxman Tomás Arnaude 03 04 AUDIT COMMITTEE Report of 320 Contact 324 Regular Member Carlos Tovagliari Diana Mondino Independent Miguel Bein Auditors Alternate Member José María Tenaillon Isaac Héctor Mochón Enrique Luján Benítez 01 Annual Report Contents
Glossary of Terms 8
01. 2018 Results and Future Outlook 12
02. Corporate Governance 18
03. Our Shareholders / Stock Performance 25
04. Macroeconomic Context 28
05. The Argentine Electricity Market 30
06. The Argentine Oil and Gas Market 54
07. Relevant Events for the Fiscal Year 69
08. Description of Our Assets 90
09. Human Resources 118
10. Corporate Responsibility 121
11. Information Technology 126
12. Quality, Safety, Environment and Labor Health 127
13. Results for the Fiscal Year 131
14. Dividend Policy 145 ANNUAL REPORT 2018
15. Board of Directors’ Proposal 146 To the shareholders of Pampa Energía S.A. (‘Pampa’, the ‘Company’ or the ‘Group’): Pursuant to the statutory rules and Bylaws currently in force, we submit to your Appendix I: Corporate Governance Report 147 consideration the Annual Report and Financial Statements for the 75th fiscal year ended December 31, 2018.
6 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 ANNUAL REPORT TERM DEFINITION
Glossary of Terms Dam3 Cubic decameters DIGO Guaranteed Availability Commitments DisTro High-Voltage Electric Power Transmission System and/or Main Distribution D Electric Power Transmission System DoP Deliver or Pay TERM DEFINITION E&P Exploration and Production +GC Panel ByMA’s Corporate Governance Plus Panel EBISA Emprendimientos Energéticos Binacionales S.A. + EBITDA Earnings before interest, tax, depreciation and amortization EcoEnergía EcoEnergía Co-Generation Power Plant ABOL Argentine Business Organizations Law No. 19,550 Edenor Empresa Distribuidora y Comercializadora Norte S.A. ADRs/ADSs American Depositary Receipts Eg3 EG3 Red S.A. ANSES Administración Nacional de la Seguridad Social (National Social Security ENARGAS Ente Nacional Regulador del Gas (National Gas Regulatory Entity) A Administration) E ENARSA / IEASA Integración Energética Argentina S.A. (former Energía Argentina S.A.) AR$ Argentine Pesos Energía Plus Energía Plus Program, SE Res. No. 1,281/06 ENIM Ente Autárquico Intermunicipal de Cutral Có y Plaza Huincul (Cutral Có and Plaza Huincul Intermunicipal Autonomous Entity) Bbl Barrel ENRE Ente Nacional Regulador de la Electricidad (National Electricity Regulatory Entity) BCRA Banco Central de la República Argentina (Central Bank of the Republic ExxonMobil ExxonMobil Exploration Argentina S.R.L. of Argentina) BNA Banco de la Nación Argentina (Argentine National Bank) BO Boletín Oficial (Public Gazette) FGS Fondo de Garantía de Sustentabilidad del ANSES (Sustainability Guarantee B Board of Directors Pampa Energía’s Board of Directors Fund of ANSES) Boe Barrels of oil equivalent FO Fuel Oil BOPS Bi–orientated polystyrene FOCEDE Fondo de Obras de Consolidación y Expansión de Distribución Eléctrica (Fund BTU British Thermal Unit for Electricity Distribution Expansion and Consolidation Works) Bylaws Pampa Energía’s Bylaws FODER Fondo para el Desarrollo de Energía Renovables (Fund for the Development of ByMA Bolsas y Mercados Argentinos (Buenos Aires Stock Exchange) F Renewable Energies) FONINVEMEM Fondo para Inversiones Necesarias que permitan incrementar la oferta de energía eléctrica en el Mercado Eléctrico Mayorista (Fund for Investments CAMMESA Compañía Administradora del Mercado Eléctrico Mayorista S.A. (Argentine required to increase the Power Supply in the Electricity Wholesale Market) Wholesale Electricity Market Clearing Company) Foundation Fundación Pampa Energía CAU Cargo de Acceso y Uso (Access and Use Position) FS Financial Statements CBs Corporate Bonds CC Combined Cycle CEE Comité Ejecutivo de Emergencia (Emergency Executive Committee) Gas Plus Natural Gas Production Promotion Program, SE Res. No. 24/08 CEO Chief Executive Officer GB Great Britain CFO Chief Financial Officer GDP Gross Domestic Product CH Hydroelectric power plant GE General Electric CIESA Compañía de Inversiones de Energía S.A. GO Gas Oil (Diesel Oil) Citelec Compañía Inversora en Transmisión Eléctrica Citelec S.A. Government / National Federal Government of the Republic of Argentina CMA Capital Market Act No. 26,831 Administration / Federal CNG Compressed Natural Gas Government C CNV Comisión Nacional de Valores (National Securities and Exchange G GS Gas Stations Commission) GT Gas turbine Code Pampa’s Code of Corporate Governance GU Large Users CPB Central Piedra Buena S.A. GUDI Large Distribution Company Users CPD Costo Propio de Distribución (Own Distribution Cost) GUMA Major Large Users CPI Consumer Price Index GUME Minor Large Users CSJN Corte Suprema de Justicia de la Nación Argentina (Supreme Court GWh Gigawatt-hour of Justice of the Republic of Argentina) GyP Gas y Petróleo de Neuquén S.A.P.E.M. CT Thermal power plant CTG Central Térmica Güemes S.A. HI Hydroelectric plants CTGEBA Central Térmica Genelba HIDISA Hidroeléctrica Diamante S.A. CTIW Central Térmica Ingeniero White HINISA Hidroeléctrica Los Nihuiles S.A. CTLL Central Térmica Loma De La Lata S.A. H HPPL Hidroeléctrica Pichi Picún Leufú CTP Central Térmica Piquirenda Hydrocarbon Investments National Plan for Hydrocarbon Investments’ Strategic Planning and CTPP Central Térmica Parque Pilar Committee Coordination Committee CVP Costo Variable de Producción (Variable Production Cost)
8 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 9 ANNUAL REPORT TERM DEFINITION TERM DEFINITION
IAS International Accounting Standards QSELH Quality, Safety, Environment and Labor Health ICC International Chamber of Commerce ICSID International Centre for Settlement of Investment Disputes Q I IDB Inter-American Development Bank IFRS International Financial Reporting Standards IMF International Monetary Fund R&D Refining and Distribution segment INDEC Instituto Nacional de Estadística y Censos de Argentina (National Institute RBB Bahía Blanca Ricardo Eliçabe Refinery of Statistics and Censuses) RCD Campo Durán Refinery IPIM Wholesale Domestic Price Index RDSA Rivera Desarrollos S.A. Refinor Refinería del Norte S.A. R RENPER Registry of Renewable Electric Power Generation Projects KCal Kilocalories Res. Resolution / Resolutions kW Kilowatt RTI Integral Tariff Review K kWh Kilowatt-hour RTP Plant’s thermal reduction
LNG Liquefied natural gas S&P Standard & Poor’s Global Ratings LPG Liquefied petroleum gas SADI Sistema Argentino de Interconexión (Argentine Electricity Grid) LU300 Large users with demands in excess of 300 kW SBR Styrene Butadiene Rubber LVFVDs Liquidaciones de Ventas sin Fecha de Vencimiento a Definir (Sales SE Former Secretariat of Energy L SEC Security and Exchange Commission Settlements with Maturity Date to be Defined) SEE Subsecretariat of Electric Energy (former Secretariat of Electric Energy) S Senior Management M. Mindlin, D. Mindlin, G. Mariani and R. Torres M3 Cubic meters SGE Government Secretariat of Energy (former MinEn) MAT Term Market SOX Sarbanes-Oxley Act MAT ER Term Market from Renewable Energy Sources SRH Subsecretariat of Hydrocarbon Resources (former Secretariat of MBTU Million BTUs Hydrocarbon Resources) MECON Ministry of Economy SRRYME Secretariat of Renewable Resources and Electricity Market Medanito La Pampa 25 de Mayo – Medanito Sudeste block, located in the Province of La Pampa ST Steam turbine MEGSA Gas Electronic Market MerVal Mercado de Valores de Buenos Aires (Buenos Aires Securities Market) M MEyM Former Ministry of Energy and Mining Telcosur Telcosur S.A. MinEn Former Ministry of Energy (former MEyM) TGS Transportadora de Gas del Sur S.A. MMC Cost Monitoring Mechanism TIBA Transportista Independiente Buenos Aires S.A. MTO Cash tender offer to the minority shareholdings of Petrobras Argentina TJSM Termoeléctrica José de San Martín MW Mega watt TMB Termoeléctrica Manuel Belgrano MWh Mega watt-hour TOE Ton of oil equivalent Ton Metric ton ToP Take or pay N.a. Not applicable T Trafigura Trafigura Ventures B.V. and Trafigura Argentina S.A. N/A Not available Transba Empresa de Transporte de Energía Eléctrica por Distribución Troncal de la NGL Natural Gas Liquids Provincia de Buenos Aires Transba S.A. N NYSE New York Stock Exchange Transelec Transelec Argentina S.A. Transener Compañía de Transporte de Energía Eléctrica en Alta Tensión Transener S.A. OCP Oleoducto de Crudos Pesados OED Organismo Encargado del Despacho (Agency in Charge of Dispatch) Unconventional Plan Gas Encouragement Program for the Investment in Development of Natural Gas OldelVal Oleoductos del Valle S.A. Production from Unconventional Reservoirs Program, MEyM Res. No. 46, O 419, 447 /2017 and 12/2018 UNIREN Public Utility Contract Renegotiation and Analysis Unit Pampa / the Company / Pampa Energía S.A. and its subsidiaries U US$ U.S. Dollars the Group / the Issuer UTE Joint venture PELSA Petrolera Entre Lomas S.A. PEMC Parque Eólico Ingeniero Mario Cebreiro PEN Poder Ejecutivo Nacional (National Executive Branch) VAD Distribution Added Value PEPASA / Petrolera Pampa Petrolera Pampa S.A. VAT Value-added tax PEPE Pampa Energía Wind Farm V Vista Oil & Gas Vista Oil & Gas S.A.B. de C.V. Petrobras Argentina Petrobras Argentina S.A. P PGSM Puerto General San Martín port PIST Transportation System Entry Point or natural gas price at wellhead WEM Wholesale Electricity Market Plan Gas Plan Gas I and Plan Gas II WFP Wind Farm Project Plan Gas I Natural Gas Surplus Injection Promotion Program, SE Res. No. 1/13 W Plan Gas II Natural Gas Injection Promotion Program for Companies with Reduced Injection, SE Res. No. 60/13 YPF Yacimientos Petrolíferos Fiscales S.A. Plan Gas III New Natural Gas Projects Promotion Program, MEyM Res. No. 74/16 Polisur PBB Polisur S.A. PPA Power Purchase Agreement Y Priority Demand Set of residential users, hospitals, schools, healthcare centers and other essential services PUREE Program for the Rational Use of Electric Power
10 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 11 ANNUAL REPORT their investment commitment in the country, having disbursed the amount of US$1,096 million1, 7% higher than the US$1,026 million recorded in 2017.
EVOLUTION OF INVESTMENTS BY BUSINESS SEGMENT
190 184 162 274 382 702 725 1,026 1,096 6 5 16 7 01 79 207 253 230 2018 Results 250 271 43 81 and Future Outlook 379 297
2010 2011 2012 2013 2014 2015 2016 2017 2018 The energy sector’s normalization process, with the full application of its laws and regulatory frameworks that started three years ago, faced several difficulties in 2018. It is clear that this is neither an easy task nor a smooth path. The country’s macroeconomic instability significantly aggravates this search for normalization and Power Generation Transener Edenor Oil & Gas TGS Downstream Holding compliance with the regulatory framework.
Despite the numerous challenges faced, in 2018 we continued with Pampa’s consolidation by restructuring In the power generation segment, in February 2018 the SADI experienced a record-breaking 26,320 MW our assets portfolio so that it is functional to the Company’s strategy, also keeping investment levels with demand, which was smoothly met thanks to the investments for more efficient power capacity made in 2017 no precedents in the history of Pampa. The Company’s restructuring is geared at focusing its resources both and 2018 (SEE Res. No. 21/16), together with a higher availability of natural gas within the system during the on the expansion of its power generation installed capacity and on the development and exploitation of our summer period. New commissioning of renewable units under the RenovAr program also made a significant unconventional gas reserves (shale and tight gas), as well as at continuing investing in the development of our contribution; in this sense, we would like to highlight the commissioning of PEMC, the first large-scale 100 utility concessions. In fiscal year 2018, the EBITDA was led by our power generation segment, where we have MW wind farm in June 2018, before the stipulated date, in line with the tradition and discipline which has incorporated units in CTLL, CTPP and CTIW, which have been operative during the whole year, added to PEMC’s characterized our previous projects. commissioning in June 2018. Although renewable energy currently represents less than 4% of the SADI’s total installed capacity, looking 2018 ADJUSTED EBITDA | BASED ON OUR INTERESTS ahead we foresee that it will be disruptive to the Argentine electricity market, added to the new higher- efficiency thermal units under SEE Res. 21/16 and 287/17, from which more than 3 GW have already been commissioned as of the date hereof, and almost 2 GW are in the construction stage. Consequently, part of the legacy power facilities may become obsolete in a closer than expected future. In view of this new paradigm and fuel management possibilities —a topic that we will cover shortly—, and even though our legacy energy assets portfolio remains competitive in light of these new times, competition in energy dispatch is growing and thus it GAS & OIL is essential to be prepared. In 2019, we will inaugurate two new wind farms for 106 MW and the 183 MW gas- 11% fired open cycle as part of Genelba’s closing to combined cycle for 383 MW. EDENOR 29% In 2018, legacy energy continued being remunerated under the SEE Res. No. 19/2017 scheme. However, as E&P 5% from March 2019 the SGE provided for reductions in remunerations to legacy thermal units and establishing 13% TRANSENER a link between the payment for power capacity and the utilization factor. Even though this change is closely TGS associated with the Government’s efforts to reduce the fiscal deficit, as generators we need predictability and 42% signs encouraging competition and laying the grounds for a permanent regulatory scheme. GENERATION Despite the volatility experienced in 2018, CAMMESA has met its commitments both in terms of payment conditions and billing currency (US$). This was key for the whole national grid and, especially, for legacy energy NOTE: it does not consider our petrochemicals, to continue improving their availability year after year, from 72% in 2015, when president Macri’s administration residual R&D, eliminations and holding segments. E&P includes our interest in OldelVal. ELECTRICITY took office, to 85% in November 2018.
As regards investments, Pampa and its subsidiaries continue reporting one of the highest investment levels in the country. In 2018, companies controlled and co-controlled by Pampa pursued 1 It includes 100% of investments in Transener and TGS, which under IFRS are not consolidated in Pampa’s FS.
12 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 13 ANNUAL REPORT THERMAL POWER PLANTS | PAMPA AND REST OF THE SYSTEM’S HISTORICAL AVAILABILITY gas pipeline, also cooperating with other ideas for shale gas monetization: liquefaction, expansion of NGL As a % of the nominal installed capacity processing capabilities, midstream services. Regarding this last item, TGS has embarked on an ambitious project at its own risk, which consists of the construction of a 150-km gathering gas pipeline and conditioning plants to help producers evacuate unconventional gas to the main gas pipeline, which involved an investment exceeding 83 82 89 87 80 90 87 79 85 97 US$250 million and is expected to be commissioned this year. Despite the many challenges, 2018 was the second year that the RTIs granted to our utility subsidiaries have been 69 69 76 74 70 73 72 71 79 84 in effect, and so far they have been fully performed for Edenor, TGS and Transener. Furthermore, the applicable regulatory entity implements semiannual updates on account of cost variations, which are linked to inflation.
EDENOR’S RESIDENTIAL TARIFF POSITIONING CONSUMPTION: 275 KWH PER MONTH
Monthly bill in US$ including taxes 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Pampa´s thermal old capacity Old thermal grid without Pampa Edenor’s Tariff Evolution Other Countries
NOTE: Information for the year 2018 takes into consideration data up to and including November.
The exchange rate volatility and the economic crisis, which was exacerbated as from May 2018, had a FEB 2018 AUG 2018 FEB 2019 30 50 53 54 54 59 negative impact in our E&P segment, especially in gas price dynamics during the second half of the year, which was completely different from projections made in early 2018. 8 15 9 17 15 29 In the first semester of 2018, gas sales prices for the demand were stable mainly thanks to Plan Gas II, an incentive program that expired on June 30, 2018. Numerous projects were awaiting approval under the Unconventional Plan Gas pursuant to MEyM Res. No. 46/17, including Pampa’s blocks, which renegotiated with provincial authorities the extension of unconventional exploitation licenses for another 35-year term in order to submit the incentive Social Normal Social Normal Social Normal CHILE PERU BRAZIL UK FRANCE SPAIN application as and when required. Only three blocks El Mangrullo, Sierra Chata and Río Neuquén remained eligible tariff tariff tariff tariff tariff tariff for the last step – the approval by the federal energy authority. In January 2019, this authority informed that no 27% 25% 24% new projects would be approved, and that the SGE would evaluate a new incentive scheme for the winter period. of the of the of the clients clients clients Therefore, since July 2018, we have only depended on the sales price paid by the demand. NOTE: For the social tariff, it is considered without savings and February 2018 considers a bill cap. Exchange rate: AR$37.70/US$. The impossibility to pass through actual prices to residential users, added to the need to encourage SOURCE: Edenor. production for the development of unconventional gas, continued creating a distorted market, with a high level of intervention and fiscal costs for the Federal Government. In the second half of 2018, this combination of For 2019, the main challenge we face is the normalization of regulatory assets and liabilities, which is added factors had a strong impact on the price at which we sell our production. Despite this, an important milestone to the already complex transfer of jurisdiction from the federal level to the Autonomous City of Buenos Aires both for E&P and for power generation was the return of fuel procurement by generators since November 2018, and the Province of Buenos Aires, enacted in March 2019, among other issues that have been under analysis which allows vertical integration and leveraging synergies between Pampa’s two core businesses. and discussion for several years. Furthermore, in 2019 Edenor will continue making investments to regain the reliability of the distribution system, stressing that service quality statistics have shown improvements, even The gas seasonal deficit has been a structural problem in our country for a decade and, with changes in the though there is still a considerable way to go to recover from the 16-year tariff freeze. Unconventional Plan Gas, lower prices in the short and medium-term and the fragility of sales conditions, it remains to be seen whether the gas production upward trend will prevail, and, specifically, whether gas development In this brief account, we would also like to highlight other actions adding value to our shareholders in levels will be maintained in Vaca Muerta, where unconventional production reached 45% in December 2018 2018, a year that was quite turbulent in every respect. The corporate reorganization was finally completed in (in December 2017, it was 33%). Furthermore, as a result of the gas seasonal deficit, the country continues August 2018, which involved the merger of 12 companies, simplifying Pampa’s corporate structure, harvesting importing gas at prices significantly higher than those paid to domestic producers and in larger quantities during operational and resource synergies, concentrating fund flows at Pampa, and thus concluding a process initiated the winter season, in addition to the substitution of gas by liquid fuels for power generation. Therefore, to solve back in December 2016. this structural problem and substitute imports, we believe that public policies such as contractualization under terms acceptable for both supply and demand should be implemented in the medium term. The restructuring process involved divestments of assets which were not functional to Pampa’s business strategy, and during the first half of 2018 we closed the sales of crude oil E&P and refining and distribution To be ready for such change, we have decided to continue with our resource derisking plan in our blocks in assets, as well as the sale, in November 2018, of 21% interest in OldelVal, the country’s largest oil transportation Vaca Muerta, with an exploratory well drilling campaign in El Mangrullo and Sierra Chata aiming to increase our company. It should be stressed that, in spite of the difficult context, aforementioned divestments have resulted 2P reserves, enhance average life, keep a positive reserve replacement ratio and add value to our E&P segment. in very good valuation multiples.
Given our medium- and long-term view on gas in Argentina, we have coordinated our strategy with our The significant flow from these sales, for a total US$600 million, has allowed us to navigate through the subsidiary TGS, which will play a key role in Vaca Muerta with its contribution in the development of a new crisis with the highest cash levels in the history of Pampa, even when 10% of the Company’s issued capital
14 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 15 ANNUAL REPORT stock was repurchased at a total US$328 million, this being the largest and most ambitious share buyback program in Argentina. Furthermore, the Company’s cash position has allowed to smoothly face expansion expenses exceeding US$400 million, as well as recurring investments for almost US$700 million2. The prudential management of the Company’s liabilities before the crisis was crucial to keep such liquidity level, with debt maturities concentrated in the long-term, whereas short-term maturities are for non-significant amounts, which are manageable with the Company’s operating cash flow.
Furthermore, Pampa’s shares continue being one of the most liquid securities among listed Argentine companies, leading the MerVal and MSCI Argentina indexes, and with the new listing, as from June 20, 2019, on the MSCI Emerging Markets and Frontier Emerging Markets indexes. As regards our actions towards sustainability, we should mention Pampa’s listing and entry into other prestigious indexes and panels: IDB/BYMA’s sustainability index and Bloomberg gender-equality index, as well as BYMA’s Corporate Governance Plus Panel. These actions ratify the management’s commitment with accomplishing the Company’s mission, vision and values, creating long-term sustainable value and prioritizing the welfare of all stakeholders (employees, communities where our assets are located, shareholders, lending institutions, customers, suppliers, etc.)
ARGENTINE PUBLIC COMPANIES’ LIQUIDITY RANKING LISTED ON NYSE/NASDAQ, AVERAGE FOR THE LAST 12 MONTHS AS OF MARCH 6, 2019
In million US$
31 21 20 17 16 12 8 7 6 6 4 4 3 3 2 2 1 TGS YPF IRSA CRESUD EDENOR TELECOM GLOBANT DESPEGAR ADECOAGRO G. F. GALICIA F. G. LOMA NEGRA LOMA BANCO MACRO BANCO G. SUPERVIELLE PAMPA ENERGÍA BBVA B. FRANCÉSBBVA CENTRAL PUERTO C. AMÉRICA AEROP.
This would not have been possible without the effort and dedication of the Company’s employees and advisors who accompany us with commitment and involvement, for which Pampa’s Board of Directors would like to seize this opportunity to thank them all for helping us overcome the challenges of our business on a daily basis and consolidate the Company as a leading representative of the energy business, both in Argentina and worldwide. We would also like to thank our families, suppliers, financial institutions and investors for the continuous support and trust placed on us.
2 Calculation resulting from adding amounts from individual Pampa and 100% held subsidiaries.
16 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 17 ANNUAL REPORT 02 Corporate Governance Currently, Pampa’s Board of Directors is composed as follows:
At Pampa we believe that the best way of preserving and protecting our investors is to adopt and implement the best corporate governance practices, which consolidate us as one of the most trustworthy and transparent TERM companies in the market. NAME POSITION INDEPENDENCE EXPIRATION*
For such purpose, we constantly strive to incorporate those practices by taking into account international Marcos Marcelo Mindlin Chaiman Non-Independent 12/31/2017 market trends, as well as domestic and foreign applicable corporate governance standards and rules. Gustavo Mariani Vice-chairman Non-Independent 12/31/2019 In this line, on December 18, 2018, Pampa joined the special stock quote panel called +GC Panel, launched Ricardo Alejandro Torres Director Non-Independent 12/31/2019 by ByMA on that same date. The +GC Panel has no precedents in Argentina, and includes companies already Damián Miguel Mindlin Director Non-Independent 12/31/2020 listed at ByMA with single-vote shares that complies with the best corporate governance and transparency Gabriel Cohen Director Non-Independent 12/31/2018 practices even beyond the regulatory required level, which Pampa entirely fulfills. These practices, which are periodically monitored for compliance, are aligned with the Corporate Governance principles of the Organization Diana Mondino Director Independent 12/31/2018 for Economic Co-operation and Development (OECD) and adopted by the G203. Santiago Alberdi Director Independent 12/31/2018 Carlos Tovagliari Director Independent 12/31/2018 Beyond the information contained in this presentation, further information on Pampa’s corporate governance practices can be found in Appendix I to this Annual Report, which contains the corporate governance report Diego Martín Salaverri Director Non-Independent 12/31/2020 required under the Code pursuant to CNV General Res. No. 606/12 issued on March 23, 2012 Miguel Bein Director Independent 12/31/2019 José María Tenaillon Alternate Director Independent 12/31/2018 Mariano Batistella Alternate Director Non-Independent 12/31/2018 2.1 Pablo Díaz Alternate Director Non-Independent 12/31/2018 Isaac Héctor Mochón Alternate Director Independent 12/31/2018 Pampa’s Corporate Structure Nicolás Mindlin Alternate Director Non-Independent 12/31/2018 Board of Directors Brian Henderson Alternate Director Non-Independent 12/31/2020 Victoria Hitce Alternate Director Non-Independent 12/31/2019 Pursuant to the ABOL, as amended from time to time, the CMA and Pampa’s Bylaws, decision-making within Enrique Luján Benítez Alternate Director Independent 12/31/2020 the Company is vested in the Board of Directors. The Board consists of ten regular directors and an equal or smaller number of alternate directors as determined by the Shareholders’ Meeting, a percentage of whom will María Carolina Sigwald Alternate Director Non-Independent 12/31/2020 be independent according to the independence standards set out in the CNV Rules. All of our directors are Mauricio Penta Alternate Director Non-Independent 12/31/2020 elected for a term of three years and may be re-elected indefinitely. The expiration and further renewal of terms of office is made on a partial and staggered basis every year, with the election of three directors for two years, and four directors on the third year. *They will be in office until their reelection or the election of their substitutes.
3 For further information, see section 7.10: ‘Entry into +GC Panel’ of this Annual Report.
18 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 19 ANNUAL REPORT Senior Management Audit Committee The following table includes information on our senior management: Pursuant to Section 109 of the CMA, Pampa has an Audit Committee consisting of three regular members, integrated by three regular members and three alternate members, who all hold independent status according to the independence standards set out in the CNV Rules. The Audit Committee members have professional expertise in financial, accounting, legal, and/or business matters.
NAME POSITION Pursuant to the applicable legislation and its own Internal Regulations, the Audit Committee is responsible for compliance with, inter alia, the following duties: Marcos Marcelo Mindlin Chairman i. Supervising the operation of internal control systems and the administrative/accounting system, as well Gustavo Mariani Executive vice president and CEO as the reliability of the latter and of all financial information or any other significant events that may be Ricardo Alejandro Torres Executive vice president disclosed to the CNV and the markets in compliance with the applicable reporting system; Damián Miguel Mindlin Executive vice president ii. Expressing its opinion on any proposal by the Board of Directors to designate external auditors to be hired Gabriel Cohen CFO by the Company, and ensuring their independence; Horacio Jorge Tomás Turri Executive director of oil and gas iii. Reviewing the plans submitted by external and internal auditors, assessing their performance, and issuing María Carolina Sigwald Executive director of legal affairs an opinion on the presentation and disclosure of annual FS, all of which pursuant to the CNV’s Rules; Mariano Batistella Executive director of strategy, planning, downstream and affiliates iv. Supervising the implementation of risk management information policies within the Company; v. Providing the market with full information on transactions where there may be a conflict of interest with members of corporate bodies or controlling shareholders; vi. Rendering its opinion on remunerations and stock options plans’ proposals for the Company’s directors Supervisory Committee and managers submitted by the Company’s Board of Directors; vii. Approving any proposal for compensation of Pampa’s Senior Management to be submitted by the Board Our Bylaws provide that the oversight of Pampa will be in charge of a Supervisory Committee consisting of Directors to the Shareholders’ Meeting for consideration, with the authority to consult worldwide- of three regular members and three alternate members appointed by our shareholders pursuant to the legal renowned specialists in remuneration issues, and seeking to ensure that Senior Management receive provisions in force. The Supervisory Committee will be composed of duly registered lawyers and/or accountants remunerations in line with similar positions in Argentina and abroad in the same area of business, taking admitted to practice in Argentina, who will serve for a term of three fiscal years. into consideration each Senior Management’s contribution and the Company’s financial condition and operating results; The primary function of the Supervisory Committee is to exercise statutory control over the Board of Directors, complying with the provisions set forth in the ABOL, the Bylaws, its regulations, if any, and the viii. Rendering its opinion on the compliance with legal requirements and the reasonableness of the conditions Shareholders’ Meeting decisions. In the accomplishment of these duties, the Supervisory Committee does for the issuance of shares or convertible securities in capital increases with the exclusion or limitation of neither monitor our operations nor assess the merits of decisions made by board members. preemptive rights;
ix. Issuing a well-founded opinion on related-party transactions in the cases provided by law, and disclosing Currently, Pampa’s Supervisory Committee is composed as follows: it in compliance with law whenever there is or may be an alleged conflict of interest within Pampa; x. Supervising the operation of a channel whereby the Company’s executives and staff may report accounting, internal control and audit issues pursuant to the applicable provisions to such effect; TERM xi. Providing any report, opinion or statement required by the current regulations in force, with the scope NAME POSITION EXPIRATION** and frequency required by such regulations, as amended, etc.; xii. Fulfilling all obligations provided for in the Bylaws, as well as laws and regulations binding the Company; Germán Wetzler Malbrán Statutory auditor* 12/31/2020 José Daniel Abelovich Statutory auditor 12/31/2020 xiii. Checking compliance with applicable standards of ethical conduct; and Martín Fernández Dussaut Statutory auditor 12/31/2020 xiv. Drawing up an annual action plan for which it will be held accountable to the Board of Directors and Marcelo Héctor Fuxman Alternate statutory auditor** 12/31/2018 the Audit Committee. The Audit Committee will submit such action plan within a term of 60 calendar days as from the beginning of the fiscal year. Tomás Arnaude Alternate statutory auditor 12/31/2020
* Chairman of the Supervisory Committee (Statutory Auditors). ** He will be in office until his reelection or the election of his substitute.
20 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 21 ANNUAL REPORT Currently, Pampa’s Audit Committee is composed as follows: Moreover, Pampa has a Fraudulent Practices Prevention Policy and a Procedure for handling complaints. This last document describes the process to be followed from the reception of the complaint to the conclusion of the investigation and the application of any pertinent corrective action. One of the available instruments is the Ethics Hotline, an exclusive channel to report, on a strictly confidential basis, any suspected misconduct or breach to the Code of Business Conduct. The line can be accessed through different channels (website, toll- NAME POSITION free telephone number or e-mail) and is managed by a third-party provider to ensure higher transparency. The Audit Committee is responsible for supervising the channel’s operations and the resolution of complaints in issues within its authority. Carlos Tovagliari Chair Diana Mondino Regular member Policy on Best Security Market Practices Miguel Bein Regular member José María Tenaillon Alternate member This Policy has been implemented with the purpose of establishing certain restrictions and formalities regarding the trading of marketable securities, whether Pampa’s and/or any related companies’, in a stock exchange, thus Isaac Héctor Mochón Alternate member ensuring higher transparency and guaranteeing that no Pampa employee may derive any economic advantage or Enrique Luján Benítez Alternate member benefit from the use of material non-public information about Pampa and/or any of its affiliates.
This Policy applies to Pampa and its subsidiaries’ employees deemed ‘covered individuals’, including, but not limited to, directors, members of the Supervisory Committee, and Senior Management lines.
2.2 Policy on Related-Party Transactions Minority Shareholder Protection Pursuant to the CMA, all high-value transactions made between Pampa and individuals and/or legal entities Pampa’s Bylaws include safeguards aimed at the protection of Pampa’s minority shareholders, such as: which, pursuant to the applicable regulations in force, are considered ‘related parties’ will be subject to a specific prior authorization and control procedure to be carried out under the supervision of Pampa’s executive legal • Only one class of shares granting equal economic and political rights; department and which involves both Pampa’s Board of Directors and its Audit Committee (as applicable). • Special majorities of up to 66.6% of the votes to amend certain clauses of the Bylaws; • Possibility to call a shareholders’ meeting upon request of shareholders representing at least 5% of the Board of Directors’ Self-Assessment Questionnaire capital stock. In line with the Code’s recommendations, in 2008 Pampa’s Board of Directors approved the implementation of a self-assessment questionnaire to annually examine and assess its own performance and management.
The Company’s executive legal department is in charge of examining and filing each individual questionnaire; 2.3 afterwards, based on the results, it will submit to Pampa’s Board of Directors all measures deemed useful to improve the performance of the Board of Directors’ duties. Corporate Governance Policies Integrity Program – Law No. 27.401 Policy on Material Information Disclosure In the year 2009, the Relevant Information Disclosure Policy was approved in order to regulate the basic Upon the enactment and entry into force of the Legal Entities’ Criminal Liability Law, Pampa’s Board of principles guiding the operation of the processes to be followed when publishing information relevant to Pampa Directors assessed the level of compliance with the Integrity Program set forth in sections 22 and 23 of such in accordance with the regulatory requirements imposed by the securities markets where Pampa’s securities are law, which seeks to implement a set of internal proceedings, mechanisms and actions for integrity, supervision traded or those in which Pampa is a registered issuer. and control, geared at preventing, detecting and correcting the irregularities and illegal acts covered by such law.
The Program set forth by law has mandatory and optional requirements, and Pampa has defined the need to Prevention Regarding QSELH comply with all of them. It is worth highlighting that all mandatory requirements had already been implemented On April 26, 2017, Pampa’s Board of Directors approved the QSELH Policy to continue meeting the operational at Pampa before the law’s effective date. standards of E&P, power generation, electricity distribution, R&D and petrochemicals segments with the highest safety possible within the ordinary course of each activity. Furthermore, the Integrity Program is periodically monitored by the Board of Directors to identify the existence of improvement opportunities or necessary updates. The Board of Directors has defined that Pampa’s internal audit department will be responsible for the implementation of the Integrity Program. Dividend Policy On November 9, 2018, Pampa’s Board of Directors approved the Company’s Dividend Policy, which Code of Business Conduct – Ethics Hotline outlines the guidelines to be followed to reach a proper balance between distributed amounts and Pampa’s investment plans with the purpose of establishing a clear, transparent and consistent practice allowing Pampa has a Code of Business Conduct in place which lays down the ethical principles that constitute the shareholders informed decision-making, all of this consistent with the Company’s Bylaws and the applicable foundation of the relationships between Pampa, its employees and other stakeholders (customers, suppliers, legal and regulatory framework in force. government, shareholders, community, etc.) by providing guidelines and supplying instruments that guarantees the transparency of affairs and proper Company management.
22 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 23 ANNUAL REPORT Compensation Policy On November 9, 2018, Pampa’s Board of Directors approved the Compensation Policy, which aims to establish general rules to determine the composition, update and handling of directors’ remunerations, as well as the rules to determine the reimbursement of their expenses.
Under the Compensation Policy, the Board of Directors created the Compensation Committee, which reports to Pampa’s Board of Directors, and will be made up of three regular members and an equal or smaller number of alternate members, who may not exercise executive functions in the Company. Currently, Pampa’s Compensation Committee is composed as follows: 03
TERM NAME POSITION INDEPENDENCE EXPIRATION** Our Shareholders / Miguel Ricardo Bein Chairman Independent 12/31/2019 Diana Mondino Regular member Independent 12/31/2018 Diego Martín Salaverri Regular member Non-Independent 12/31/2020 Enrique Luján Benítez Alternate member Independent 12/31/2020 Stock Performance Isaac Héctor Mochón Alternate member Independent 12/31/2018
As of December 31, 2018, Pampa held 1,899,870,264 common shares with a par value of AR$1 each and each granting the right to one vote. The following table shows information on Pampa’s common shareholdings: Nomination Policy On November 9, 2018, Pampa’s Board of Directors approved the Nomination Policy, which sets the general guidelines regarding independence, incompatibilities and diversity in the Board of Directors, and describes the process to be followed by both the Board of Directors and shareholders for the identification and evaluation of NUMBER NUMBER % OF % OF Board of Directors’ nominees to be presented for consideration by the Shareholders’ Meeting. OF SHARES, OF ADRS, ISSUED CAPITAL NET HOLDER IN MILLION IN MILLION CAPITAL REPURCHASES Under the Nomination Policy, the Board of Directors created the Nomination Committee, which will assist Pampa’s Board of Directors and Shareholders’ Meeting in the nomination and appointment process of the Board Management (1) 368.3 14.7 19.4% 19.6% of Directors’ members. Free Float at NYSE and ByMA 1,506.2 60.2 79.3% 80.1%
(2) The Nomination Committee reports to Pampa’s Board of Directors, and will be made up of three regular Share buyback program 20.1 0.8 1.1% - members and an equal or smaller number of alternate members, the Chairman having to be independent Employee stock-based compensation plan 5.3 0.2 0.3% 0.3% pursuant to the independence criteria stipulated by the CNV rules. Currently, Pampa’s Nomination Committee is composed as follows: Total Issued Capital 1,899.9 76.0 100.0% 100.0% Total Outstanding Capital (3) 1,879.8 75.2
TERM NAME POSITION INDEPENDENCE EXPIRATION** NOTE: All figures are rounded off, so the total may not equal the sum of the figures. (1) It includes direct and indirect stakes of Messrs. Marcos Marcelo Mindlin, Damián Miguel Mindlin, Gustavo Mariani and Ricardo Alejandro Torres. (2) Repurchases made under the Programs announced on April 27 and June 22, 2018. The repurchased amount does not include 182.8 million common Miguel Ricardo Bein Chairman Independent 12/31/2019 shares timely cancelled by the Shareholders’ Meeting on October 2, 2018. 3 Net of repurchases under the Programs. For further information, see Gustavo Mariani Regular member Non-Independent 12/31/2019 section 7.9 of this Annual Report. Ricardo Alejandro Torres Regular member Non-Independent 12/31/2019 Isaac Héctor Mochón Alternate member Independent 12/31/2018 Victoria Hitce Alternate member Non-Independent 12/31/2019 María Carolina Sigwald Alternate member Non-Independent 12/31/2020
24 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 25 ANNUAL REPORT As regards remaining shares repurchased under the Programs, their cancellation will be submitted to the approval of the next General Ordinary and Extraordinary Shareholders’ Meeting.
Pampa is listed on the ByMA and is one of the Argentine companies with a greater weight on the Merval index (7.1809% as from January 1, 2019). Moreover, Pampa is one of the companies with a greater weight on the MSCI Index in US$ in Argentina (10.77% as of January 31, 2019).
Furthermore, the Company joined the first sustainability stock index (non-traded) which selected, based on the methodology sponsored by the IDB, 15 listed companies with the best performance in terms of environmental, social and corporate government aspects. Pampa is also a founding member of the first special stock quote panel, known as +GC Panel, which selects listed companies having the best corporate governance practices4. Finally, the Company also participates in the Bloomberg’s gender-equality stock index (non-traded), in which Pampa is the only Argentine company and one of the four selected companies in the energy sector.
Pampa has a Level II ADS program listed on the NYSE, and each ADS represents 25 common shares.
The following chart shows the price evolution per share and Pampa’s traded volume on the ByMA from The following chart shows the price evolution per ADS and Pampa’s traded volume on the NYSE from January 2006 to December 31, 2018: October 9, 2009 to December 31, 2018:
AR$ Volume US$ Volume per Share* (AR$ million) per ADS* (US$ million) 80 140 60 250 70 120 50 200 60 100 40 50 150 80 40 30 60 30 100 40 20 20 50 20 10 10 - - - - OCT OCT OCT OCT OCT OCT OCT OCT OCT OCT JAN JAN JAN JAN JAN JAN JAN JAN JAN JAN JAN JAN JAN 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
* Price adjusted as per issuances. Source: Bloomberg. * Priced adjusted according to preemptive subscription rights and issuances. Source: ByMA/Bloomberg.
4 For further information, see section 7.10: ‘Entry into +GC Panel’ of this Annual Report.
26 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 27 ANNUAL REPORT 04 Macroeconomic Context 4.3 Fiscal Situation 4.1 In 2018, Non-Financial Public Sector’s fiscal accounts accumulated a 2.5% and 5.3% primary and total fiscal deficit to GDP, respectively. The annual variation of aggregated tax revenues, measured in AR$ based on figures Economic Activity published by the Federal Administration of Public Revenue (AFIP), ended 2018 with a 30.7% increase compared to 2017. Besides, in 2018 primary expenditures by the National Treasury showed a 22.4% year-on year variation. Due to the external crisis and the later outcome on the domestic front with fiscal and exchange crisis, as of the third quarter of 2018 the economic activity recorded an accumulated 1.4% decrease compared to the same period of the previous year. Public consumption fell by 3.0%, mainly due to the Government’s target of reducing the fiscal deficit, whereas exports net of imports suffered a 13.1% decrease. On the other hand, investment 4.4 and private consumption grew by 1.7% and 0.2%, respectively. The activity contraction affected 7 out of 16 identified sectors of the economy, the most affected being agriculture, livestock, hunting and forestry (-19.6%), Financial System transportation and communications (-2.2%) and manufacturing industry (-1.8%). These falls were partially offset by increases in financial intermediation (+6.6%), construction (+4.9%) and real estate, business and rental BCRA’s US$ currency wholesale exchange rate (Res. A3500) was AR$37.81/US$ as of December 31, 2018, activities (+3.0%), among others. showing a cumulative 101.4% increase compared to the end of 2017 and a 69.6% average year-on-year variation. BCRA’s international reserves stock amounted to US$65.8 billion at closing, which represents a US$10.7 billion increase compared to the previous year. Moreover, the monetary base reached AR$1,409 billion, showing a 40.7% increase at the closing of 2018 compared to the previous year. Furthermore, BCRA’s debt stock in issued 4.2 bonds amounted to US$19.4 billion as of the closing of 2018, which represents a 69% year-on-year contraction. Price Trends In 2018 the Cost of Living Index published by the INDEC showed a 47.6% variation. The most important 4.5 variations were recorded in transportation (+66.8%), communications (+55.3%), and basic goods and services (+53.2%). The sectors affected to a lower extent were alcoholic beverages and tobacco (+28.3%), education Trade Balance (+32.1%) and clothing and footwear (+33.1%). Furthermore, salaries, as measured by the registry of the Stable Workers’ Average Taxable Remuneration (RIPTE), experienced a 30.7% year-on-year increase between December According to the INDEC, as of the third quarter of 2018 the cumulative current account deficit amounted 2018 and the same month of the previous year. to US$25.8 billion, which represents 4.7% of the GDP. In these first three quarters of 2018, Free on Board value exports reached US$45.6 billion, whereas Cost, Insurance and Freight value imports amounted to US$52.1 billion. Primary exports decreased by 12.1% during this period, whereas agricultural manufactures and industrial manufactures exports experienced a 0.1% and 11.1% increase, respectively. On the other hand, fuel and energy exports experienced a 92.7% increase, reaching US$3 billion. Imports experienced an increase compared to the same period of 2017 in the sectors of fuels and lubricants (+25.6%), intermediate goods (+18.1%), consumables (+3.6%) and accessories (3.4%), whereas decreases were registered in capital expenditures (-9.8%) and automotive sector (-1.9%).
28 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 29 ANNUAL REPORT 05 The Argentine PEAK POWER CAPACITY RECORDS
2010 2011 2012 2013 2014 2015 2016 2017 2018
Electricity Market Capacity (MW) 20,843 21,564 21,949 23,794 24,034 23,949 25,380 25,628 26,320 Date 08-Mar 01-Aug 16-Feb 23-Dec 20-Jan 27-Jan 12-Feb 24-Feb 8-Feb Temperature (ºC) 1.6 3.5 34.2 35.4 29.6 35.6 35.1 27.7 30.2 5.1 Time 19:45 20:18 15:10 14:20 15:05 14:13 14:35 14:25 15:35 Generation
Evolution of Demand Source: CAMMESA.
During 2018, the demand for electricity experienced a slight increase, with a 0.3% variation compared to On February 8, 2018, at 15:35, there was a 26,320 MW record-breaking demand for electricity in the SADI. 2017, with a total electricity demand volume of 132,925 GWh and 132,530 GWh for 2018 and 2017, respectively.
The following chart shows the breakdown of electricity demand in 2018 by type of customer: Evolution of Electricity Supply and Fuel Consumption In 2018 there was a 0.8% increase in power generation, with 137,199 GWh and 136,064 GWh volumes for the years 2018 and 2017, respectively. ELECTRICITY DEMAND | BY TYPE OF CUSTOMER Thermal power generation remained as the main resource to meet the electricity demand, both with natural gas or liquid fuels (GO and GO) and mineral coal, supplying an electricity volume of 87,725 GWh (64%), followed by hydroelectric power generation, which contributed 39,671 GWh net of pumping (29%), nuclear power generation, with 6,453 GWh (5%), and renewable power generation with 3,350 GWh (2%). Additionally, there were imports for 344 GWh (53% lower than in 2017), exports for 280 GWh (higher than the 69 GWh recorded 29% < 300 kW in 2017), and losses for 4,337 GWh (3% higher than in 2017). NO RESIDENTIAL Hydroelectric power generation net of pumping’s contribution volumes experienced a slight increase compared to 2017 (+1%), whereas nuclear power generation recorded a 13% increase, and generation from > renewable sources evidenced a 27% increase, mainly as a result of commissioning under the RenovAr program. 43% < 10 kW 10% 300 kW These increases were moderately offset by a 1% thermal generation decrease compared to 2017. RESIDENTIAL NO RESIDENTIAL The following chart shows the evolution of power generation by source (thermal, hydroelectric, nuclear, 18% and renewable): LARGE USERS
SOURCE: ADEERA.
30 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 31 ANNUAL REPORT
The following table describes the incorporation of new power units in 2018: GENERATION BY TYPE OF POWER PLANT 2010 – 2018
In % and in GWh REGION TECHNOLOGY CAPACITY (MW)
112,829 118,254 124,659 128,978 129,330 134,624 136,135 136,064 137,199 Biogas 1.2 Wind 48 Center 246 GT 150 0% 0% 0% 1% 2% 2% 2% 2% Solar 46.8 6% 5% 5% 4% 4% 5% 6% 4% 5% Center west - Comahue CC 60 60 29% 31% 31% 35% 33% 29% 26% 29% 29% Cuyo Solar 84 84 CC 280 Buenos Aires Outskirts – Wind 252.6 Northwest Litoral – 1,520.3 Buenos Aires Diesel 40 GT 947.8 Diesel 25.6 62% 66% 64% 64% 64% 66% 65% 64% Northwest 59% GT 315.6 392.7 Solar 51.5 CC 113 South - Patagonia 336 Wind 223
2010 2011 2012 2013 2014 2015 2016 2017 2018 TOTAL 2,639 Thermal 73% Thermal Hydroelectric Nuclear Renowable Renewable 27%
NOTE: It includes WEM and Patagonian WEM System. Hydroelectric power generation net of pumping. SOURCE:CAMMESA. SOURCE: CAMMESA and Pampa Energía’s own surveys.
During 2018, power generation facilities have recorded an increase in their installed capacity compared to the previous year, totaling 38,538 MW (+2,033 MW compared to 2017). The main commercial commissioning were for thermal units under SEE Res. No. 21/16.
32 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 33 ANNUAL REPORT Additionally, hydroelectric power units’ power capacities were adjusted based on their reservoirs for a As regards the generation capacity remuneration, the remuneration scheme established by SE Res. No. total -310 MW and thermal units for -26 MW. Furthermore, agreements for 270 MW corresponding to mobile 19/177 has remained unchanged since the economic transactions corresponding to the month of February 2017. generation were terminated. The following chart shows the composition of the Argentine installed power capacity as of December 31, 2018: Evolution of WEM Prices Until October 2018, the approved average monthly spot price for energy was AR$240/MWh, which is the maximum price stipulated pursuant to SEE Res. No. 20/17. As from November 2018, this price increased to ARGENTINE INSTALLED POWER CAPACITY AR$480/MWh pursuant to SEE Provision No. 97/18. 100% = 38.5 GW On the other hand, the following chart shows the average monthly price that all electricity system users should pay so that the power grid would not run into a deficit. This cost includes not only the energy price, but 3.8% also the power capacity fee, the generation cost, fuels such as natural gas, FO or GO, and other minor items. RENEWABLE AVERAGE MONTHLY MONOMIC PRICE 63.7% 4.6% In AR$/MWh THERMAL NUCLEAR
2,850 2,669 2,543 28% 2,459 2,444 2,408 AVERAGE HYDROELECTRIC 2,284 2018 2,117 1,821 SOURCE: CAMMESA. 1,504 1,517 1,441 1,467 AVERAGE 2017 Regarding fuel supply for electric power generation, until early November, 2018, supply remained centralized 1,173 in CAMMESA (with the exception of fuel supply for generators covered by the Energía Plus Service) as provided for by SE Res. No. 95/13 and amending provisions. SGE Res. No. 70/185 authorized power generators, co- JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC generators and self-generators within the WEM to acquire fuels required for own power generation, originally 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 for units corresponding to capacity under the SEE Res. No. 19/17, and later being extended to units under PPAs executed with CAMMESA. It should be noted that CAMMESA will remain in charge of the commercial SOURCE: CAMMESA. management and the dispatch of fuels for power generators which ‘do not or cannot’ make use of such capacity. SEE Res. No. 19/17: Former Remuneration Scheme for Legacy Capacity Likewise, the country continued purchasing LNG and its re-gasification, as well as natural gas from the Republic of Bolivia. However, the natural gas supply remained insufficient to meet power generation needs, On February 2, 2017, the SEE issued Res. No. 19/17, which superseded the remuneration scheme set forth and therefore authorities have continued to rely on the consumption of liquid fuels (FO and GO) for power by SE Res. No. 22/16, as amended, and established guidelines for the remuneration to power generation plants generation to meet the demand, although in volumes lower than in 2017. between February 1, 2017 and February 28, 2019.
Natural gas consumption for electric power generation recorded a 5.3% increase in 2018 compared to the Res. No. 19/17 provides for remunerative items based on technology and scale, establishing US$-denominated prices previous year (18 million dam3). FO consumption was 56% lower than in 2017, totaling 0.57 million tons. GO payable in AR$ by applying BCRA’s exchange rate effective on the last business day of the month of the applicable consumption decreased by 37.4% compared to 2017. Finally, the consumption of mineral coal has experienced economic transaction; furthermore, the transaction’s maturity will be that provided for in CAMMESA’s Procedures. a slight year-on-year increase. Remuneration for Available Power Capacity Price of Electricity Thermal Power Generators The energy authority has continued with the policy launched in the year 2003 whereby the WEM spot price Res. No. 19/17 defines a minimum remuneration for power capacity based on technology and scale, and is determined according to the available power generating units’ CVP with natural gas, even if these units are allows power generators, co-generators and self-generators owning conventional CTs to offer DIGO for the power not generating electricity with such fuel (SE Res. No. 240/03). The additional cost for the consumption of liquid capacity and energy generated by their units and not committed under Energía Plus or under PPAs executed with fuels is recognized outside the specified market price as a temporary dispatch surcharge. Furthermore, pursuant the WEM pursuant to SE Res. No. 220/07. to SGE Res. No. 25/18, the WEM bears the costs of imported gas as from October 1, 20186.
7 For further information, see section 5.1: ‘SEE Res. No. 19/17: Former Remuneration Scheme for Legacy Capacity’ of this Annual Report. 5 For further information, see section 7.1: ‘Fuel Self-Procurement for Thermal Power Plants’ of this Annual Report. 6 For further information, see section 7.4: ‘Natural Gas Price for Power Generation’ of this Annual Report.
34 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 35 ANNUAL REPORT The DIGO for each unit should be declared for a term of three years, together with information for the Summer Hydroelectric Generators Seasonal Programming, with the possibility to offer different availability values for the summer and winter six- month periods. In the case of CHs, a base remuneration and an additional remuneration for power capacity were established. Power capacity availability is determined independently of the reservoir level, the contributions made, or the Finally, power generators will enter into a DIGO Agreement with CAMMESA, which may assign it to the demand expenses incurred. Furthermore, in the case of pumping hydroelectric power plants, the following is taken into as defined by the SE. The thermal generators’ remuneration for committed power capacity will be proportional consideration to calculate availability: i) the operation as turbine at all hours within the period, and ii) the availability to their compliance. as pump at off-peak hours every day and on non-business days. Base Remuneration Minimum Remuneration It is determined by the actual power capacity plus that under programmed and/or agreed maintenance: It applies to generators without DIGO:
BASE PRICE (US$ MINIMUM PRICE CLASSIFICATION / MW-MONTH) TECHNOLOGY / SCALE (US$ / MW-MONTH) Medium HI Capacity > 120 ≤ 300 MW 3,000 Large CC Capacity > 150 MW 3,050 Small HI Capacity > 50 ≤ 120 MW 4,500 Large ST Capacity > 100 MW 4,350 Medium Pumped HI Capacity > 120 ≤ 300 MW 2,000 Small ST Capacity ≤ 100 MW, Internal Combustion Engines 5,700 Renewable HI Capacity ≤ 50 MW 8,000 Large GT Capacity > 50 MW 3,550
As provided by SE Res. No. 22/16, in the case of CHs maintaining control structures on river courses and Base Remuneration not having an associated power plant, a 1.20 factor will be applied to the plant at the headwaters. It applies to generators with DIGO: Additional Remuneration It applies to power plants of any scale for their actual availability and based on the applicable period:
BASE PRICE (US$ PERIOD / MW-MONTH) TYPE OF ADDITIONAL PRICE POWER PLANT PERIOD (US$ / MW-MONTH) May 2017 – October 2017 6,000 November 2017 onwards 7,000 May 2017 – October 2017 500 Conventional November 2017 onwards 1,000
May 2017 – October 2017 0 Pumped Additional Remuneration November 2017 onwards 500 This remuneration for the additional available power capacity aims to encourage DIGO for the periods with a higher demand of the system. Bimonthly, CAMMESA will define a Monthly Thermal Generation Goal for the set of qualified generators, and will call for additional power capacity availability offers with prices not exceeding the additional price. As from November 2017, the allocation and collection of 50% of the additional remuneration is conditional upon the generator taking out insurance, to CAMMESA’s satisfaction, to cover for major incidents on critical equipment, as well as upon the progressive updating of the plant’s control systems pursuant to an investment plan to be submitted based on criteria to be defined by the SGE. ADDITIONAL PRICE PERIOD (US$ / MW-MONTH) Other Technologies: Wind Power The remuneration is made up of a base price of US$7.5/MWh and an additional price of US$17.5/MWh, which May 2017 – October 2017 1,000 are associated with the availability of the installed equipment with an operating permanence longer than 12 November 2017 onwards 2,000 months as from the beginning of the Summer Seasonal Programming.
36 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 37 ANNUAL REPORT Remuneration for Generated and Operated Energy of such maintenance works will be applied first. The balance will be repaid by discounting US$1/MWh for the energy generated until the total cancellation of the financing. The remuneration for Generated Energy is valued at variable prices according to the type of fuel: Fuel Supply SE Res. No. 95/13 provided that power generators may not renew or extend their fuel supply agreements IN US$ / MWH with their suppliers upon termination, and that fuel supply would be centralized in CAMMESA. This provision remained effective under SEE Res. No. 19/17. TECHNOLOGY / SCALE NATURAL GAS HYDROCARBONS However, SGE Res. No. 70/188 authorized power generators, co-generators and self-generators within the Large CC Capacity > 150 MW 5.0 8.0 WEM to acquire fuels required for own power generation, originally for units corresponding to legacy capacity Large ST Capacity > 100 MW 5.0 8.0 (with remuneration scheme under SEE Res. No. 19/17), and later being extended to units under PPAs executed 9 Small ST Capacity ≤ 100 MW 5.0 8.0 with CAMMESA. For its instrumentation, maximum natural gas prices at PIST for the generation of electricity to be sold within the WEM —provided for by MinEn Res. No. 46/18 for the 2018 and SGE Note No. 66680075/18 Large GT Capacity > 50 MW 5.0 8.0 for the year 2019— were observed. Internal Combustion Engines 7.0 10.0 On February 8, 2019, the SGE issued Note No. 07973690 instructing CAMMESA to recognize within CVPs declared as from February 18, 2019, and for each subsequent two-week period, the maximum weighted average price of natural gas by basin that would have resulted if the total domestic natural gas production necessary The remuneration for Operated Energy applies to the integration of hourly power capacities for the period to supply the electricity sector had been acquired under agreements entered into in CAMMESA’s last auction (over rotating units), and is valued at US$2.0/MWh for any type of fuel. In the case of CHs, prices for Generated conducted through MEGSA10. and Operated Energy are as follows: It should be noted that for agents which ‘do not or cannot’ make use of such capacity, CAMMESA will remain in charge of the commercial management and the dispatch of fuels.
IN US$ / MWH Suspension of MAT Contracts TECHNOLOGY / SCALE GENERATED ENERGY OPERATED ENERGY SE Res. No. 95/13 suspended the inclusion of contracts in the MAT (excluding those derived from a differential remuneration scheme), as well as their extension or renewal. Contracts in force under SE Res. No. 95/13 will Medium HI Capacity > 120 ≤ 300 MW 3.5 1.4 continue being managed by CAMMESA until their termination, after which GU will have to acquire their supplies Small HI Capacity > 50 ≤ 120 MW 3.5 1.4 directly from CAMMESA pursuant to the conditions established by the SE to such effect. This provision is still Medium Pumped HI Capacity > 120 ≤ 300 MW 3.5 1.4 effective under SEE Res. No. 19/17. Renewable HI Capacity ≤ 50 MW 3.5 1.4
Additional Remuneration for Low-Use Thermal Generators SE Res. No. 19/17 provides for an additional remuneration for low-use thermal generators having frequent startups based on the monthly generated energy for a price of US$2.6/MWh multiplied by the usage/startup factor.
The usage factor is based on the Rated Power Utilization Factor recorded during the last rolling year, which will have a 0.5 value for thermal units with a usage factor lower than 30% and a 1.0 value for units with a usage factor lower than 15%. In all other cases, the factor will equal 0.
Additional Remuneration for Thermal Generators having Frequent Startups The startup factor is established based on startups recorded during the last rolling year for issues associated with the economic dispatch made by CAMMESA. It will have a 0.0 value for units with up to 74 startups, a 0.1 value for units recording between 75 and 149 startups, and a 0.2 value for units recording more than 150 startups. In all other cases, the factor will equal 0.
Repayment of Overhaul’s Financing
Res. No. 19/17 abrogates the Maintenance Remuneration and provides that, as regards the repayment of 8 For further information, see section 7.1: ‘Fuel Self-Procurement for Thermal Power Plants’ of this Annual Report. outstanding loans applicable to CTs and CHs, credits already accrued and/or committed to the cancellation 9 For further information, see section 6.1: ‘Natural Gas for Power Generation’ of this Annual Report. 10 For further information, see section 7.4: ‘Natural Gas Price for Power Generation’ of this Annual Report.
38 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 39 ANNUAL REPORT Implementation Criteria for SEE Res. No. 19/17 Thermal Power Generators The following table shows CAMMESA’s classifications for our legacy units: The remuneration under SRRYME Res. No. 1/19 is still made up of a payment for power capacity and a payment for energy (generated energy and operated energy).
For generators without a DIGO declaration, the following power capacity base prices will apply: POWER GENERATING PLANT UNIT TECHNOLOGY SIZE CAPACITY
CPB BBLATV29 ST Large >100 MW CAPACITY’S BASE PRICE BBLATV30 ST Large >100 MW TECHNOLOGY / SCALE (US$ / MW-MONTH) CTG GUEMTV11 ST Small ≤100 MW Large CC Capacity > 150 MW 3,050 GUEMTV12 ST Small ≤100 MW Small CC Capacity ≤ 150 MW 3,400 ST Large GUEMTV13 >100 MW Large ST Capacity > 100 MW 4,350 CTGEBA GEBATG01 CC Large >150MW Small ST Capacity ≤ 100 MW, Internal Combustion Engines 5,200 (before 5,700) GEBATG02 CC Large >150MW Large GT Capacity > 50 MW 3,550 GEBATV01 CC Large >150MW Small GT Capacity ≤ 50 MW 4,600 CTLL LDLATG01 GT Large >50 MW LDLATG02 GT Large >50 MW LDLATG03 GT Large >50 MW Furthermore, SRRYME Res. No. 1/19 provides for a DIGO offer scheme for quarterly periods: a) summer LDLATG04* GT Large >50 MW (December, January and February); b) winter (June, July and August), and c) ‘Other’, which comprises two HIDISA ADTOHI HI Medium between 120 MW and 300 MW quarters (March, April and May; and September, October and November). LREYHB Pumped HI Medium between 120 MW and 300 MW For agents with a DIGO declaration, the guaranteed power capacity price will apply, which will equal ETIGHI Renewable HI - ≤ 50 MW US$7,000/MW-month in the summer and winter quarters, and US$5,500/MW-month in the ‘Other’ quarters. HINISA NIH1HI HI Small between 50 MW and 120 MW Additionally, the power capacity remuneration whether or not the agent has a DIGO declaration will be NIH2HI HI Small between 50 MW and 120 MW affected by a usage or utilization factor equivalent to the average dispatch factor for the generating unit NIH3HI** HI Small between 50 MW and 120 MW during the rolling year prior to the calculation month, applying a coefficient range between 70% and 100% of HPPL PPLEHI01 HI Medium between 120 MW and 300 MW the power capacity price; in this sense, if the usage factor is: i) higher than 70%, 100% of the power capacity remuneration is paid; ii) lower than 30%, 70% of the power capacity remuneration is paid; and iii) between 30% PPLEHI02 HI Medium between 120 MW and 300 MW and 70%, the power capacity remuneration is linearly associated with between 70% and 100% of the power PPLEHI03 HI Medium between 120 MW and 300 MW capacity remuneration.
Generated Energy remuneration values have decreased by US$1/MWh for all technologies except for Internal NOTES: * Only 26 MW of the unit is covered under this Res. ** A 1.20 coefficient applies on remuneration. Combustion Engines, in which the decrease amounted to US$3/MWh. The Operated Energy remuneration value was reduced from US$2/MWh to US$1.4/MWh. In the case of CTG’s unit GUEMTG01 and CTGEBA’s unit GEBATG03, pursuant to Section 6 of SE Res. No. In case the power generator has opted to self-procure fuels for power generation (pursuant to the option 482/15 and with the agreement of ‘Energía Plus’ power generators, both the energy delivered to the spot set forth by SGE Res. No. 70/18) and at the moment of dispatching it does not have the fuel, the calculation market and the available power capacity not committed under the Energía Plus agreements in force during each of the power capacity availability will be reduced by 50% of the real availability. In a similar sense, it will lose period were remunerated based on the items set out by SEE Res. No. 19/17, being the cost of the fuel provided the dispatch order and if the OED procures the fuel for power generation, it will only be remunerated for the by CAMMESA, thus not being part of the transaction. Generated Energy, at 50% of the non-fuel variable costs approved.
SRRYME Res. No. 1/19: Current Remuneration Scheme for Legacy Capacity The additional remuneration scheme to encourage DIGO offers during the periods with a higher demand in the grid and the additional remuneration of efficiency-based power generation variable costs were eliminated. On March 1, 2019, the SRRYME published Res. No. 1/19, which abrogated SEE Res. No. 19/17 and incorporated Furthermore, the additional remuneration for low-use thermal generators was also eliminated. modifications to the remuneration regime for the WEM’s power self-generators, co-generators and generators not covered by agreements stipulating a differential remuneration scheme. Hydrological Generators SRRYME Res. No. 1/19 provides that the OED will convert US$-denominated values into AR$ at the SRRYME Res. No. 1/19 maintains the power capacity base prices established by SEE Res. No. 19/17, as well as exchange rate published by BCRA’s Communication ‘A’ 3500 (Wholesale) on the day preceding the economic remuneration values for Generated Energy and Operated Energy. However, as regards the power capacity payment, transactions’ maturity date. as from March 1, 2019, the hours during which a hydroelectric generator is not available due to programmed and/or agreed maintenance will no longer be computed for the calculation of the power capacity remuneration.
40 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 41 ANNUAL REPORT Other Items CTLL and CTP have entered into agreements with CAMMESA under this Res., which account for a gross power capacity of 28911 MW. As regards generation from unconventional sources (wind, photovoltaic solar, biomass, biogas from urban solid waste), a single remuneration value for Generated Energy is established at US$28/MWh, irrespective of the source used. Energy generated by power generators from unconventional sources prior to their commissioning Agreement to Increase Thermal Generation Availability by the OED will be remunerated at 50% of the afore-mentioned remuneration. In 2014, the Federal Government submitted a proposal to generators for the execution of a new agreement for the increase in thermal generation availability through the application of LVFVDs and the generators’ own As regards refunds to generators under the loan agreements for the execution of overhauls in their units, resources. CTLL, CTG, CPB, HINISA and HIDISA entered into this agreement, which sets out the conditions the Res. established, firstly, the application of all receivables accrued in favor of generators for settlement, and for the incorporation of new generation capacity in CTLL through the installation of a high-efficiency GT (105 secondly, a discount scheme in the generator’s revenues equivalent to US$1/MWh for each generated MW, or MW), which was commissioned for service in July 2016, and two engines (15 MW), which are scheduled for US$700/MW-month for the unit’s real availability, whichever is higher. commissioning during the first quarter of 2019. The Company is currently analyzing the impact of these changes, as well as the measures to adopt to In 2015, the Federal Government submitted a proposal to generators for the execution of a new agreement. safeguard its rights. CTLL, CTG, CPB, HINISA and HIDISA entered into this agreement whereby CTLL would incorporate a new high- efficiency GT (105 MW), as well as investments in renewable energies. However, this Agreement was canceled Energía Plus with the implementation of SEE Res. No. 19/17. In September 2006, the SE approved Res. No. 1281/06, which establishes certain restrictions on the sale of electricity and implements the Energía Plus service, with the objective to encourage the development of new SEE Resolution No. 21/16: New Thermal Generation Capacity power generation offers. These measures imply that: As a result of the state of emergency in the national electricity sector,12 on March 22, 2016 the SEE issued i. Power generators, co-generators and self-generators which, as of the date of the publication of SE Res. Res. No. 21/16 launching a call for tenders for new thermal power generation capacity with the commitment to No. 1281/06, are neither WEM agents nor have facilities or interconnection with the WEM, will qualify; making it available through the WEM for the 2016/2017 summer, 2017 winter, and 2017/2018 summer periods. ii. These power plants should have fuel supply and transportation; Successful bidders entered into a PPA for a fixed price (in US$/MW-month) and a variable price excluding fuels (in US$/MWh) with CAMMESA, which acted on behalf of distributors and WEM’s GU. iii. The energy used by LU300 in excess of the Base Demand (the electrical consumption for the year 2005) qualifies to contract Energía Plus within the MAT at a price negotiated between the parties; and Pampa was awarded CTLL’s 105 MW expansion project and the construction of CTIW for a 100 MW capacity, iv. For new LU300 entering the grid, their Base Demand equals zero. which were commissioned for service in August and December 2017, respectively. Furthermore, Pampa acquired and developed the CTPP project for a 100 MW capacity, which was commissioned for service in August 2017. Within this framework, CTG, EcoEnergía and CTGEBA provide the Energía Plus service to different WEM clients, which represents a 283 MW gross power capacity. SEE Res. 287/17: Co-generation and Closing to CCs If a power plant cannot meet its Energía Plus demand, it should purchase that power in the spot market On May 10, 2017 the SEE issued Res. No. 287/17 launching a call for tenders for co-generation projects and at the operated marginal cost. On the other hand, SE Note No. 567/07, as amended, provided that LU300 the closing to CC over existing equipment. The projects should have low specific consumption (lower than 1,680 not purchasing their Surplus Demand within the MAT should pay the Surplus Demand Incremental Average kcal/kWh with natural gas and 1,820 kcal/kWh with alternative liquid fuels), and the new capacity should not Charge (CMIEE or Cargo Medio Incremental de la Demanda Excedente), and the difference between the real exceed the existing electric power transmission capacity; otherwise, the cost of the necessary extensions would cost and the CMIEE would be accumulated in an individual account on a monthly basis for each LU300 within be borne by the bidder. CAMMESA’s scope. Awarded projects will be remunerated under a PPA which will be effective for a term of 15 years. The Pursuant to SE Note No. 111/16, until May 2018, the CMIEE was AR$650/MWh for GUMA and GUME, and remuneration will be made up of the available power capacity price plus the variable non-fuel cost for the AR$0/MWh for GUDI. As from June 2018, pursuant to SE Note No. 28663845/18, the CMIEE became the delivered energy and the fuel cost (if offered), less penalties and fuel surpluses. Power capacity surpluses would greater of AR$1,200/MWh or the temporary dispatch surcharge. Additionally, it was provided that, until further be remunerated pursuant to SEE Res. No. 19/17. instruction, movements in the individual account of each LU300 would temporarily not be recorded. Within this framework, in September 2017 the SEE issued Res. No. 820/17 awarding only three co-generation Energía Plus contract values are mostly denominated in US$; therefore, when expressed in AR$, they are projects for a 506 MW power capacity, and in October 2017, pursuant to Res. No. 926/17, it awarded projects exposed to the nominal exchange rate. Due to the decrease in surplus demand resulting from the downturn for a total 1,304 MW power capacity. Genelba Plus’ closing to CC, which will add an incremental capacity of 383 in the economic activity, some LU300 choose not to enter into Energía Plus contracts and, consequently, MW to CTGEBA’s current facilities13 —which commissioning at open cycle is expected for the second quarter of generators have to sell their energy at the spot market with lower profitability margins. 2019, and at closed cycle for the second quarter of 2020— is among the awarded projects.
WEM Supply Agreements – SE Res. No. 220/07 Aiming to modify the market conditions to encourage new investments and increase the generation offer, the SE passed Res. No. 220/07, which empowers CAMMESA to enter into ‘WEM Supply Commitment Agreements’ with WEM Generating Agents for the energy produced with new generation equipment. These will be long-term PPAs denominated in US$, 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. 11 It includes CTLL’s TG04 power capacity, which is partially committed under this contract. 12 Declared pursuant to PEN Executive Order No. 134/15 effective until December 31, 2017. 13 For further information, see section 8.1: ‘Current Expansions’ of this Annual Report.
42 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 43 ANNUAL REPORT Measures for the Promotion of Renewable Energy Projects between the parties, although the committed electricity volumes will be limited by the electric power from renewable sources produced by the generator or supplied by other generators or suppliers with which it has In October 2015, Law No. 27,191 (regulated by Executive Order No. 531/16) was passed, which amends purchase agreements in place. Law No. 26,190 on the promotion of renewable sources of energy. Among other measures, it provided that by December 31, 2025, 20% of the total demand for energy in Argentina should be covered with renewable Pampa registered the PEPE II, III and IV projects with the RENPER. It also requested the corresponding sources of energy.14 To meet such objective, WEM’s GU and CAMMESA should cover 8% of their demand with dispatch priority under MEyM Res. No. 281/17, which was granted for the whole 160 MW installed capacity such sources by December 31, 2017, the percentage rising every two years until the objective is met. The of the three projects. agreements entered into with GU and GUDI may not have an average price exceeding US$113/MWh. As regards the PEPE IV project, even though announced on May 23, 2018, the volatility of the economy Additionally, the Law provides for several incentives to encourage the construction of renewable energy and changes in the applicable legislation adversely affected the beginning of the project, and its feasibility projects, including tax benefits (advance VAT return, accelerated depreciation on the income tax return, import is being assessed16. 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. Renewable Energy Distributed Generation RenovAr Program On December 27, 2017, Law No. 27,424 was published, which declares the distributed generation of electric power from renewable sources destined to self-consumption and the possible injection of surpluses into MEyM Res. No. 71/16 issued in May 2016 launched the RenovAr Round 1 Program’s open call for tenders. the distribution network to be of national interest. The Law also establishes the distribution utility providers’ In October 2016 and pursuant to Res. No. 213/16, the MEyM awarded 29 projects for a total 1,142 MW (97% obligation to facilitate such injection by guaranteeing free access to the distribution network, notwithstanding of which were wind and solar energy projects), including our 100 MW PEMC project in the Province of Buenos the provinces’ own powers. Aires, which was commissioned for service in June 201815. Additionally, in October 2016 MEyM Res. No. 252/16 was issued launching the RenovAr Round 1.5 Program’s call for tenders, and in the following month MEyM Furthermore, all national public building projects should contemplate the use of a distributed generation Res. No. 281/16 was issued, whereby 30 projects for a total 1,281.5 MW (100% of them wind and solar energy system leveraging the use of renewable sources after conducting, if applicable, an environmental impact study. projects) were awarded. Besides, the enforcement authority will carry out a study of existing national public buildings and will suggest incorporating power efficiency systems, including renewable distributed generation capacity. Furthermore, in August 2017 MEyM Res. No. 275/17 was issued launching the RenovAr Round 2 Program’s call for tenders, and in December 2017 MEyM Res. No. 473/17 and 488/17 were issued, whereby 88 projects for PEN Executive Order No. 986/18 issued in November 2018 and SGE Res. No. 314/18 in December 2018 a total 2,043 MW (89% of them wind and solar energy projects) were awarded. Finally, in November 2018, SGE regulated the Regime Encouraging Grid-Integrated Renewable Energy Distributed Generation seeking to reach Res. No. 100/18 launched the RenovAr MiniRen Round 3 Program’s call for tenders for smaller-scale renewable a 1,000 MW capacity within a term of 12 years. projects (between 0.5 and 10 MW) contemplating its connection to the facilities of the distribution company corresponding to the location, expecting a maximum 400 MW facility installation, of which 350 MW are wind As regards the billing scheme, it is expected that a balance will be reached between each user-generator’s and solar energy projects. consumption and injection. Moreover, distributors should file a monthly declaration to CAMMESA indicating the values corresponding to the electric power injected by users-generators. It is worth highlighting that in all projects under the RenovAr rounds, all and any reductions of greenhouse- gas emissions resulting from the power capacity installed throughout the national territory, including that Restructuring of the Federal Government’s Interests in the Energy Sector 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 Federal Government for the fulfillment of the contribution goal under the On November 1, 2017, Executive Order No. 882/17 was published, which provides for the reorganization United Nations Framework Convention on Climate Change and the Paris Agreement. of the Federal Government’s interests in several energy sector companies and ventures aiming to limit its participation to those works and services which may not be properly undertaken by the private sector. In this MAT ER sense, it instructed: i. The merger through absorption of EBISA into ENARSA, and the change of its corporate name to IEASA. MEyM Res. No. 281/17 issued on August 18, 2017 regulated the MAT ER regime, which sets the conditions As from the pre-merger agreement, IEASA will sell the energy corresponding to Argentina in all binational for WEM’s GU and GUDI to meet their demand supply obligation from renewable sources through the individual projects where EBISA takes part; purchase within the MAT ER or through self-generation from renewable sources. Furthermore, this Res. regulates the conditions applicable to renewable power generation projects. Specifically, it created the RENPER, where ii. That IEASA will act as principal in the Condor Cliff and Barrancosa CHs. Furthermore, it will act as the such projects will be registered. generation concessionaire for the transfer of the concession to the private sector; iii. That IEASA will act as principal in the Río Turbio CT; the Regional Centro II gas pipeline; the Sistema Projects destined to supply the MAT ER may not be committed under other remuneration mechanisms Cordillerano/Patagónico gas pipeline; the Cordillerano gas pipeline, and the ‘La Costa’ gas pipeline; (e.g., the Renovar Program). Surplus power generation exceeding commitments with MAT ER are remunerated until 10% of the power generation at the minimum price for the applicable technology covered by the RenovAr iv. The necessary measures so that IEASA may sell, assign or otherwise transfer the Ensenada de Barragán Program, and the balance, at the remuneration value for that type of technology set in SEE Res. No. 19/17. and Brigadier López CTs (contemplating their closing to CC); assets and interests in the Manuel Belgrano II CT, and IEASA’s shareholding in CITELEC; and Furthermore, agreements executed under the MAT ER regime will be administered and managed in v. The sale, assignment or other type of transfer of the MEyM’s equity interests in: Central Dique S.A., CTG, accordance with the WEM Procedures. The contractual terms —life, allocation priorities, prices and other Central Puerto S.A., Centrales Térmicas Patagónicas S.A., TRANSPA and Dioxitek; as well as the Federal conditions—, notwithstanding the maximum price set forth in Section 9 of Law No. 27,191, may be freely agreed Government’s interests in TMB, TJSM, the Vuelta de Obligado CT and the Guillermo Brown CT.
14 As from December, 2016, CHs with a power capacity lower than 50 MW are classified as renewable sources of energy. 15 For further information, see section 7.1: ‘First WFP’s Commercial Commissioning’ of this Annual Report. 16 For further information, see section 7.1: ‘Construction of New WFPs’ of this Annual Report.
44 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 45 ANNUAL REPORT The above-indicated sales should follow public and competitive processes, preserving the rights stipulated Transener’s Tariff Situation in the applicable contracts and corporate documents (i.e., preemptive rights). Competent public bodies (for example, the Appraisal Court) will take part in the valuations, although private entities may be hired to such The Public Emergency and Exchange Rate Regime Reform Law (Law No. 25,561) imposed the obligation on effect. Furthermore, the MEyM and IEASA were authorized to receive as payment the LVFVDs issued pursuant public utilities, such as Transener and its subsidiary Transba, to renegotiate their agreements in force with the to SE Res. No. 406/03 and other provisions passed by the SE for up to the maximum amounts and under the Government while continuing supplying electricity services. This situation has significantly affected Transener conditions to be established by the MEyM. and Transba’s economic and financial situation.
To such effects, IEASA launched the public tender for the sale of the Ensenada de Barragán CT and the In May 2005, Transener and Transba signed with the UNIREN the Memorandums of Understanding stipulating Brigadier López CT. The date for the presentation of bids was repeatedly postponed, and finally set for on the terms and conditions for updating the Concession Agreements. The Memorandums of Understanding January 31, 2019. The public tender contemplates the transfer of the goodwill and the assignment of certain provided for the performance of an RTI before the ENRE and the determination of a new tariff regime for rights, contracts and staff, as well as the repurchase of part of the liabilities issued by both trusts. Appraisals Transener and Transba, which should have come into force in 2006, as well as for the recognition of variations were made by the National Appraisal Court. Bids should contemplate the payment in cash of 75% of the in operating costs incurred until the entry into effect of the new tariff regime resulting from the RTI. applicable appraisal. Bids above the minimum price may consist of cash or LVFVDs. As of the issuance of this Annual Report, the assets on sale have still not been awarded. Since 2006, Transener and Transba have repeatedly requested the ENRE to regularize compliance with the commitments stipulated in the Memorandum of Understanding, expressing the need to launch the RTI process. Furthermore, Transener and Transba filed their respective tariff claims for their assessment, the holding of a 5.2 public hearing and the definition of the new tariff scheme. Transmission Instrumental Agreement In December 2010 Transener and Transba entered into an Instrumental Agreement to UNIREN’s Memorandum Evolution of the High-Voltage Transmission System of Understanding with the SE and the ENRE, which mainly provided for the acknowledgment of a credit claim in favor of Transener and Transba for cost fluctuations incurred during the June 2005 – November 2010 period The following chart shows the evolution of the transformation capacity’s cumulative growth and the number calculated as per the Cost Variation Index established in the Memorandum of Understanding. These receivables of kilometers of high-voltage transmission system lines, compared to the percentage cumulative growth of were assigned in consideration of disbursements by CAMMESA, which were executed through loan agreements. peak demand since 1992. Upon collecting these receivables and still without the RTI, in May 2013 Transener and Transba, respectively, executed with the SE and the ENRE a Renewal Agreement, effective until December 31, 2015, which, among EVOLUTION OF THE TRANSMISSION SYSTEM other provisions, acknowledged a credit claim for cost variations recorded during the December 2010 – CUMULATIVE GROWTH December 2012 period. In view of the repeated delays in the implementation of the RTI provided for in the Memorandum of Understanding, the SE and the ENRE successively extended the recognition of higher costs up In % to and including November 2015. In May 2016, upon the expiration of the Renewal Agreement and without any pending recognized receivables, Transener and Transba continued collecting the loans granted by CAMMESA, which were disclosed as liabilities. Finally, on December 26, 2016, Transener executed the last agreement 142 144 148 with the SE and the ENRE, which recognized credits for cost variations in favor of Transener and Transba for 134 121 141 the December 2015 - January 2017 period. On June 19, 2017, CAMMESA made the last disbursement, thus 126 132 offsetting all credits for cost variations. 110 101 101 101 101 RTI 79 90 91 On September 28, 2016, pursuant to the instruction given by MEyM Res. No. 196/16, the ENRE passed Res. 52 No. 524/16 approving the program applicable to the RTI for Electric Power Transmission. The public hearing for the defense of the proposal was conducted in December 2016. 24 34 34 34 25 0 16 On January 31, 2017, the ENRE issued Res. No. 66/17 and No. 73/17 establishing the tariffs applicable for 15 the 2017/2021 five-year period, the recognized capital base being AR$8,343 million and AR$3,397 million, and the granted regulated revenues amounting to AR$3,274 million and AR$1,499 million for Transener and 1992 ... 1996 ... 2000 ... 2005 ... 2011 ... 2015 2016 2017 2018 Transba, respectively. Furthermore, the ENRE established the remuneration update mechanism, the service quality system and applicable penalties, the reward system, and the investment plan to be executed by both Accumulated evolution of transformers capacity Accumulated evolution of km of lines companies during such period. Accumulated growth of maximum generated capacity Based on the discrepancy between Transener and Transba’s proposal and what was granted by the RTI, SOURCE: Transener and CAMMESA. on April 7 and 21, 2017, Transener and Transba filed a Motion for Reconsideration against ENRE Res. No. 66/17, 84/17 and 139/17, and No. 73/17, 88/17 and 138/17, respectively. In consolidated terms, the Motion for Reconsideration mainly requested an additional 50% increase in the recognized capital base, and a 28% As illustrated in the graphic above, the High-Voltage Transmission System has grown significantly since increase in regulatory income. 2005, mainly due to the implementation of the 500 kV Transmission Federal Plan. The implementation of this Federal Plan has provided the SADI with more stability and better conditions to meet the rising demand. On October 25, 2017, the ENRE issued Res. No. 516/17 and No. 517/17 partially upholding the motions filed
46 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 47 ANNUAL REPORT by Transener and Transba. As a result of this proceeding, the ENRE established, retroactively as of February It is worth highlighting that prices payable by distribution companies in consideration of electric power 2017, a AR$8,629 million and AR$3,575 million recognized capital base and AR$3,534 million and AR$1,604 transmission within the WEM are stabilized for their payment by distributors, and are calculated together with million annual regulated income for Transener and Transba, respectively. Notwithstanding the foregoing, claims each Seasonal Programming or Quarterly Reprogramming. In the case of distributing agents whose demand is submitted by Transener and Transba regarding the capital base valuation on which the profitability fixed by connected to different DisTros, the demand percentage corresponding to each DisTro will be ascertained, and ENRE Res. No. 553/2016 applied, as well as other issues which were not resolved favorably, continued being the price will contemplate the demand and the price on a weighted basis. heard before the SEE under the appeal brought subordinately to the Motions for Reconsideration. Furthermore, prices applicable to GU within the WEM are calculated in the economic transaction on a On the other hand, during fiscal year 2017, Transener and Transba requested the recognition of damages for monthly basis. In the case of WEM GU not directly associated with the high-voltage transmission and/or DisTro, the May 2013 – January 2017 period on account of breaches by the Federal Government in the adjustment of the applicable monthly value will be that corresponding to the connecting agent. the remuneration for the supply of the high-voltage electric power transmission and main distribution service in the Province of Buenos Aires based on the actual cost variations under the Transition Tariff Regime and the failure to remunerate the capital base and the reasonable profitability which would result from the RTI. 5.3 Furthermore, the purpose of the semiannual adjustment mechanism stipulated in the RTI is to keep real- term values for remunerations collectable by Transener and Transba during the RTI’s five-year period. The Distribution adjustment formula takes into consideration the variations during such semester in the IPIM, ‘Manufactured Products’ item, the CPI and the Salary Index published by the INDEC, which are weighed based on the cost Memorandum of Understanding between Edenor and the Argentine structure and average investments for the 2017-2021 period in the RTI. This mechanism contemplates a trigger Government clause that weighs the IPIM and the CPI semiannual variations published by the INDEC, ascertained at a variation equal to or higher than 5%. On February 13, 2006, Edenor entered into a Contract Renegotiation Memorandum of Understanding with the UNIREN, which established, effective as from November 1, 2005, a 23% increase in the average distribution For the December 2016 – June 2017 period, the trigger clause amounted to 9.02%, and, therefore, the margin, which, however, may not result in an increase in the average utility tariff above 15%, as well as a 5% semiannual adjustment for Transener and Transba remuneration was activated; however, its application was average additional VAD increase to be allocated to certain specific investments in capital goods. Furthermore, it deferred until December 15, 2017, when ENRE issued Res. No. 627/17 and No. 628/17 updating Transener and provided for the inclusion of a social tariff and established quality standards for the service to be rendered and a Transba’s remunerations by 11.35% and 10.96%, respectively, for the December 2016 – June 2017 period, minimum investment plan in the electricity grid to be performed by Edenor, as well as the performance of an RTI. retroactively to August 1. During the last few years following the execution of the Memorandum of Understanding, and on account On February 19, 2018, the ENRE issued Res. No. 37/18 and No. 38/18, which were later amended on April of the failure to perform the RTI, the SE and the ENRE passed several transitory measures seeking to reduce 5, 2018 by ENRE Res. No. 99/18 and 100/18, respectively. These resolutions updated Transener and Transba’s Edenor’s operating and asset deterioration resulting from the tariff freeze. The background and the current tariff remunerations by 24.15% and 23.39%, respectively (both including a 0.2% X-Factor17 adjustment stimulating situation are disclosed below. efficiency), accumulated during the December 2016 – December 2017 period and applicable to the remuneration scheme as from February 1, 2017. SE Res. No. 32/15 On November 16, 2018, the ENRE issued Res. No. 280/18 and No. 281/18 updating Transener and Transba’s As a result of the delay in the implementation of the Memorandum of Understanding and in order to fund remunerations by 42.55% and 43.25%, respectively (both including a 0.2% X-Factor adjustment), for the expenses and investments associated with the ordinary operation of the public utility, on March 11, 2015 the SE December 2016 – June 2018 period, applicable on the remuneration scheme as from August 1, 2018. As passed Res. No. 32/15 granting Edenor a transitory income increase as from February 1, 2015, to be charged CAMMESA did not compute interests for the months of August and September 2018, Transener and Transba against the RTI to be timely performed. This income results from the monthly difference between a theoretical filed a claim before the ENRE and CAMMESA for the settlement of the applicable interests. tariff scheme embodied in an annex to said Res. and the schemes then effective for each tariff category. Additionally, pursuant to this provision, the amounts collected under the PUREE program are deemed part of As of the publication of this Annual Report, the ENRE has still not issued the resolutions corresponding to the Edenor’s income. It should be pointed out that this Res. did not generate any increases in the tariff scheme semiannual update for Transener and Transba’s remuneration, which, according to the RTI, should have been applicable to customers, but was borne directly by the Federal Government. This Res. was rendered ineffective applied since February 1, 2019. Based on real data and estimates, the calculation of Transener and Transba’s on February 1, 2016 with the issuance of SE Res. No. 6/16 and 7/16. updates would amount to 25.5% and 27%, respectively (including the 0.14% X-Factor adjustment), accumulated for the June 2018 – December 2018 period. Transener is currently conducting the applicable procedures to ENRE Res. No. 347/12 regularize this situation. ENRE Res. No. 347/12 applied a differential fixed amount to each of the different tariff categories, with the only exception of customers exempt from paying the tariff scheme provided for by ENRE Res. No. 628/08. Such SEE Res. No. 1085/17 amounts —which continued to be deposited in a special account and were used exclusively for the execution of infrastructure and corrective maintenance works in Edenor’s facilities within the concession area— were SEE Res. No. 1085/17 issued on November 28, 2017, and effective as from December 1, 2017, established managed by the FOCEDE. the methodology for the distribution of costs associated with the remuneration of transmission companies among the Transmission Systems’ users. These costs are distributed based on the demand and/or contribution Subsequently, on January 29, 2016, ENRE Res. No. 2/16 was passed declaring the termination of the FOCEDE of energy by each WEM agent (distributors, GU, self-generators and generators), directly and/or indirectly trust on January 31, 2016 and establishing a new system for the funds collected pursuant to ENRE Res. No. associated to the DisTro, after discounting costs assigned to generating agents as operational and maintenance 347/12, which ceased being deposited into such trust and started being managed by Edenor. Finally, with costs for connection and transformation equipment. the implementation of the RTI for Edenor in February 2017, these fixed amounts for works and maintenance stopped being charged as a special item on customer bills.
17 Factor stimulating efficiency which passes cost reductions on to users.
48 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 49 ANNUAL REPORT SE Res. No. 250/13 update, a retroactive adjustment in real terms as of November 2017 and August 2017, respectively. Additionally, increases in power capacity reference prices, the energy stabilized prices and the transfer of stabilized transmission Since May 2013, the SE has provided for the recognition of costs owed to Edenor resulting from the partial prices to the end user pursuant to SEE Res. No. 1091/17 were also taken into consideration. Furthermore, the application of the MMC, the result of which was lower than the actual increase stipulated in the 2007 Contractual reference price for power capacity, the energy stabilized price and the transmission stabilized price were set Renegotiation Agreement, which was not duly passed on to tariffs. This measure was implemented with the for the December 2017 – January 2018, and February 2018 - April 2018 periods. For both periods, the power passing of SE Res. No. 250/13 and its subsequent extensions, which has allowed for the offsetting of this capacity reference price was set at approximately AR$3,157/MW-month, and the transmission stabilized price at recognition with debts Edenor has generated under PUREE and with CAMMESA for energy purchases. This Res. AR$44/MWh for the extra high voltage system; besides, a price was defined for main distribution based on the was rendered ineffective on February 1, 2016 with the issuance of SE Res. No. 6/16 and 7/16. distribution company, which, in the case of Edenor, amounted to AR$1.1/MWh.
Loan Agreements – Extraordinary Investments Plan Energy reference prices were applied making a distinction between customers with supplies higher than a 300 kW power capacity at AR$1,395/MWh for both periods, at AR$880/MWh for other users during the Due to the delay in obtaining the RTI, Edenor has secured the granting of loan agreements by the Federal December 2017 – January 2018 period, and at AR$1,081/MWh for other users during the February 2018 – April Government to conduct the investments plan it may deem appropriate. 2018 period.
Pursuant to MEyM Res. No. 7/16, CAMMESA suspended, as from February 1, 2016 and until receiving further Furthermore, this Res. approved a new scheme applicable to users covered by the social tariff. This consisted instructions, all effects from the executed loan agreements and the transfer of resources to distribution of a bonus in the stabilized price of electric power within the WEM which was disclosed as a direct subsidy by companies on behalf of the FOCEDE trust and, therefore, the new works plan will be financed exclusively with the Federal Government in the bills of covered customers. For residential customers whose demand did not tariff proceeds. reach 10 kW, the discount scheme based on savings compared to the consumption recorded in the same month of the year 2015 remained in effect; if savings were equal to or exceeding 20%, a 10% discount would apply. Tariff Transition Process Furthermore, the social tariff scheme for base consumptions pursuant to SEE Res. No. 20/17 was kept in place, but with a 50% discount over the surplus until reaching 150 kWh/month over the base consumption. On January 27, 2016, pursuant to Res. No. 7/16, the MEyM instructed the ENRE to perform all necessary acts to fulfill Edenor’s RTI, annul the tariff schemes resulting from SE Res. No. 32/15, and adjust the VAD to ENRE Res. No. 33/18 issued on January 31, 2018 published a new tariff scheme, effective as from February be charged against the RTI in Edenor’s tariff schemes, thus canceling the PUREE and suspending the loan 1, 2018, which contemplated new power capacity and energy reference prices; applied the last 17.8% VAD agreements entered into with Edenor. Moreover, on the same date and pursuant to Res. No. 6/16, the MEyM increase and the 22.5% CPD update corresponding to the August 2017 – January 2018 six-month period, and approved the quarterly summer reprogramming within the WEM for the months of February through April 2016. considered a total amount of AR$6,343 million recoverable in 48 installments, which included the corresponding Consequently, on January 29, 2016, the ENRE issued Res. No. 1/16 and 2/16 granting a new tariff scheme for CPD updates as from February 2017, subject to an annual review in February 2019, 2020 and 2021. Edenor effective as from February 1, 2016. It is worth highlighting that the 22.5% CPD update contemplated a -2.51% E-factor adjustment stimulating Later, on September 5, 2016, Edenor filed a tariff proposal before the ENRE for its consideration under the efficiency resulting from the RTI as an element geared at passing on to the distributor’s users expected efficiency RTI process. This presentation has pointed out that the proposal does not contemplate the value Edenor assigns gains as from i) factor X, which captures gains resulting from management optimization and the existence of to damages resulting from the failure to timely and properly implement the Memorandum of Understanding economies of scale, which reduces the CPD; and ii) investments factor Q, which captures the impact of the or the collection of income necessary to face the liabilities Edenor has incurred as a result of such breach. The cost of capital and the evolution of exploitation costs resulting from investments made by the company, which public hearing was held on October 28, 2016. increases the CPD.
RTI On May 14, 2018, SEE Provision No. 44/2018 was issued, which ratifies, for the May – October 2018 period, the same reference prices than for the December 2017 – April 2018 period approved pursuant to SEE Res. No. On January 31, 2017, the ENRE issued Res. No. 63/17, as amended by ENRE Res. No. 82 and 92/17, which 1091/2017: the power capacity reference price was set at approximately AR$3,157/MW-month, the stabilized established the final tariff schemes, the review of costs, required quality levels and other rights and obligations price for transmission in the extra high voltage system at AR$44/MWh, and a price for main distribution based by Edenor for the five-year period beginning February 1, 2017. on the distribution company, which, in the case of Edenor, amounted to AR$1.1/MWh. Besides, energy reference prices amounted to AR$1,395/MWh for GUDI and to AR$1,081/MWh for the remaining users. These Res. provide that the ENRE, as instructed by the MEyM, should limit the VAD increase as a result of the RTI process applicable as from February 1, 2017 to a maximum 42% of the VAD, and that the application On July 31, 2018, Edenor agreed with the MinEn to defer the application of 50% of the CPD update for the of the new VAD’s balance value will be completed in two phases, the first one in November 2017 and the last February – July 2018 period without this implying a negative economic impact for Edenor or affecting the one in February 2018. Additionally, the ENRE will recognize to Edenor the VAD difference resulting from the service quality parameters resulting from the RTI implemented on February 1, 2017. Furthermore, the MinEn gradual tariff increase recognized in the RTI in 48 installments payable as from February 1, 2018, which will be agreed to implement the actions necessary to regularize the Memorandum of Understanding entered into in incorporated into the resulting VAD value as of that date. 2007 and the Framework Agreement. Consequently, on August 1, 2018, ENRE Res. No. 208/2018 was published in the BO; this Res. provided for a 15.85% update in the CPD, 7.925% of which is applicable as from August 1, These tariff schemes include the prices established by SEE Res. No. 20/17 issued on January 27, 2017, which 2018, and the balance in six monthly consecutive installments effective as from February 1, 2019, adjustable approved the WEM’s summer seasonal reprogramming for the February 1 - April 30, 2017 period. based on the CPD update applicable on that date.
On October 31, 2017, the ENRE, through Note No. 128,399 and upon the MEyM’s instruction, provided for the On the other hand, on July 31 and October 24, 2018, the SEE issued Provisions No. 75/2018 and 97/2018, deferral until December 1, 2017 of the application of the VAD increase scheduled for November 1, 2017, as well which established, for the August 2018 – January 2019 period, the power capacity reference price at AR$10,000/ as the CPD adjustment which should have been made in August 2017; in both cases, the result of such deferral MW-month, the stabilized price for transmission in the extra high voltage system at AR$64/MWh, and a price should be recognized pursuant to the adjustment mechanism provided for by ENRE Res. No. 63/2017 of the RTI. for main distribution based on the distribution company which, in the case of Edenor, amounted to AR$0/ MWh. Furthermore, energy reference prices were set at AR$2,283/MWh for GUDI and at AR$1,470/MWh for the ENRE Res. No. 603/17 dated November 30, 2017 established a new tariff scheme applicable to the December remaining users. As regards the social tariff, SEE Res. No. 1091/2017’s criteria regarding subsidies to users and 2017-January 2018 two-month period, also contemplating, besides the 18% VAD increase and the 11.6% CPD discounts for savings remained in effect.
50 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 51 ANNUAL REPORT Furthermore, on December 27, 2018, SGE Res. No. 366/2018 was issued, which abrogated SEE Res. No. 1091/2017 and, consequently, the Federal Government’s social tariff and the savings discount scheme, fixing a power capacity reference price of AR$80,000/MW-month effective as from February 2019, with 25% and 20% increases in the months of May and August, respectively, effective until October 2019. The stabilized price for transmission in the extra high voltage system and the distributor-based main distribution price remained unchanged. Energy reference prices were set at AR$2,762/MWh for GUDI for the February – October 2019 period, and at AR$1,852/MWh for the remaining users as from February 2019, with 5% increases in the months of May and August, effective until October 2019.
Finally, on February 1, 2019, ENRE Res. No. 25/2019 was published in the BO, which approved the tariff scheme effective as from its publication date and reflected the new seasonal prices described in SGE Res. No. 366/2018. ENRE Res. No. 27/2019 was published on the same date but effective as from March 1, 2019, which provided for a 24% retroactive adjustment as of February 2019 of the CPD for the August 2018 – January 2019 semester (including the -1.59% E-Factor adjustment stimulating efficiency) and the 7.925% CPD update which had been deferred in August 2018, with retroactive effects as of that date.
EDENOR’S RESIDENTIAL TARIFF POSITIONING EDENOR’S INDUSTRIAL TARIFF POSITIONING CONSUMPTION: 275 KWH PER MONTH CONSUMPTION: 1,095 MWH PER MONTH
Monthly bill in US$ per kWh including taxes Monthly bill in cents of US$ per kWh including taxes
Edenor’s Tariff Evolution Other Countries Edenor’s Tariff Evolution Other Countries
FEB 2018 AUG 2018 FEB 2019 30 50 53 54 54 59 FEB 2018 AUG 2018 FEB 2019 10.8 11.2 12.1 12.3 12.3 15.4
8 15 9 17 15 29 5.1 7.8 10.6
Social Normal Social Normal Social Normal CHILE PERU BRAZIL UK FRANCE SPAIN tariff tariff tariff tariff tariff tariff 27% 25% 24% of the of the of the clients clients clients
PERU FRANCE SPAIN BRAZIL CHILE UK
NOTE: For the social tariff, it is considered without savings. Reference exchange rate: AR$37.70/US$. NOTE: Clients with a peak demand of 2.5 MW in medium-voltage networks. Reference exchange rate: AR$37.70/US$. SOURCE: Edenor. SOURCE: Edenor.
52 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 53 ANNUAL REPORT Natural Gas During 2018, the total gross natural gas production amounted to 129 million m3 per day, which represents a 5% increase compared to the volumes produced in 2017. This is mainly due to the continuous growth of production in the Neuquina Basin (+6 million m3 per day) and, to a lesser extent, in the Austral Basin (+2 million m3 per day), with an increase in contributions associated with the development of unconventional gas reserves, which was partially offset by the decline in the Golfo San Jorge and Noroeste basins.
As regards natural gas imports by the Argentine Government, the supply from Bolivia reached an average of 16.3 million m3 per day in 2018, a figure 10% lower than the volume recorded in 2017. In this same sense, imports of seaborne LNG later injected in the national natural gas transportation system at the Bahía Blanca 06 and Escobar ports, in the Province of Buenos Aires, recorded an average contribution of 10 million m3 per day in the year 2018, 24% lower than the volume recorded in 2017. Furthermore, imports of LNG regasified in Chile totaled 0.6 million m3 per day, a volume slightly lower than that recorded in 2017, which amounted to 0.8 million m3 per day. The Argentine Oil Based on the last annual information published by the SGE, as of December 31, 2017 total natural gas reserves and resources within the country reached 1,052,011 million m3, of which 34% are proven reserves. Furthermore, 51% of the total reserves and resources were unconventional. Compared with the same information as of December 31, 2016, total reserves and resources have recorded a 23% increase. Furthermore, resources and Gas Market increased by 53%, totaling 359,924 million m3.
EVOLUTION OF NATURAL GAS PRODUCTION, AND RESERVES AND RESOURCES* 6.1 2006-2018
Hydrocarbon Exploration and Exploitation In billion m3 The Argentine Energy Matrix 52.3 51.1 47.0 Natural gas and oil constitute the main energy sources in the national primary energy matrix. The 50.6 48.4 44.7 47.1 45.5 45.0 following chart illustrates their shares as of December 31, 2017, as there is no available information for the 44.1 41.7 41.5 42.9 year 2018:
1,073 1,052 2017 ARGENTINE ENERGY MATRIX 971 987 951 921 878 823 808 820 848 855 100% = 80.28 MILLION TOE
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
0.2% Reserves and Resources Production 54% RENEWABLE NATURAL GAS 2.2% SOURCE: SGE. * There is no available information on reserves for the year 2018. Production is gross. NUCLEAR 4.3% Oil HYDRO In 2018, total oil production amounted to 78 thousand m3 per day, a volume slightly higher than that 1.3% recorded in 2017 (76 thousand m3 per day), thus reversing the downward trend in oil production recorded in 31.2% COAL Argentina over the last sixteen years. OIL Based on the last annual information published by the SGE on oil imports, during 2018 1.2 thousand m3 per day were imported, a volume 65% lower than that recorded in 2017. This volume represented only 2% of the total domestic production during 2018. On the other hand, in 2018 oil exports amounted to 9.3 thousand m3 per day, a volume 105% higher than in 2017. This volume represented 12% of the total domestic production SOURCE: SGE. during 2018.
54 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 55 ANNUAL REPORT As of December 31, 2017, total oil reserves and resources within the country totaled 687,319 thousand m3, of Terms for Exploitation Concessions and Permits which 47% were proven reserves. Furthermore, 18% of the total reserves and resources were unconventional. Compared with the same information as of December 31, 2016, total reserves and resources have recorded a The terms for the exploration permits will be established in each tender issued by the enforcement authority slight 3% decrease. Furthermore, resources increased by 4%, totaling 169,775 thousand m3. according to the exploration’s purpose (conventional or unconventional) and based on the following criteria: 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 EVOLUTION OF OIL PRODUCTION, AND RESERVES AND RESOURCES* reduced from fourteen to eleven years; 2006-2018 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 In million m3 iii. Exploration in the continental shelf and the territorial sea: the basic term is divided into two periods of three years each, plus an optional extension of one year each.
38.3 37.3 36.6 36.1 35.4 Upon the expiration of the basic term’s first period, the exploration permit holder will decide whether to 33.2 33.2 continue exploring the block or to transfer it back in whole to the Government. The whole originally-granted 31.3 30.9 30.9 29.7 27.8 28.4 block may be kept provided the obligations arising from the permit have been properly 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 use the extension period, in which case the reversion will be limited to 50% of the remaining block.
808 829 Exploitation concessions will be granted for the following terms, which will be computed as from the 755 742 739 701 674 741 753 749 707 687 granting resolution’s date: i. Conventional exploitation concession: 25 years;
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 ii. Unconventional exploitation concession: 35 years; and iii. Continental shelf and off-shore exploitation concession: 30 years. Reserves and Resources Production Furthermore, the holder of an exploitation concession may, with a minimum one-year notice before the expiration of the concession, request the granting of indefinite extensions, for a 10-year term each, provided it SOURCE: SGE. * There is no available information on reserves for the year 2018. has properly met its obligations as exploitation concessionaire, is actually producing hydrocarbons in the blocks in question, and files an investment plan consistent with the development of the concession.
Amendment to the Argentine Hydrocarbons Law The ban on simultaneously holding more than five exploration permits and/or exploitation concessions (whether directly or indirectly) has been lifted. On October 29, 2014, the National Congress enacted Law No. 27,007 amending Hydrocarbons Law No. 17,319. This Law incorporates new drilling techniques available in the industry, as well as changes mainly related to terms and extensions of exploration permits and exploitation concessions, levies and royalty rates, the Concessions Extension incorporation of concepts for the continental shelf and off-shore exploration and exploitation of unconventional Law No. 27,007 grants the provinces having already started the concession extension process a 90-day term hydrocarbons, and a promotion regime pursuant to Executive Order No. 929/13, among other key factors for to finish it based on the conditions established for each of them. All subsequent extensions will be governed by the industry. The main changes introduced by Law No. 27,007 are detailed below: the Argentine Hydrocarbons Law.
Unconventional Hydrocarbons Exploitation Awarding of Blocks The Law conferred a legal status to the concept of ‘Hydrocarbon Unconventional Exploitation Concession’ Law No. 27,007 proposes the drafting of a standard bid form that will be jointly made by the SE and the created by Executive Order No. 929/13. The term hydrocarbon unconventional exploitation is defined as the provincial authorities, to which all tenders launched by law enforcement authorities should adjust, and introduces extraction of liquid and/or gaseous hydrocarbons by unconventional stimulation techniques applied in reservoirs a specific criterion for the awarding of permits and concessions by incorporating the specific parameter of situated in geological formations of schist rock or slate (shale gas or shale oil), tight sandstone (tight sands, tight gas, ‘greater investment or exploration activity’ as tie-breaker, at the PEN or the Provincial Executive Branch’s duly tight oil), coal bed methane and/or deposits characterized, in general, by the presence of low permeability rocks. supported discretion, as applicable. Holders of exploration permits and/or hydrocarbon exploitation concessions will be entitled to request a hydrocarbon unconventional exploitation concession to the enforcement authority pursuant to the following terms: Levy and Royalties • The exploitation concessionaire may request, within its block, the subdivision of the existing block into The amended Argentine Hydrocarbons Law updated the values related to the exploration and exploitation new hydrocarbon unconventional exploitation blocks and the granting of a hydrocarbon unconventional levy established by Executive Order No. 1,454/07; such values may, in turn, be generally updated by the exploitation concession. Such request will be based on the development of a pilot plan aiming at the Executive Branch based on variations in the domestic market’s crude oil price. The updated values for each levy commercial exploitation of the discovered reservoir pursuant to acceptable technical and economic criteria. and royalty are detailed below. • Holders of a hydrocarbon unconventional exploitation concession also being holders of a preexisting Exploration Levy and adjacent exploitation concession may request the unification of both blocks as a single hydrocarbon unconventional exploitation concession provided they duly demonstrate the geological continuity of The holder of the exploration permit will pay the levy on an annual basis, in advance, for each square these blocks. Such request should be based on the development of a pilot plan. kilometer or its fraction based on the following scale:
56 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 57 ANNUAL REPORT which will result from multiplying the remaining proven reserves associated with the exploitation of conventional • First period: AR$250 per km2 or fraction; hydrocarbons at the expiration of the granted concession by 2% of the average basin price applicable to the specific • Second period: AR$1,000 per km2 or fraction; and hydrocarbons for the two years prior to the granting of the hydrocarbon unconventional exploitation concession.
2 • Extension: during the first year of the extension; AR$17,500 per km or fraction, with a 25% annual Transportation Concessions cumulative increase. Transportation concessions (which had so far been granted for 35 years) will be granted for the same term than In this case, offsetting mechanisms will remain in place: the amount that the exploration permit holder that granted for the originating exploitation concession, with the possibility of receiving subsequent extensions should pay for the second period of the basic term and for the extension period may be readjusted by offsetting for up to 10 years each. Thus, transportation concessions originating in a conventional exploitation concession it with exploration investments actually made within the block, until reaching a minimum levy equivalent to 10% will have a basic 25-year term, whereas those originating in an unconventional exploitation concession will have of the applicable levy according to the period per km2, which will be payable in all cases. a basic 35-year term, each plus any granted extension term. After the expiration of these terms, title to the facilities will be transferred back to the Federal or Provincial Government, as applicable, by operation of law and Exploitation Levy without any charges or encumbrances whatsoever.
The holder of the exploitation permit will pay a levy which will consist of an annual advance payment of Uniform Legislation AR$4,500 per km2 or its fraction. Law No. 27,007 provides for two types of non-binding commitments between the Federal Government and Royalties the provinces regarding tax and environmental issues: Royalties are defined as the only revenue the jurisdictions holding title to the hydrocarbons will collect, in i. Environmental Legislation: It provides that the Federal Government and the provinces will seek to establish their capacity as grantors, from the production of hydrocarbons. 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 percentage the exploitation concessionaire should pay on a monthly basis to the grantor as royalty the development of the activity while properly protecting the environment. remains at 12% of the proceeds derived from liquid hydrocarbons production extracted at wellhead. The ii. Tax System: It provides that the Federal Government and the provinces will seek to adopt a uniform fiscal production of natural gas will bear a like percentage of the value of extracted and actually used volumes, and treatment encouraging the development of hydrocarbon activities in their corresponding territories in will be payable on a monthly basis. adherence with the following guidelines:
Cash payment of the royalty will be made based on the value of crude oil at wellhead less freight costs up to - The gross receipts tax rate applicable to the extraction of hydrocarbons will not exceed 3%; the base location for the definition of its commercial value. Payment in kind of this royalty will only apply when - The freezing of the current stamp tax rate and the commitment not to charge with it any the concessionaire is assured a reasonably permanent reception. The possibility to reduce the royalty up to 5% financial contracts executed in order to structure investment projects, guarantee and/or warrant taking into consideration productivity, conditions and wells location remains in place. investments; and - The commitment by the provinces and its municipalities not to impose new taxes —or increase In case of extension, additional royalties for up to 3% of the royalties applicable upon the first extension and the existing ones— on permit and concession holders, except for service compensation rates, up to a total maximum of 18% of royalties for the following extensions will be payable. improvement contributions and general tax increases.
For the conduction of hydrocarbon conventional exploitation complementary activities, as from the Restrictions on the Reservation of Blocks to National or Provincial Government- expiration of the granted concession and within the hydrocarbons unconventional exploitation concession, the enforcement authority may fix additional royalties of up to 3% above the current royalties, up to a maximum Controlled Companies 18%, as applicable. The amendment to the Argentine Hydrocarbons Law restricts the Federal Government and the provinces from reserving new blocks in the future in favor of public or mixed companies or entities, irrespective of their The PEN or the Provincial Executive Branch, as applicable, acting in its capacity as granting authority, may legal form. Thus, contracts entered into by provincial companies for the exploration and development of reduce by up to 25% the amount corresponding to royalties applicable to the production of hydrocarbons during reserved blocks before this amendment are safeguarded. a term of 10 years after the conclusion of the pilot project in favor of companies requesting a hydrocarbon unconventional exploitation concession within a term of 36 months as from Law No. 27,007’s effective date. 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 Finally, with the Hydrocarbon Investments Committee’s prior approval, royalties may be reduced to 50% for participation of such companies during the development stage will be proportional to their investments. In this tertiary production projects, extra-heavy oil and offshore products in view of their productivity, location and way, the ‘carry’ system during the blocks’ development or exploitation stage has been done away with. Such other unfavorable economic and technical characteristics. system has not been prohibited for the exploration stage.
Extension Bond Conventional and Unconventional Hydrocarbon Investment Promotion Regime For exploitation concession extensions, Law No. 27,007 empowers the enforcement authority to establish On July 11, 2013, the PEN issued Executive Order No. 929/13, which created the Investment Promotion the payment of an extension bond, the maximum amount of which will result from multiplying the remaining Regime for the Exploitation of Hydrocarbons —both conventional and unconventional— with the purpose of proven reserves at the expiration of the concession by 2% of the average basin price applicable to the specific encouraging investments destined to the exploitation of hydrocarbons, and introduced the concept of hydrocarbons hydrocarbon during a term of 2 years before the granting of the extension. unconventional exploitation concession.
Exploitation Bond Law No. 27,007 extends the benefits of the Promotion Regime to hydrocarbon projects involving a minimum of US$250 million direct investment denominated in foreign currency, assessed at the time the hydrocarbon The enforcement authority may establish the payment of an exploitation bond, the maximum amount of
58 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 59 ANNUAL REPORT exploitation investment project is presented, to be invested during its first 3 years. Before the amendment, the increase and its injection into the domestic market, as well as to generate higher levels of activity, investment Promotion Regime benefits reached investment projects denominated in foreign currency for a minimum US$1,000 and employment in the sector. million amount during a term of 5 years. Before June 30, 2013, any company registered with the National Registry of Hydrocarbon Investments created Holders of exploration permits and/or hydrocarbons exploitation concessions, and/or third parties associated by Executive Order No. 1277/12 could submit its projects before the Hydrocarbon Investments Committee. The with such holders and registered with the National Registry of Hydrocarbon Investments submitting this kind of Federal Government had undertaken to pay a monthly compensation resulting from: projects will enjoy the following rights as from the third year of their respective projects’ execution: i. The difference between the Surplus Injection price (US$7.5/MMBTU) and the price actually collected from the sale of the Surplus Injection; plus i. 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 in offshore projects, respectively, with ii. The difference between the Base Price and the price actually collected from the sale of the Adjusted a 0% export duty, if applicable; and Base Injection. ii. The 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 entry of foreign currency These projects would be in force for a maximum term of 5 years as from January 1, 2013, with the possibility into the Argentine financial market. for an extension.
During periods in which the national production of hydrocarbons is insufficient to meet domestic supply needs On April 26, 2013, Hydrocarbon Investments Committee’s Res. No. 3/13 was published in the BO, which pursuant to Section 6 of the Argentine Hydrocarbons Law, the subjects covered by the Promotion Regime will have, regulated Plan Gas I and provided that companies interested in participating in this program should submit as from the third year following the execution of their respective investment projects, the right to obtain a price not monthly affidavits to the Hydrocarbon Investments Committee containing specifically-detailed documentation lower than the reference export price (without computing the incidence of any applicable export duties) from the on injection, price, contracts, etc., so that they may, after meeting the methodology and terms specified therein, exportable liquid and gaseous hydrocarbon percentage produced under such projects. obtain the applicable compensation. Furthermore, the resolution expressly prohibited natural gas purchase and sale transactions between producers, and provided for special considerations regarding new high-risk projects, Pursuant to these investment projects, Law No. 27,007 provides for two contributions payable to the producing investments control, the evolution of reserves, and Plan Gas I’s audit mechanism. provinces where the investment project is conducted: On July 11, 2013, pursuant to Provision No. 15/13 of the Hydrocarbon Investments Committee, PEPASA was i. The first one, payable by the project holder, for an amount equivalent to 2.5% of the investment amount registered with the National Registry of Hydrocarbon Investments. PEPASA submitted several projects so that undertaken to be committed to corporate social responsibility projects; and the Hydrocarbon Investments Committee should evaluate its inclusion under Plan Gas I. On August 7, 2013, ii. The second contribution, payable by the Federal Government, which amount will be determined by the pursuant to Res. No. 27/13, the Hydrocarbon Investments Committee approved the submitted projects for an Hydrocarbon Investments Committee based on the size and scope of the investment project, and which increase in the total natural gas injection, with retroactive effects as of March 1, 2013. will be destined to infrastructure projects. On July 15, 2015, the Hydrocarbon Investments Committee published Res. No. 123/15 creating the Rules applicable to acquisitions, sales and assignments of blocks, rights and interests under Plan Gas I. These rules Regulations Specifically Applicable to the Gas Market provided that companies acquiring, selling or assigning blocks, rights or interests should submit the applicable presentation within a term of 10 business days after the transaction is made. PEPASA filed the applicable Encouragement Programs for the Increase in Domestic Natural Gas presentation for operations conducted in the Rincón del Mangrullo block. Production Plan Gas II Gas Plus In November 2013, the Hydrocarbon Investments Committee issued Res. No. 60/13 establishing Plan Gas II. In a context of regulated prices and without market intervention in the commercialization of gas, the main Producers could submit projects to increase natural gas production levels until March 31, 2014. This program appeal of this program for gas producers, created in 2008, was the free availability and commercialization of was targeted at companies with no previous production or with a maximum injection limit of 3.5 million m3/ the extracted gas. In order to qualify, the producer had to submit an investment project in new gas blocks, in day, and provided for price incentives in the case of production increases, and penalties involving LNG imports blocks which had not been in production since 2004, or in blocks with complex geological characteristics of in the case of non-compliance with committed volumes. Furthermore, beneficiary companies covered by Plan compact sands or low permeability. Additionally, except for new entities, companies had to be up-to-date with Gas I and meeting the applicable conditions could request the termination of their participation in that program 18 the production quota fixed pursuant to the Natural Gas Producers’ Agreement . and their incorporation into Plan Gas II.
In May 2016, MEyM Res. No. 74/16 created the ‘New Natural Gas Projects Promotion Program’, which provided In March 2014, Res. No. 60/13 was amended by Res. No. 22/14 issued by the Hydrocarbon Investments that no new projects may be submitted under the Gas Plus program, although approved projects would remain Committee, whereby the deadline for submission was extended until April 30, 2014, and the previous maximum effective under the same conditions. injection limit was increased to 4.0 million m3/day.
In September 2018, Gas Plus agreements timely entered into by Pampa expired. In August 2014, the MECON, through Res. No. 139/14, introduced new changes to Res. No. 60/13 issued by the Hydrocarbon Investments Committee, including, among others, the elimination of the previous maximum Plan Gas I injection limit and the fixing of two annual registration periods. Former Petrobras Argentina filed an application to be included under Plan Gas II and was registered with this program on January 30, 2015 pursuant to Res. No. On February 14, 2013, Res. No. 1/13 was published in the BO establishing the Plan Gas I, which aims to 13/15 issued by the Hydrocarbon Investments Committee. The participation of Pampa’s areas included under evaluate and approve projects furthering the national self-supply of hydrocarbons through a gas production Plan Gas II is effective until June 30, 2018.
In furtherance of Hydrocarbon Investments Committee’s Res. No. 123/15, Pampa modified its registration 18 For further information, see section 6.1: ‘Natural Gas for the Residential and CNG Segment’ under ‘Regulations Specifically Applicable to the following the assignment, in March 2015, of 100% of its blocks in the Austral Basin (Santa Cruz I and II) to YPF Gas Market’ of this Annual Report.
60 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 61 ANNUAL REPORT and, in October 2016, 33.33% of its interests in Río Neuquén and 80% of its interests in Aguada de la Arena to authority19. However, on January 30, 2019, in a meeting called by the SGE with the participation of gas producers YPF, as well as the assignment of 33.60% of its interests in Río Neuquén to Petrobras Operaciones S.A. affected by the Unconventional Plan Gas, including the Company, it was informed that no new projects will be approved under the Unconventional Plan Gas, and that the SGE will evaluate a new encouragement scheme for Furthermore, Res. No. 185/15 created the ‘Program for the Promotion of Natural Gas Injection for Companies the production of unconventional gas during the winter season. with No Injection’, the compensation mechanism of which is similar to Plan Gas I and Plan Gas II’s. Natural Gas for the Residential and CNG Segment On January 4, 2016, Executive Order No. 272/15 was published, which dissolved the Hydrocarbon Investments Committee created pursuant to Executive Order No. 1277/12, and provided that its powers Priority Demand and CEE would be vested in the MEyM. In 2007, the Argentine Government and producers signed a Natural Gas Producers’ Agreement, the main On May 18, 2016, the MEyM passed the above-mentioned Res. No. 74/16 creating the New Natural Gas Projects goals of which were to secure supply of the domestic demand for gas and the gradual recovery in prices Promotion Program. This Res. superseded the program created by Hydrocarbon Investments Committee’s Res. through all market segments. The afore-mentioned agreement was approved by SE Res. No. 599/07, being the No. 185/15. This new incentive program sought to attract new projects by companies not covered by either Plan residential supply commitment the last expiration in December 2011. Gas I or Plan Gas II, established specific requirements, and was effective until December 31, 2018. In October 2010, through Res. I-1410 issued by ENARGAS, the natural gas dispatch method was modified, Unconventional Plan Gas placing a priority on the supply of the residential and CNG segments’ demand, with volumes exceeding those stipulated under SE Res. No. 599/07. In December 2011, the Argentine Government, through SE Res. No. 172/11, On March 6, 2017, MEyM Res. No. 46/2017 was published in the BO creating the Encouragement Program temporarily extended the conditions of the Producers’ Agreements on a unilateral basis, and thus allowed to further investments for the production of natural gas from unconventional reservoirs in the Neuquina Basin ENARGAS to continue using gas producers’ shares stipulated in such agreement. effective from its publication to December 31, 2021. In June 2016, MEyM Res. No. 89/16 was published in the BO, which established the criteria for the normalization This program provided for a compensation mechanism for each beneficiary company of the unconventional of natural gas purchase agreements within the PIST by distribution service providers in order to meet the Priority gas volume —either tight or shale— produced in the Neuquina Basin, which was calculated based on a minimum Demand. Additionally, criteria were established to guarantee the meeting of the Priority Demand through the guaranteed price and the total weighted-average sale price of gas by each company to the domestic market, CEE in case of operational emergencies which may affect the normal supply. including both conventional and unconventional gas. The minimum price was fixed at US$7.5/MBTU for calendar year 2018, and would be later decreased by US$0.5/MBTU per year until reaching US$6.0/MBTU for calendar year 2021. Finally, in June 2017 ENARGAS Res. No. 4502/17 was issued, which approved the procedure for dispatch administration in the CEE. In case the CEE did not reach an agreement, ENARGAS would define the supply This program provides for a more agile payment method, with the initial disbursement of a provisional taking into consideration each producer’s available quantities, deducting the amounts previously contracted to payment based on 85% of the theoretical compensation resulting from projections, the difference being later meet the Priority Demand, with a progressive allocation until matching the proportional quota of each producer/ adjusted, either positively or negatively, based on actual production. Additionally, compensations resulting from importer in the Priority Demand. the Unconventional Plan Gas for each concession will be paid as follows: 88% to companies and 12% to the province where the concession under the Unconventional Plan Gas is located. New Natural Gas Prices within the PIST
Later, on November 2, 2017, MEyM Res. No. 419/2017 was published in the BO, which amended the terms In early January, 2018, the extension period set forth by Law No. 27,200 to the public emergency declared and conditions provided for by MEyM Resolution No. 46/2017. The new Res. classifies projects into pilot and in 2002 terminated and, therefore, Law No. 24,076 was reinstated, which provides that the price of natural developing, the latter having an initial production, that is, a monthly average unconventional gas production gas supply agreements should be determined by the free interaction of supply and demand. As a result, equal to or higher than 500,000 m3 per day between July 2016 and June 2017. in November 2017 and supported by the MEyM, natural gas distributors executed an agreement with the country’s main natural gas producers, including Pampa, effective for a year as from January 1, 2018. Prices were Pilot projects applying for the incentive may obtain the guaranteed minimum price for their whole differentiated based on the source basin, the user category, and whether the tariff was full or differential, with unconventional production provided they reach an annual average production equal to or higher than 500,000 periodic increases, and ranged from US$1/MBTU to US$6.5/MBTU. m3 per day during a twelve-month period by December 31, 2019. Developing projects may only apply for the incentive for the incremental portion on top of the defined initial production. The reference price for the However, on account of the significant devaluation of the AR$ and the impossibility by distributors to pass incentive would be calculated using the domestic market’s weighted average reported by the MEyM’s SRH. this new exchange rate on to final users’ tariff schemes, in early October, 2018, this agreement was rendered Furthermore, permanence in the program would be conditional upon the blocks meeting the investment plan ineffective20 and, consequently, prices began to be agreed with distributors in the spot market on a daily basis. timely informed to the provincial enforcement authority; otherwise, collected amounts, adjusted by the BNA’s interest rate, should be returned. Furthermore, ENARGAS Res. No. 280-289 and 292/2018 were issued, which established, effective for a six- month period beginning on October 1, 2018, new natural gas final tariffs for residential, P General Service with On the other hand, on November 17, 2017 MEyM Res. No. 447/17 was published in the BO, which extends full service and CNG users, considering a price of natural gas as a raw material ranging between US$1.74/MBTU the application of the Unconventional Plan Gas to the Austral Basin. Additionally, on January 20, 2018, MEyM and US$3.98/MBTU, including the differential tariff21. Res. No. 12/18 was issued, which introduced the applicable amendments to the Unconventional Plan Gas so as to apply the incentives provided therein to adjacent concessions operated on a unified basis and meeting On the other hand, on November 15, 2018 PEN Executive Order No. 1053/2018 was issued, which established, all other applicable conditions. Since companies interested in participating in the Unconventional Plan Gas had on an exceptional basis, that the Federal Government would bear the exchange difference between the price suffered certain delays in the proceedings for the granting and approval of their specific investment plans, they requested an adjustment in the payment date of the first compensation under the Unconventional Plan Gas, and, correspondingly, the performance of the applicable reviews associated with the initial provisional payment. 19 For further information, see section 7.4: ‘Changes to the Unconventional Gas Production Encouragement Program’ of this Annual Report. Pampa had requested before the SGE for the inclusion under this program of its projects in the Río Neuquén, 20 For further information, see section 7.4: ‘Natural Gas Price for Residential and CNG Demand’ of this Annual Report. El Mangrullo and Sierra Chata blocks, which had been previously approved by the Provincial enforcement 21 Tariff schemes for final users are denominated in AR$, and these Res. contemplate a AR$37.69/US$ exchange rate, BNA’s closing rate on October 3, 2018.
62 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 63 ANNUAL REPORT of gas purchased by gas distributors and that recognized in the gas distributors’ final tariffs for the April 2018 – Natural Gas Export24 March 2019 period, in 30 monthly and consecutive installments payable as from October 1, 2019. On August 21 and September 15, 2018, MinEn Res. No. 104/2018 and SGE Res. No. 9/2018, respectively, Finally, on February 12, 2019, with the publication in the BO of ENARGAS Res. No. 72/19, the methodology were issued establishing a Procedure for the Authorization of Natural Gas Exports, being the security of supply for passing the gas price on to tariffs and the general procedure for calculating accumulated daily exchange to the Argentine domestic market a condition in all cases. Furthermore, in the case of projects covered by the differences entered into effect. Among other aspects, this methodology contemplates the recognition of Unconventional Plan Gas, exported natural gas may not be eligible for such program. prices stipulated in the agreements entered into between distributors and producers and the definition of the exchange rate to be used. Specifically, it provides that the exchange rate to be considered between producers In December 2018 and January 2019, Pampa was authorized pursuant to SGE Res. No. 252/2018 and and distributors should be BNA’s average currency exchange rate for the first 15 days of the month immediately 12/2019 to export natural gas to Chile and Uruguay, on an interruptible basis, from the Río Neuquén and preceding the beginning of each seasonal period or, if lower, the exchange rates stipulated in the agreements. Rincón del Mangrullo blocks.
Public Tender for Gas Supply on a Firm Basis22 On the other hand, Executive Orders No. 793 and 865/2018, issued by the PEN on September 3 and 27, 2018, respectively, regulated the application of a duty on exports for all the goods under the Common Mercosur SGE Res. No. 32/19, published in the BO on February 11, 2019, approved the mechanisms for the single- Nomenclature, including natural gas, effective as from September 4, 2018 to December 31, 2020. This duty price public tender to supply gas on a firm basis to gas distributors from producers and IEASA. It also defined provides for a AR$4 withholding on each exported US$, with a maximum 12% tax rate. ToP commitments for the purchaser and DoP commitments for the seller for up to 70% of the maximum daily volume for a term of 12 months, with seasonality, effective as from April 2019. Regulations Specifically Applicable to the Crude Oil Market From the southern and Neuquina basins, 14.4 million m3 per day were assigned for the summer, and 36.1 million m3 per day for the winter, at a weighted average price by awarded bids of US$4.62/MBTU. Out of these Liquid Hydrocarbons Export Duty volumes, 83% corresponded to the Neuquina Basin at a weighted average price of US$4.61/MBTU. Pampa On December 29, 2014, MECON Res. No. 1077/14 established export duty rates in line with the crude oil’s tendered and was awarded this auction. international price, which was determined based on the reference Brent’s value on the month corresponding to the export minus US$8.0/bbl. Under this system, if the international price did not exceed US$71, the Furthermore, from the Noroeste Basin, 3.8 million m3 per day were assigned for the summer and 9.4 million producer paid export duties for 1% of that value, and if the international price exceeded US$72/bbl, variable m3 per day for the winter, at a weighted average price of US$4.35/MBTU. withholdings were settled. This system would be in force for a term of 5 years as from its enactment on January 6, 2002. The term was extended for a five-year term pursuant to Law No. 26,217, and later re- Natural Gas for Electric Power Generation23 extended for a like term pursuant to Law No. 26,732. On January 6, 2017, upon the absence of extension, the provisions regulating this issue (Public Emergency Law No. 25,561/02, as amended and supplemented), On April 13, 2016, MEyM Res. No. 41/16 established new natural gas prices for the power plants’ segment, which the withholdings scheme on the exports of oil and its derivatives terminated and, therefore, all applicable reached an average price of US$5.20/MBTU, the highest price (US$5.53/MBTU) being for the Neuquina Basin. outstanding rights were canceled by the Customs Office.
However, on August 1, 2018, MinEn Res. No. 46/2018 was published in the BO, which set maximum prices On the other hand, Executive Orders No. 793 and 865/2018, issued by the PEN on September 3 and 27, within the PIST for natural gas, based on the source basin, effective as from the publication of such Res., with 2018, respectively, regulated the application of a duty on exports for all the goods under the Common Mercosur a weighted average of US$4.20/MBTU, and a price of US$4.42/MBTU for the Neuquina Basin. Nomenclature, including crude oil, effective as from September 4, 2018 to December 31, 2020. This duty provides for a AR$4 withholding on each exported US$, with a maximum 12% tax rate. On September 6, 2018, CAMMESA’s auction for the September – December 2018 period took place, and price indications were received for a total gas volume of 143 million m3 per day on an interruptible basis, at a weighted average PIST price of US$3.8/MBTU. Furthermore, on December 27, 2018, under another CAMMESA’s Agreement for the Transition to International Prices in the Argentine auction conducted for the year 2019, price indications were received for a total gas volume of 222 million m3 per Hydrocarbon Industry day on an interruptible basis, at seasonal PIST prices with a maximum price of US$5.2/MBTU and a minimum price of US$3.2/MBTU for the June – August 2019 period, and with a maximum price of US$3.7/MBTU and a In December 2015, the abolition of official foreign exchange control regulations had a direct impact on crude minimum price of US$2.2/MBTU for the rest of the year. Pampa participated in both auctions. oil costs for refineries. Therefore, the Federal Government agreed with Argentine producers and refineries on a crude oil price for 2016 leading to a gradual convergence of the price of the crude oil barrel traded in Argentina In the last CAMMESA’s auction, maximum PIST seasonal reference prices were considered based on the towards the international price. source basin, pursuant to SGE Note No. 66680075/2018 issued on December 19, 2018 and effective as from January 2019. In the case of the Neuquina Basin, for the June – August 2019 period the price was set at Later, on January 11, 2017, the Federal Government executed the Agreement for the Transition to International US$4.95/MBTU, and for the rest of the year at US$3.70/MBTU. Price in the Argentine Hydrocarbon Industry with producers and refineries of crude oil with the same purpose of generating a gradual convergence of the price of the crude oil barrel traded in Argentina towards the On the other hand, seeking that the WEM should bear the costs of imported gas and, consequently, reflect international price. them in the variable costs the electric dispatch is based on, on October 4, 2018 SGE Res. No. 25/2018 was issued, which provides that, in case the supplier is IEASA, CAMMESA should adopt the acquisition and commercialization On March 21, 2017, on account of the lower international prices and seeking to sustain the domestic activity, cost, effective as from October 1, 2018. Executive Order No. 192/2017 provided for the regulation of imports of crude oil and certain derivatives until domestic prices converge towards international prices.
22 For further information, see section 7.4: ‘Public Tender for Gas Supply on a Firm Basis for Distribution Companies’ of this Annual Report. 23 For further information, see section 7.4: ‘Natural Gas Price for Power Generation’ of this Annual Report. 24 For further information, see sections 7.4 and 7.5: ‘Gas Export Authorization’ and ‘New Export Duty’ of this Annual Report.
64 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 65 ANNUAL REPORT Finally, on September 22, 2017, through Note No. 21505927/17, the MEyM notified the signatories to the The public hearing to present costs variations was held on November 14, 2017, and pursuant to ENARGAS Transition Agreement of its suspension as from October 1, 2017 since the Brent crude oil price exceeded US$55/ Res. No. 120/17, an average 78% increase in tariff schemes was established, effective as from December 1, bbl for 10 consecutive days, a condition stipulated in the Transition Agreement. 2017, including a 15% increase on account of the non-automatic adjustment provided for by ENARGAS Res. No. 4362/17 for the January – October 2017 period. This increase was deemed charged against the amounts Since then, the domestic price for crude oil barrel to be used as raw material for refining and gas pump prices resulting from the Comprehensive Renegotiation Memorandum of Understanding for the License executed by have been determined based on domestic market rules. TGS on March 30, 2017.
Furthermore, on January 31, 2018, ENARGAS Res. No. 247/18 was published in the BO, which called for a public hearing to be held on February 20, 2018 to discuss TGS’s transportation tariff update. On March 28, 6.2 2018, PEN Executive Order No. 250/18 was published in the BO, whereby the Federal Government ratified the Comprehensive Renegotiation Memorandum of Understanding for the license executed by TGS on March 30, Midstream 2017, thus concluding the RTI process initiated in the month of April, 2016, and as a result, on June 26, 2018, TGS voluntarily dismissed the Arbitration Proceeding it had brought before the ICSID. Regulations Specifically Applicable to Gas Transportation Therefore, and pursuant to MEyM Res. No. 74E/17, ENARGAS issued Res. No. 310/18, which approved, Public Emergency and Exchange Rate Regime Reform Law No. 25,561, which was passed and enacted during effective as from April 1, 2018, the last installment of the tariff increase granted by Res. No. 4362/17, equivalent the first days of the month of January, 2002 and later extended on several occasions until early January 2018, to a 50% increase in tariff schemes applicable to the natural gas transportation utility provided by TGS, as well provided for the turning into pesos of utility service tariffs; consequently, the transportation tariff remained as in the CAU, including a 13% recognition on account of IPIM variations for the November 2017 – February 2018 unchanged in AR$ as from 1999, despite the sharp increase in price indexes and operating costs. As a result period, and a compensation for the tariff increase deferral payable in installments. of this situation, tariffs in this segment suffered a significant lag when compared to the important increases in other macroeconomic variables, which directly affected operating costs, and thus deteriorated the company’s On September 4, 2018, the public hearing to analyze cost variations between February and August 2018 was economic and financial situation. held, and on September 27, 2018, ENARGAS issued Res. No. 265/2018 granting a 19.7% increase in tariff schemes 25 The tariff freeze continued until April 2014, when a mere 20% increase was obtained as a result of the applicable to the natural gas transportation utility provided by TGS, effective as from October 1, 2018. implementation of the transitory agreement entered into in 2008. Later on, effective as from May 1, 2015, an additional 44.3% increase in the natural gas transportation tariff and a 73.2% increase in the CAU were granted. Finally, pursuant to Res. No. 1/19 issued on February 4, 2019, ENARGAS called TGS for a public hearing to be held on February 26, 2019 with the purpose of disclosing the application of the semiannual tariff update Throughout 2016, TGS continued conducting the relevant procedures aimed at the implementation of the corresponding to the August 2018 - February 2019 period. transitory agreement signed with the Federal Government on February 24, 2016 Within this context, on March 29, 2016, the MEyM issued Res. No. 31/16 which, among other measures, instructed ENARGAS to conduct Regulations Specifically Applicable to the LPG Business the RTI process and to grant a transitory tariff increase until the conclusion of the RTI process. In furtherance thereof, on March 31, 2016 ENARGAS passed Res. No. 3724/16 approving the new tariff schemes for the natural Household Gas Bottles’ Program and Propane for Grids Agreement gas transportation utility service and the CAU, granting a 200.1% increase effective as from April 1, 2016. However, on August 18, 2016, the CSJN established the obligation to hold a public hearing for setting tariffs In the domestic market, during 2018 TGS continued taking part in several product supply programs and prices without market intervention, and declared the nullity of MEyM’s Res. No. 28/16 and 31/16 regarding developed by the Federal Government, such as the program for the supply of butane for gas bottles at residential users, for which tariff schemes were taken back to the values effective as of March 31, 2016. The subsidized prices pursuant to PEN Executive Order No. 470/2015, later regulated by SE Res. No. 49/2015 public hearing was held on October 6, 2016, and consequently, ENARGAS issued Res. No. 4054/16 providing for and No. 70/2015, the Household Gas Bottles’ Program regulated by SRH Res. No. 56/2017 and 287/2017 a 200.1% transitory tariff increase effective as from October 7, 2016, the execution of the investment plan, and and SRH Provision No. 5/2018, and the Agreement for the Supply of Propane Gas for Undiluted Propane Gas restrictions on the distribution of dividends. Distribution Grids (the ‘Propane for Grids Agreement’), whereby the SE issued a series of resolutions aiming to regulate the price of propane. The public hearing required by the RTI process was held in December 2016. On March 30, 2017, pursuant to ENARGAS Res. No. I-4362/17, a transitory tariff scheme was approved, which, if granted in a single installment The Household Gas Bottles’ Program establishes a maximum reference price for parties involved in the as from April 2017, would have represented a 214.2% and 37% increase in the natural gas transportation LPG supply chain seeking to guarantee supply to low-income residential users by compelling producers to utility service and the CAU, respectively, applicable as from April 1, 2017, with a semiannual non-automatic supply LPG at a set price to fractionation companies, with a defined quota for each of them. Additionally, the tariff adjustment mechanism subject to the PPI published by the INDEC. As a result, TGS executed the 2017 payment of a compensation to participating producers is established. Comprehensive Memorandum of Understanding, and on the same date, the 2017 Transitory Agreement was entered into with the purpose of making a transitory tariff adjustment to be charged against the RTI; to such The sale price for butane and propane under the Household Gas Bottles’ Program is determined by the effect, ENARGAS Res. No. 4362/17 was issued pursuant to MEyM Res. No. 74/17, which limited the tariff increase SRH, which issued Res. No. 287/17 and Provision No. 5/18 setting a price of AR$4,302/ton for propane and resulting from the RTI process and provided for its application in three stages, 58% in April 2017, and the AR$4,290/ton for propane as from December 2017, and of AR$5,416/ton for butane and AR$5,502/ton for balance in December 2017 and April 2018. propane as from April 2018. The compensation received from the SRH amounted to AR$550/ton, which has been the compensatory amount since April 2015. Furthermore, on January 25, 2019, SGE Res. No. 15/19 was Both the RTI process and the determination of the transitory tariff adjustments provide TGS with a framework issued, which updated prices to AR$9,154/ton for butane and AR$9,042/ton for propane, effective as from to operate the gas pipeline system on a prudential and economically sound basis. So much so that the increases February 2019. Furthermore, the compensation receivable from the SRH has been nullified. were granted taking into consideration the income necessary to execute a Five-Year Investment Plan that requires a high level of investments which are essential to face operational and maintenance needs. For the five-year period starting on April 1, 2017 and finishing on March 31, 2022, this plan will amount to AR$6,787 million, an approximate average of AR$1,360 million per year for the five-year period, expressed in values as of December 2016. This Five-Year Investment Plan was devised by TGS to guarantee the safety and continuity of 25 For further information, see section 7.5: ‘Ratification of the Comprehensive Renegotiation Memorandum of Understanding and Costs and Tariffs the natural gas transportation utility service so as to meet the expected higher demand from the system as a Remuneration Update’ of this Annual Report. result of the development of natural gas reserves.
66 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 67 ANNUAL REPORT Due to its participation in this program, TGS is bound to produce and sell the LPG volumes required by the MEyM at prices ostensibly lower than market prices. As a result of this situation, TGS has been forced to adopt the necessary mechanisms to minimize its negative impact.
As regards the Propane for Grids Agreement and under the gradual subsidy reduction path, MEyM Res. No. 474/17 provided, effective as from December 1, 2017, an increase in the price of undiluted propane gas to be destined to the Propane for Grids Agreement in the amount of AR$1,941/ton and AR$3,964/ton, depending on the client the product is targeted at. On the other hand, on May 30, 2018, TGS executed the 16th extension to the agreement, which set a new methodology for price determination and volumes to be sold for the April 1, 2018 – December 31, 2019 period under this program. Both the Household Gas Bottles’ Program and the Propane for Grids Agreement provide for a compensation 07 to participants, payable by the Federal Government, which is calculated as the difference between the price defined by the SGE and the export parity published by the SRH on a monthly basis. Even though it is not being collected timely and in due form, collection terms have improved during fiscal year 2018.
Natural Gas Import Financing Charges Relevant Events As regards Res. I-1982/11 and I-1991/11 issued by ENARGAS, which provided for an approximate 700% increase in the natural gas import financing charge (created by PEN Executive Order No. 2067/08), TGS continued pursuing legal proceedings timely initiated seeking that this charge should be declared unconstitutional and, for the Fiscal Year consequently, inapplicable. In 2018, TGS was granted new injunctions, the last one maturing in March 2019. Export Duty26 7.1 Executive Orders No. 793 and 865/2018, issued by the PEN on September 3 and 27, 2018, respectively, regulated the application of a duty on exports for all the goods under the Common Mercosur Nomenclature, Power Generation Segment including natural gas, propane, butane and natural gasoline, effective as from September 4, 2018 to December 31, 2020. This duty provides for a AR$4 withholding on each exported US$, with a maximum 12% tax rate. First WFP’s Commercial Commissioning On May 23, 2018, Pampa inaugurated PEMC (formerly known as ‘Corti’), Pampa’s first wind farm and also the first Regulations Specifically Applicable to Crude Oil Transportation project of this size and using this technology to reach such milestone under the Renovar 1 Open Call for Tenders.
In the month of June 2016, the conduction of an RTI process was requested to the MEyM as the then-current The PEMC project, which consisted of the construction and installation of 29 Vestas wind turbines, each tariffs were outdated and insufficient to develop a maintenance and investment plan that may guarantee the with a 3.45 MW power capacity, an 87-meter hub height and three blades with a total diameter of 126 meters integrity of facilities, minimize wastages, prevent and detect fraud, and improve energy efficiency towards the powering the turbine, is located at Corti, 20 kilometers from Bahía Blanca, Province of Buenos Aires. PEMC, which evolution of the transportation service in terms of reliability and efficiency. contributes 100 MW of renewable energy to the national grid, required a total investment of US$139 million.
The Enforcement Authority considered OldelVal’s allegations admissible, and on March 10, 2017 MEyM Res. No. On June 8, 2018, CAMMESA granted the commercial commissioning of PEMC. It is worth highlighting that 49/17 was published in the BO defining a new US$-denominated tariff scheme with an average 34% increase and PEMC’s commissioning was achieved before the term originally stipulated in the PPA executed with CAMMESA. effective for a term of 5 years as from March 2017.
In November 2018 Pampa closed the sale of 21% of Oldelval’s capital stock to ExxonMobil, keeping a 2.1% Construction of New WFPs equity interest in OldelVal27. Pursuant to MEyM Res. No. 281-E/17 regulating the MAT ER, CAMMESA granted the Company and its subsidiaries the dispatch priority for new WFPs, which production will be destined to meet the GU segment’s demand through PPAs between private parties.
PEPE II and PEPE III projects, announced on January 30, 2018 and each having a 53 MW installed capacity, are already in the construction stage, and their commissioning is expected for the second quarter of 2019, requesting an approximate US$135 million investment. PEPE II is located in a lot adjacent to PEMC, and PEPE III is located in Coronel Rosales, 25 kilometers away from Bahía Blanca. It is worth mentioning the wind quality in both projects’ areas, which is conducive to a generation factor higher than 50%. In each wind farm, 14 wind turbines are projected to be installed.
Furthermore, on May 23, 2018 the PEPE IV project was announced, which is located in Las Armas area, in the Municipality of Maipú, Province of Buenos Aires, with a gross capacity of 53 MW and an estimated US$74 million investment. However, the volatility of the economy and changes in the applicable legislation 26 For further information, see section 7.5: ‘New Export Duty’ of this Annual Report. adversely affected the project, and its feasibility is being assessed. 27 For further information, see section 7.6: ‘Sale of Equity Ownership at OldelVal’ of this Annual Report.
68 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 69 ANNUAL REPORT Fuel Self-Procurement by Thermal Power Plants 7.2 SGE Resolution No. 70/2018, published in the BO on November 6, 2018, authorized power generators, co- generators and self-generators within the WEM and remunerated under Res. No. 19/17 to acquire fuels of any Transener kind required for own power generation. This Res. amends Section 8 of SE Res. No. 95/2013, which provided 30 that fuel procurement for power generation would be centralized in CAMMESA (with the exception of the power Semiannual Remuneration for Cost Update generation under Energía Plus regime). On February 19, 2018, the ENRE issued Res. No. 37/18 and No. 38/18, which were later amended on April 5, 2018 by ENRE Res. No. 99/18 and 100/18, respectively. These resolutions updated Transener and The cost of generation with own fuels will be valued according to the mechanisms for the recognition of Transba’s remunerations by 24.15% and 23.39%, respectively (both including a 0.2% X Factor adjustment CVPs standardized by CAMMESA. Furthermore, in December 2018, the fuel self-procurement capacity was stimulating efficiency), accumulated during the December 2016 – December 2017 period and applicable to extended to power plants subject to differential remuneration schemes. However, CAMMESA will remain in the remuneration scheme as from February 1, 2018. charge of the commercial management and fuel dispatch for power generators that cannot or do not make use of such capacity. Furthermore, after filing repeated claims before the ENRE through the Association of Electric Power Transmission Companies of the Republic of Argentina (ATEERA), on November 16, 2018, the ENRE issued Since the seasonal programming conducted on November 12, 2018 the Company has opted to make use of Res. No. 280/18 and 281/18, which adjusted Transener and Transba’s remunerations by 42.55% and 43.25%, this self-procurement capacity, and has destined a significant part of its natural gas production to its thermal respectively (both including a 0.2% X Factor adjustment), for the December 2016 – June 2018 period, units’ dispatch. applicable on the remuneration scheme as from August 1, 2018. As CAMMESA did not compute interest for the months of August and September 2018, Transener and Transba filed a claim before the ENRE and Finally, on February 8, 2019, SGE Note No. 07973690 was issued, which instructed CAMMESA, effective as CAMMESA for the settlement of the applicable interest. from February 18, 2019, to apply, for the definition of maximum CVP recognizable in each two-week period, the weighted average price of natural gas by basin that would have resulted if the total domestic natural gas As of the publication of this Annual Report, the ENRE has still not issued the resolutions corresponding production necessary to supply the electricity sector had been acquired under agreements entered into in to the semiannual update for Transener and Transba’s remuneration, which, according to the RTI, should CAMMESA’s last auction conducted through MEGSA28. have been applied since February 1, 2019. Based on actual data and estimates, the calculation of Transener and Transba’s updates would amount to 25.5% and 27%, respectively (both including a 0.14% X Factor New Remuneration Scheme for Legacy Capacity29 adjustment stimulating efficiency), accumulated for the June 2018 – December 2018 period. Transener is currently conducting the applicable procedures to regularize this situation. On March 1, 2019, SRRYME Res. No. 1/19 was published in the BO, which abrogated the remuneration scheme established by SEE Res. No. 19/17. The new remuneration scheme is denominated in US$ and applicable as from March 1, 2019. The main changes are: RTI for Independent Power Transmitters • The power capacity remuneration for thermal power plants with the DIGO declaration is reduced to On July 3, 2018, the ENRE launched the proceeding for the determination of the remuneration to independent US$5,500/MW-month for the periods of March – May (fall) and September – November (spring); power transmission companies in the exploitation stage, including TIBA (operated by Transener’s subsidiary, Transba), the Fourth Line (operated by our subsidiary, Transener), and Enecor (Pampa’s subsidiary). • For thermal power plants, a coefficient derived from the unit’s average utilization factor during the last twelve months is applied: to collect 100% of the power capacity payment, a minimum 70% utilization factor On October 8, 2018, the information on costs, investments and tariff expectations for the Fourth Line and is required; if the utilization factor ranges between 30% and 70%, a percentage linearly correlated with the TIBA were submitted before the ENRE. In this same line, on October 17, 2018 Enecor filed a request for the factor is collected; and if the load factor is lower than 30%, the resulting coefficient will be 0.70; and corresponding tariff review. • The operation and maintenance remuneration is reduced to US$4/MWh for energy generated with gas and to US$7/MWh if generated with FO or GO, and the remuneration for operated energy is reduced to As of the issuance of this Annual Report, the ENRE has still not published the conclusions of the RTI or the US$1.4/MWh. resulting tariff schemes.
Power Capacity Increase at CTLL Distribution of Cash Dividends In August 2011, after postponing the closing to CC’s commissioning at CTLL, the work contractor informed Pursuant to the delegation of powers granted by Transener’s Ordinary Meeting of Shareholders held that Siemens, the equipment supplier, had detected design flaws in other STs using the same technology, on April 12, 2018, on December 12, 2018 Transener’s Board of Directors resolved to release the amount of so it decided to remove the last vane wheel of the ST installed in CTLL; as a result, the commissioning was AR$1,489.4 million from the reserve account for future dividends and to distribute such amount as cash declared for a lower capacity than that originally committed (165 MW instead of 178 MW). dividends for the fiscal year ended December 31, 2017.
This vane wheel was replaced in October 2017, and after commercial testing, on January 19, 2018 Declared dividends were paid on December 26, 2018. CAMMESA granted unit LDLATV01’s commercial commissioning for a 180 MW capacity, with a 15 MW increase, collecting the remuneration stipulated in the PPA entered into with CAMMESA pursuant to SE Res. No. 220/07. Therefore, CTLL’s total capacity amounts to 765 MW.
28 For further information, see section 7.4: ‘Price of Natural Gas for Power Generation’ of this Annual Report. 29 For further information, see section 5.1: ‘SRRYME Res. No. 1/19: Current Remuneration Scheme for Legacy Capacity’ of this Annual Report. 30 For further information, see section 5.2: ‘Transener’s Tariff Situation’ and ‘RTI’ of this Annual Report.
70 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 71 ANNUAL REPORT 7.3 Regulatory Asset and Liability Situation On July 31, 2018, the MinEn and Edenor agreed to carry out the necessary administrative actions Edenor to regularize outstanding liabilities for the Transition Period regarding the effects of the breach of the Memorandum of Understanding executed in 2007. CPD and VAD Remuneration Update31 On September 15, 2018, SEE Note No. 2018-45662399 extended the term for such regularization until ENRE Res. No. 33/18 issued on January 31, 2018 published a new tariff scheme, effective as from February the end of November 2018. Furthermore, on September 28, 2018 the SEE required Edenor to update the 1, 2018, which applied the seasonal prices under SEE Res. No. 1091/2017, the last 17.8% VAD increase, and the damage report covering all claims resulting from the breach of the Memorandum of Understanding, net 22.5% CPD update corresponding to the August 2017 – January 2018 six-month period (including a -2.51% E of the amounts collected in the time period under analysis, timely submitted on May 11, 2017 with values Factor stimulating efficiency), accumulated since January 2017 and provided for the collection in 48 installments updated as of January 31, 2017, as well as to provide a detail of the amount of regulatory liabilities incurred of the amount deferred as a result of tariff gradual application between February 2017 and January 2018. as a result of the tariff lag and the damage to the company’s economic and financial situation. On July 31, 2018, Edenor agreed with the MinEn to defer the application of 50% of the CPD update for the As of the issuance of this Annual Report, the SEE has not issued any resolution on the treatment to be February – July 2018 period, without this implying a negative economic impact for Edenor or affecting the given to regulatory asset and liability. service quality parameters resulting from the RTI implemented on February 1, 2017. Furthermore, the MinEn agreed to carry out the necessary actions to regularize the Memorandum of Understanding entered into in 2007 and the Framework Agreement. Consequently, on August 1, 2018, ENRE Res. No. 208/2018 was published in the Transfer of Edenor’s Concession Jurisdiction BO, which provided for a 15.85% update in the CPD, 7.925% effective as from August 1, 2018, and the balance Pursuant to Laws No. 27,469 (2018 Fiscal Consensus) and No. 27,467 (Fiscal Year 2019 General Expenses being payable in six monthly consecutive installments effective as from February 1, 2019 and adjustable based and Resources Budget for the National Administration), on February 28, 2019 the representatives of the Federal on the CPD update applicable on that date. Government, the Province of Buenos Aires and the Autonomous City of Buenos Aires executed an agreement to transfer the electricity distribution utility service _timely granted by the Federal Government to our subsidiary Finally, on February 1, 2019, ENRE Res. No. 25/2019 was published in the BO, which approved the tariff Edenor_ to the jurisdictions of the Province of Buenos Aires and the Autonomous City of Buenos Aires. scheme effective as from its publication date and reflected the new seasonal prices described in SGE Res. No. 366/2018. On the same date, ENRE Res. No. 27/2019 was also published, being effective as from March 1, 2019, It should be noted that Edenor has not been a party to this agreement, which does not affect either the terms and which provided for a 24% retroactive adjustment as of February 2019 of the CPD for the August 2018 – of the concession or the results of the RTI. However, Edenor is currently analyzing its scope and implications. January 2019 semester (including the -1.59% E Factor adjustment stimulating efficiency) and the 7.925% CPD update that had been deferred in August 2018, with retroactive effects as of that date. Claim Filed Against RDSA WEM Seasonal Programming With the purpose of concentrating Edenor’s centralized functions on a single facility and reducing rental costs and the risk of future rent increases, in October 2015 Edenor acquired from RDSA a real estate asset On May 14, 2018, SEE Provision No. 44/2018 was issued, ratifying for the May – October 2018 period to be developed for a total amount of US$46 million equivalent to AR$439 million at the exchange rate the same reference prices than for the December 2017 – April 2018 period, which was approved pursuant effective on the agreement’s execution date. In order to guarantee payment of the applicable compensation to SEE Res. No. 1091/2017: the power capacity reference price was set at approximately AR$3,157/MW- in case of breach by RDSA, Edenor received a surety bond for up to US$46 million, adjusted by Badlar month; the stabilized price for transmission in the extra high voltage system, at AR$44/MWh, and a price interest rate in US$ plus 2%. for main distribution based on the distribution company, which, in the case of Edenor, amounted to AR$1.1/ MWh. Besides, energy reference prices were set at AR$1,395/MWh for GUDI and at AR$1,081/MWh for the In this respect, in view of the default to deliver the real estate, of which maturity date was due on June remaining users. 1, 2018, Edenor proceeded to constitute RDSA in arrears, notifying the insurance company issuer of the surety bond and executing the collection of the corresponding penalties. Later, and upon the expiration of Furthermore, on July 31 and October 24, 2018, the SEE issued Provisions No. 75/2018 and 97/2018, the legal terms stipulated in the agreement, on August 27, 2018 Edenor notified RDSA of its Res. due to its which established, for the August 2018 – January 2019 period, the power capacity reference price at breach, demanding the return of the purchase price plus interest at a rate of 15% in US$ applicable as from AR$10,000/MW-month, the stabilized price for transmission in the extra high voltage system at AR$64/ the price payment date until the arrears’ date, minus the above-mentioned penalties for delay. MWh, and a price for main distribution based on the distribution company which, in the case of Edenor, amounted to AR$0/MWh. Furthermore, energy reference prices were set at AR$2,283/MWh for GUDI and However, taking into consideration that RDSA filed a bankruptcy petition on February 1, 2019, and at AR$1,470/MWh for the remaining users. As regards the social tariff, SEE Res. No. 1091/2017’s criteria that on February 28, 2019, the National Superintendence of Insurance issued Res. No. 207/19 prohibiting regarding subsidies to users and discounts for savings remained in effect. the execution of new agreements and keeps the general restraint on the alienation of property until the regularization of the deficit situation, Edenor has partially provisioned the receivable value weighing Finally, on December 27, 2018, SGE Res. No. 366/2018 was issued, which abrogated SEE Res. No. the possibility of recovery on account of the quality of its right to claim and RDSA’s financial situation. 1091/2017 and, consequently, the Federal Government’s social tariff and the discounts for saving scheme, Consequently, the receivable balance disclosed as of December 31, 2018, net of provisions, amounts to fixing a power capacity reference price of AR$80,000/MW-month effective as from February 2019, with AR$766 million. 25% and 20% increases in the months of May and August, respectively, effective until October 2019. The stabilized price for transmission in the extra high voltage system and the distributor-based main distribution price remained unchanged. Energy reference prices were set at AR$2,762/MWh for GUDI for the February – October 2019 period, and at AR$1,852/MWh for other users as from February 2019, with 5% increases in the months of May and August and effective until October 2019.
31 For further information, see section 5.3: ‘RTI’ of this Annual Report.
72 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 73 ANNUAL REPORT 7.4 Oil and Gas Extension of Concessions El Mangrullo On June 5, 2018, the Company was granted a 35-year extension to the operation of the El Mangrullo block for the development of unconventional gas, shale and tight gas, under the new exploitation concession granted to the ENIM by the Province of Neuquén, effective as from the issuance of Provincial Executive Order No. 835/2018 on June 18, 2018.
El Mangrullo block, which is currently 100% developed by Pampa, is located in central-east of the Province of Neuquén and has a 194 km2 surface. Pampa produces natural gas from the Mulichinco and Agrio formations (compact sands or tight gas), with 45 productive wells and a 3.3 million m3 daily production as of December 2018.
In consideration of the term extension, Pampa committed to conduct an investment pilot plan for an amount of US$205 million during the following 5 years aiming to continue developing the Mulichinco and Agrio formations through the drilling of 15 wells, as well as the drilling of 1 well targeting the Tordillo formation, and to explore the potential of the Vaca Muerta formation (shale gas) through the drilling of 3 additional horizontal wells. Moreover, Pampa disbursed an exploitation bond and a contribution to corporate social responsibility for US$15.4 million.
Sierra Chata On July 10, 2018, a Memorandum of Understanding was entered into with the Province of Neuquén for the granting of a new 35-year concession for the exploitation of unconventional hydrocarbons at the Sierra Chata block aiming at the development of unconventional gas in the Vaca Muerta and the Mulichinco formations, effective as from the passing of Provincial Executive Order No. 1086/2018 on July 27, 2018.
The Sierra Chata block is located 150 km northwest of the City of Neuquén and has an 864 km2 surface. The block currently produces natural gas from the Mulichinco formation (compact sands or tight gas), with 69 productive wells and a 1.2 million m3 daily net production32 as of December 2018. Pampa is the operator of the Sierra Chata block and holds a 45.6% stake, jointly with Mobil Argentina S.A. and Total Austral S.A., Argentina Branch, with a participation of 51.0% and 3.4%, respectively.
In consideration for obtaining the new concession, the Sierra Chata consortium committed to make investments in the block for an amount of US$520 million during the following 5 years (of which Pampa will contribute the amount corresponding to its stake) with the purpose of continuing with the development of the Mulichinco formation and exploring the potential of the Vaca Muerta formation. Furthermore, the Sierra Chata consortium disbursed an exploitation bond and a contribution to corporate social responsibility for US$30 million.
Exploration License in the Parva Negra Este Block The exploration license for Parva Negra Este block, located in the Province of Neuquén, granted under concession to GyP and operated by Pampa since April 2014 for a term of 4 years, expired in the month of April 2018. As the original agreement had stipulated the possibility to extend it for a year, GyP requested such extension in due time and manner.
On June 7, 2018, the Province of Neuquén issued Executive Order No. 759/18 ratifying such extension until April 3, 2019. Pampa has a 42.5% interest in the Parva Negra Este block.
32 At 100% of the area.
74 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 75 ANNUAL REPORT Las Tacanas Norte Exploration Agreement However, on February 8, 2019, the SGE issued Note No. 07973690 instructing CAMMESA to recognize within the declared CVPs the maximum gas price equivalent to the average weighted price by basin that would have On November 1, 2017, GyP’s Board of Directors had granted the Company for the bid submitted for Las resulted if the entire fuel had been acquired by CAMMESA33. Tacanas Norte block. Furthermore, on January 4, 2019, upon the publication in the BO of Executive Order No. 2315/18 of the Executive Branch of the Province of Neuquén, this exploratory agreement for a term of 4 years On the other hand, seeking that the WEM should bear the costs of imported gas and, consequently, reflect entered into effect. The awarded offer consists of the drilling of 8 wells targeting the Vaca Muerta formation them in the variable costs the electric dispatch is based on, on October 4, 2018 SGE Res. No. 25/2018 was issued, and other exploratory studies. which provides that, in case the supplier is IEASA, CAMMESA should adopt the acquisition and commercialization cost effective as from October 1, 2018. Las Tacanas Norte block has a 120 km2 surface and borders El Mangrullo block, which is currently operated by the Company. Furthermore, Pampa is the operator of Las Tacanas Norte with a 90% interest, and GyP is the permit holder with a 10% interest. Natural Gas Price for Residential and CNG Demand With the purpose of guaranteeing the proper supply of natural gas to distribution companies, promoted by Exploration Permits in Oil Blocks the MEyM, on November 29, 2017, Pampa, jointly with the country’s main natural gas producers, executed an agreement with gas distributors stipulating the terms and conditions effective for a term of one year beginning The exploration permits for Río Atuel, a block located in the Province of Mendoza operated by Petrolera El January 1, 2018 by committing a minimum supply volume. Trébol, expired in the month of September 2018, and the term was extended until March 13, 2019 pursuant to Administrative Decision No. 19/18 issued by the Department of Hydrocarbons of Mendoza. Pampa has a 33.33% However, on account of the significant devaluation of the AR$ and the impossibility by distribution companies interest in the Río Atuel block. to pass this new exchange rate on to final users’ tariff schemes, in early October, 2018, this agreement was rendered ineffective and, consequently, prices began to be agreed with distributors in the spot market on a daily Furthermore, the exploration permits for Chirete, a block located in the Province of Salta and operated by basis. Furthermore, ENARGAS Res. No. 280-289 and 292/2018 were issued, which established, effective for a High Luck Group Limited, expired in November 2018. However, as the drilling of a well is in progress, a term six-month period beginning October 1, 2018, new natural gas final tariffs for residential, P General Service with extension was requested to the Province. On February 22, 2019, Provincial Executive Order No. 249/19 was full service and CNG users, considering a price of natural gas as a raw material ranging between AR$2.42/m3 issued, which extended the exploratory term for a 12-month period effective as from November 18, 2018. (equivalent to US$1.74/MBTU) and AR$5.53/m3 (equivalent to US$3.98/MBTU), including the differential tariff34. Pampa has a 50% interest in the Chirete area. These gas prices differ based on the distribution company and the geographical location.
Natural Gas Price for Power Generation On the other hand, as regards receivables accrued by many gas producers, including Pampa, on account of exchange differences between the price of the gas purchased by gas distributors and that recognized in their On August 1, 2018, MinEn Res. No. 46/2018 was published in the BO, which set maximum prices within the final tariffs, on November 15, 2018 PEN Executive Order No. 1053/2018 was issued, which established, on an PIST for natural gas, based on the source basin, applicable for the valuation of natural gas volumes destined exceptional basis, that the Federal Government would bear such difference for the April 2018 – March 2019 to the power generation to be sold within the WEM, and effective as from the publication of such Res. The period. The resulting net amount will be transferred to gas distribution companies, which will immediately set prices were the following: US$4.42/MBTU for the Neuquina Basin, US$3.94/MBTU for the Noroeste Basin, transfer it to the involved gas suppliers in 30 monthly and consecutive installments as from October 1, 2019 US$3.87/MBTU for the Golfo San Jorge Basin, US$3.70/MBTU for the Santa Cruz Sur Basin, and US$3.58/MBTU using BNA’s effective interest rate for AR$-denominated 30-day term deposits. for the Tierra del Fuego Basin, with a weighted average of US$4.20/MBTU.
On the other hand, on September 6, 2018, CAMMESA’s auction through the MEGSA for the supply of natural Public Tender for Gas Supply on a Firm Basis for Distribution Companies gas to power plants during the September – December 2018 period took place, and price indications for a total On February 11, 2019, SGE Res. No. 32/19 was published in the BO, which approved the mechanisms for the 3 gas volume of 143 million m gas per day on an interruptible basis were received at a weighted average PIST single-price public tender to supply natural gas on a firm basis to gas distribution companies. The tender was price of US$3.8/MBTU. Pampa submitted a bid in the auction and sold gas to CAMMESA on an interruptible conducted in two stages, on February 14, 2019 for all basins except for the Noroeste Basin, and the following basis at the prices agreed in such offers. day for the Noroeste Basin with the participation of IEASA as the domestic supply is insufficient.
On December 27, 2018, another CAMMESA’s auction through the MEGSA for the supply of natural gas to The tender was held on-site at BCBA through the MEGSA platform under a single-round electronic auction 3 thermal power plants for the year 2019 took place, and price indications for a total gas volume of 222 million m mechanism, which comprised a 12-month period with seasonality, winter volumes being 2.5 times higher gas per day on a interruptible basis were received, at seasonal PIST prices ranging between a maximum price of than summer volumes, the winter period comprising the April – September 2019 period, and the summer US$5.2/MBTU and a minimum price of US$3.2/MBTU for the June – August 2019 period, and a maximum price period, comprising the October 2019 – April 2020 period, with ToP commitments for the purchaser and DoP of US$3.7/MBTU and a minimum price of US$2.2/MBTU for the rest of the year. commitments for the seller for up to 70% of the maximum daily volume. Furthermore, gas paid but not received may be recovered in the following summer period provided it is received by the purchaser. In this auction, maximum PIST seasonal reference prices were considered, based on the source basin, pursuant to the annex to SGE Note No. 66680075/2018 issued on December 19, 2018 and effective as from On the auction held on February 14, 2019, 14.4 million m3 per day were awarded for the summer, and 36.1 January 1, 2019. For the June-August 2019 period, the following prices were fixed: US$4.95/MBTU for the million m3 per day for the winter, at a weighted average price of US$4.62/MBTU among the awarded bids. Out Neuquina Basin, US$5.15/MBTU for the Noroeste Basin, US$5.10/MBTU for the Golfo San Jorge Basin, US$4.90/ of these volumes, 83% corresponded to the Neuquina Basin at a weighted average price of US$4.61/MBTU. MBTU for the Santa Cruz Sur Basin, and US$4.85/MBTU for the Tierra del Fuego Basin; whereas for the rest of Pampa submitted a tender and was awarded this auction. the year prices were fixed at US$3.70/MBTU for the Neuquina Basin, US$3.60/MBTU for the Noroeste Basin, US$3.55/MBTU for the Golfo San Jorge Basin, US$3.35/MBTU for the Santa Cruz Sur Basin, and US$3.30/MBTU for the Tierra del Fuego Basin.
33 For further information, see section 7.1: ‘Fuel Self-Procurement by Thermal Power Plants’ of this Annual Report. 34 Resolutions with the new tariff schemes contemplate an exchange rate of AR$37.69/US$, corresponding to BNA’s closing exchange rate on October 3, 2018.
76 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 77 ANNUAL REPORT Furthermore, on the auction held of February 15, 2019, 3.8 million m3 per day were awarded for the summer, consecutive installments payable as from January 1, 2019. In this sense, on May 2, 2018, Pampa filed before the and 9.4 million m3 per day for the winter, at a weighted average price of US$4.35/MBTU, 100% of the volume MEyM the adhesion form, expressing its acceptance and consent to the terms and scopes of such Res. corresponding to the Noroeste Basin. On February 21, 2019 SGE Res. No. 54/19 was published, which provided that obligations arising under MEyM Invoices will be issued in AR$/m3 within 5 days following the last day of delivery for each month, and be Res. No. 97/18 should be settled through the issuance of national debt securities. Consequently, on February 26, payable 65 days after the end of the month of actual delivery. Furthermore, payments in arrears will bear 2019, Joint Res. No. 21/2019 of the Secretariat of Finance and the Secretariat of Treasury was published, which interest at a rate equivalent to 150% of BNA’s 30-day term time deposit’s average rate. The seller may request provided for the issuance on February 27, 2019 of US$-denominated Natural Gas Programs Bonds for a term the purchaser to constitute a surety bond and, in case ENARGAS does not guarantee the pass-through of the of 2 years and 4 months, without interests, and consisting of 29 monthly and consecutive installments, being agreed sales price to the tariff, either party may terminate the rights and obligations under the agreement. the first one for 6.66% of the original face value, the following 18 installments for 3.33%, and the remaining 10 installments for 3.34%. Pass-Through Methodology of Gas Prices to Tariffs Pampa filed the application form before the SGE, stating its consent and acceptance to the terms and scopes With the publication of ENARGAS Res. No. 72/19 in the BO, the pass-through methodology of gas prices of SGE Res. No. 54/19. The receivables’ balance pending collection disclosed in the FS as of December 31, 2018 to tariffs and the general procedure for calculating accumulated daily nominal foreign exchange differences amounts to AR$5,338 million. However, as regards compensations under the Plan Gas accrued during fiscal year entered into effect on February 12, 2019. Among other aspects, this methodology considers the recognition of 2018, approximately AR$649 million were collected in January 2019. prices stipulated in the agreements entered into between gas distributors and producers under the auctions conducted pursuant to SGE Res. No. 32/1935 and the definition of the exchange rate to be used. Specifically, Gas Export Authorization it provides that the exchange rate to be considered by producers and distribution companies should be BNA’s average currency exchange rate for the first 15 days of the month immediately preceding the beginning of each On August 21 and September 15, 2018, MinEn Res. No. 104/2018 and SGE Res. No. 9/2018, respectively, seasonal period or, if lower, the exchange rates stipulated in the agreements. were issued establishing a Procedure for the Authorization of Natural Gas Exports. Authorizations may consist of short-term (up to 1 year) or long-term (1 to 10 years) exports, whether on an interruptible or on a firm basis for summer period (October - April for a term of up to 5 years), or operational exchanges in Plan Gas emergency situations, being the security of supply to the Argentine domestic market a condition in all cases. Furthermore, in the case of projects under the Unconventional Plan Gas, exported natural gas may not be Changes to the Unconventional Gas Production Encouragement Program computed as part of and/or within the production applicable to such program. One of the Company’s main strategies consists of focusing its investments on natural gas E&P, with special emphasis on the development and exploitation of unconventional gas reserves in our blocks. The extensions to On December 12, 2018, Pampa was authorized pursuant to SGE Res. No. 252/2018 to export natural gas the terms of exploitation licenses in Pampa’s blocks, achieved in 2018 for El Mangrullo and Sierra Chata, in addition to Chile, on an interruptible basis, from the Río Neuquén and Rincón del Mangrullo blocks to Colbún S.A., at 3 to Río Neuquén in 2016 and Rincón del Mangrullo in 2017, were carried out in line with this strategy, as well as a PIST price of US$$4.2/MBTU, for a maximum volume of 2 million m per day until November 15, 2019, or a requirement for joining the Unconventional Plan Gas regulated by MEyM Res. No. 46/2017 and No. 419/2017. until meeting the total maximum quantity equivalent to the authorized daily export volume by the number of days this authorization is effective, whichever occurs first. In this sense, Pampa had requested the SGE to include within the Unconventional Plan Gas the following exploitation projects duly approved by the applicable Provincial authority: Furthermore, on January 22, 2019, the Company was authorized pursuant to SGE Res. No. 12/2019 to export natural gas to Uruguay, also on a interruptible basis, and from the Río Neuquén and Rincón del i. Río Neuquén, filed on February 5, 2018, in which Pampa holds a 33.07% working interest; Mangrullo blocks to the National Administration of Power Plants and Electric Transmissions, at a PIST price of US$4.01/MBTU, for a maximum volume of 600 thousand m3 per day until May 1, 2019, or until meeting ii. El Mangrullo, filed on July 26, 2018, in which Pampa stands as operator and holds a 100% working the total maximum quantity equivalent to the authorized daily export volume by the number of days this interest; and authorization is effective, whichever occurs first. iii. Sierra Chata, filed on July 30, 2018, in which Pampa stands as operator and holds a 45.55% working interest. It should be remembered that from September 4, 2018 to December 31, 2020, the application of a natural gas export duty of AR$4 per each exported US$, with a maximum 12% tax rate, was regulated36. However, on January 30, 2019, in a meeting called by the SGE with the participation of gas producers affected by the Unconventional Plan Gas, including the Company, it was informed that no new projects will be approved under the Unconventional Plan Gas, and that the SGE will evaluate a new encouragement scheme for Settlement Agreement between the Republic of Ecuador and Pampa the production of unconventional gas during the winter period. Energía’s Subsidiary
It should be pointed out that, as of the issuance of this Annual Report, there is no Resolution or administrative As regards the conflict EcuadorTLC (a company incorporated in the Republic of Ecuador in which Pampa directly instruction issued by the SGE, nor Pampa has been formally notified that the inclusion within the Program of and indirectly has a 100% shareholding) and other partners of the Block 18 Consortium held with the Republic the abovementioned projects has not been approved. Nevertheless, the Company is assessing the next steps of Ecuador, the resolution of which was submitted to international arbitration under the UNCITRAL arbitration and awaiting the guidelines for the new encouragement proposal for the winter period. rules (CPA Case No. 2014-32: 1. EcuadorTLC S.A. et al. c. 1. The Republic of Ecuador 2. EP Petroecuador), on January 16, 2018 the arbitration court issued the final award, which determined a settlement value of US$176 million corresponding to EcuadorTLC based on its 30% interest in the Block 18 Consortium. Compensations Pending Settlement Under the Plan Gas On April 3, 2018, MEyM Res. No. 97/18 was published in the BO, which approved the procedure for the Furthermore, as regards this arbitration, on March 19, 2018, the Republic of Ecuador and the partners of the cancellation of the amounts owed for fiscal year 2017 under the Plan Gas I, II and III programs in 30 equal and Block 18 Consortium entered into an agreement whereby the plaintiff partners would not pursue the collection
35 For further information, see section 7.4: ‘Public Tender for Gas Supply on a Firm Basis for Distribution Companies’ of this Annual Report. 36 For further information, see section 7.5: ‘New Export Duty’ of this Annual Report.
78 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 79 ANNUAL REPORT of the arbitration’s final award in consideration of the granting of consequential damages, which for EcuadorTLC from April 1, 2018, the last installment of the tariff increase granted by Res. No. 4,362/17, equivalent to a 50% consisted of the release from tax and labor claims in dispute in the amount of US$132 million, and the additional increase in tariff schemes applicable to natural gas transportation utility service of TGS, as well as in the CAU, collection of US$54 million before the end of the first semester of the year (including the recovery of granted including a 13% recognition on account of IPIM variations for the November 2017 – February 2018 period, and guarantees). In 1Q18, net reporting profits were recorded for AR$807 million. a compensation for the tariff increase deferral payable in installments.
Finally, the Republic of Ecuador has declared and acknowledged that this agreement is fully valid and Under the framework of the public hearing held on September 4, 2018, in which TGS requested an binding, that any default in payment will enable the Block 18 Consortium partners to fully enforce the final approximate 30% tariff increase based on the variation in the IPIM recorded for the February – August 2018 award, and that there are no other obligations pending performance regarding the operation and exploitation period, on September 27, 2018 ENARGAS issued Res. No. 265/2018 granting a 19.7% increase in tariff schemes of Block 18 by the consortium. applicable to natural gas transportation utility service of TGS, effective as from October 1, 2018.
This increase was determined by ENARGAS based on the simple average of the IPIM, the Construction Cost Index for the February - August 2018 period, and the Salary Variation Index for the December 2017 - June 2018 7.5 period pursuant to ENARGAS Res. No. 4362/2017 concerning the RTI, which stipulates, among other issues, that under certain macroeconomic conditions and circumstances, such as the significant devaluation which took TGS place in April 2018, and taking into consideration that the semiannual update is a non-automatic adjustment mechanism, this entity may use other indexes different from the IPIM to determine tariff increases. Midstream Project in Vaca Muerta Finally, pursuant to Res. No. 1/19 issued on February 4, 2019, ENARGAS called TGS for a public hearing to On April 4, 2018, Provincial Executive Order No. 379/18 was published in the BO of the Province of Neuquén, be held on February 26, 2019 with the purpose of disclosing the application of the semiannual tariff update which establishes the entry into force of the memorandum of understanding executed on April 3, 2018 by TGS, corresponding to the August 2018 – February 2019 period. the Subsecretariat of Energy, Mining and Hydrocarbons of the Province of Neuquén, and GyP, and grants TGS a concession for the construction and operation of a gathering gas pipeline going through several fields in the Vaca Muerta formation to capture natural gas production before its entry into the gas main pipelines. Long-Term Ethane Sales Agreement
Initially, the Northern Tranche was approved, which will connect the Rincón La Ceniza field with the main On September 6, 2018, TGS entered into an ethane sales agreement with Polisur, a subsidiary of Dow Chemical and TGS’s sole customer for the commercialization of this product, which is produced at the General transportation system’s connection point and will have a transportation capacity of 35 million m3/day, a length Cerri Complex located in the City of Bahía Blanca, Province of Buenos Aires. of 90 km, a 36” diameter and a pressure of 97 kg/cm2. Additionally, TGS will build and operate a conditioning plant in the town of Tratayén, which will adapt the natural gas quality before its entry into the gas main This agreement is retroactively effective as from May 1, 2018 and will terminate on December 27, 2027. The pipelines, with an initial capacity of 5 million m3/day, extendable in modules until reaching 56 million m3/day. price of ethane is determined by the parties and is subject to certain adjustment clauses resulting from variation On June 7, 2018, a supplementary memorandum of understanding was entered into, which was later in different factors, such as annual delivered volumes and the price of gas. Additionally, this agreement includes ratified by Executive Order No. 836/2018 of the Executive Branch of the Province of Neuquén, granting TGS an ToP and DoP commitments for minimum annual quantities. extension of the gathering gas pipeline southwards, which will also go through several fields, mainly located in the Vaca Muerta formation. The Southern Tranche will extend from the progressive stop Km 32.5 of the New Export Duty Northern Tranche to the progressive stop Km 41 of the El Mangrullo-Aguada La Arena gas pipeline. This new pipeline will allow for the transportation of up to 25 million3/day, and will have a length of 33 kilometers, a 30” PEN Executive Orders No. 793 and 865/2018, issued on September 3 and 27, 2018, respectively, regulated diameter and a maximum operating pressure of 97 kg/cm2. the application of a duty on exports for all the goods under the Common Mercosur Nomenclature, including natural gas, crude oil, propane, butane and natural gasoline, effective from September 4, 2018 to December 31, On November 26, 2018, another supplement to the memorandum of understanding was entered into, 2020. This duty provides for a AR$4 withholding on each exported US$, with a maximum 12% tax rate. which was later ratified by Executive Order No. 2381/18 of the Executive Branch of the Province of Neuquén, establishing the commitment to grant TGS an extension of the Northern Tranche, which will extend from the The export duty amount will be stated in AR$ at the exchange rate effective on the date of registration of Rincón La Ceniza block (the progressive stop Km 91.0) to Los Toldos I Sur block (the progressive stop Km 116.0), the corresponding export request and, if applicable, it will remain in AR$ until the settlement of the obligation. and will have a length of 25 kilometers and a 36” diameter. Additionally, beneficiaries from the Simplified Exports Regime called ‘Exporta Simple’ are exempted from this duty.
The total investment for the 147-km pipeline and the conditioning plant is estimated at US$250 million, with Award in the Arbitration Complaint Against TGS a total transportation capacity of 60 million m3 per day. As of the issuance of this Annual Report, the related works are in the execution stage, and commissioning is estimated to be in stages as from the second quarter On April 20, 2018, TGS was notified by the ICC that on April 18, 2018 it had received the Draft Award issued by of 2019, concluding in the fourth quarter of the same year. the Court of Arbitration in the arbitration complaint timely filed against TGS for an amount of US$306 million by Pan American Energy LLC, Argentina Branch, and Pan American Sur S.A., which was finally approved on May 4, 2018. Ratification of the Comprehensive Renegotiation Memorandum On May 28, 2018, the ICC issued the Final Award, which partially upheld the allegations of the complaint of Understanding and Costs and Tariffs Remuneration Update and resolved that TGS should pay to the plaintiff a compensation in the amount of US$21.3 million, including On March 28, 2018, PEN Executive Order No. 250/18 was published in the BO, whereby the Federal interests, which disbursement was made on June 14, 2018 for a total amount of AR$553 million. Government ratified the Comprehensive Renegotiation Memorandum of Understanding for the license executed by TGS on March 30, 2017, thus concluding the RTI process initiated in the month of April, 2016, and as a result, Distribution of Cash Dividends on June 26, 2018, TGS voluntarily dismissed the Arbitration Proceeding it had brought before the ICSID. By virtue of the faculties delegated by the Ordinary and Extraordinary Shareholders’ Meeting held on April 10, Therefore, and pursuant to MEyM Res. No. 74E/17, ENARGAS issued Res. No. 310/18 approving, effective as 2018, TGS’s Board of Directors approved the distribution of the following cash dividends for a total amount of AR$3,705 million:
80 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 81 ANNUAL REPORT i. On July 6, 2018, and paid on July 17, 2018, for a total amount of AR$912 million corresponding to fiscal Sale of Equity Ownership at OldelVal year 2016, equivalent to AR$1.16 per outstanding common share or AR$0.23 per ADR; On November 2, 2018, Pampa executed an agreement with ExxonMobil to sell 21% of the capital stock at ii. On August 8, 2018, and paid on August 22, 2018, for a total amount of AR$1,220 million corresponding Oldelval, a company engaged in the main transportation of crude oil from Neuquén to Puerto Rosales, in the to fiscal year 2017, equivalent to AR$1.55 per outstanding common share or AR$0.31 per ADR; and Province of Buenos Aires. It is worth highlighting that Pampa still keeps a 2.1% equity ownership at Oldelval. On iii. On September 6, 2018, and paid on September 20, 2018, for a total amount of AR$1,573 million November 27, 2018, the transaction was closed after the meeting of all precedent conditions. The transaction corresponding to fiscal year 2017, equivalent to AR$2.0 per outstanding common share or AR$0.4 per ADR. price amounted to US$36.4 million, which was fully paid by ExxonMobil on the transaction’s closing date.
7.6 7.7 Strategic Divestments Corporate Reorganization Divestments in E&P, oil transportation and fuel R&D assets have strategic importance for the Company as they allow to focus its investments and human resources on its core businesses: the expansion of its power Completion of the 2016 Reorganization generation installed capacity, natural gas E&P, placing a special emphasis on the development and exploitation In compliance with the merger process between the Company and Petrobras Argentina, Petrobras Energía of unconventional gas reserves, as well as to continue investing on the development of its utility concessions. Internacional S.A. and Albares Renovables Argentina S.A., on February 28, 2018 Pampa provided the market with a thorough detail of the status of the merger proceedings before the CNV, as requested by the CNV on February Sale of Certain Oil Assets from the E&P Segment 27, 2018 as a result of a public information request submitted to the CNV by a shareholder of Petrobras Argentina.
On January 16, 2018, Pampa executed with Vista Oil & Gas an agreement for the sale of its direct interests of In view of the delays in the conclusion of the merger process initiated in December 2016, which was 58.88% at PELSA, 3.85% at the Entre Lomas, Bajada del Palo and Agua Amarga blocks, and 100% at Medanito fully approved by the respective Shareholders’ Meetings of Pampa and Petrobras in February 2017, and after S.E. and Jagüel de los Machos blocks. responding to multiple findings made by the CNV for its registration, the CNV informed that the process was suspended as a result of a judicial decision which had ordered it to refrain from adopting any final measure or On April 4, 2018, the transaction was closed after the meeting of all precedent conditions, including the approval resolution on such merger. Specifically, the CNV informed us that Federal Criminal and Correctional Court No. by shareholders’ meeting of Vista Oil & Gas. Following the application of the agreed adjustments, the transaction 11, Clerk’s Office No. 22, resolved as follows: ‘(…) In this regard, let the officiant know that the CNV SHOULD price amounted to approximately US$399 million, which was fully paid by Vista on the transaction’s closing date. NOT take any final measure and/or resolution regarding the merits of the case without the prior authorization from this Court in relation to the proceeding pending before the CNV regarding the corporate reorganization of Sale of Assets from the R&D Segment Pampa Energía S.A.’. It is worth highlighting that the criminal investigation refers to the voluntary participation of shareholder FGS-ANSES in the mandatory MTO conducted in October and November 2016 and does not refer On December 7, 2017, Pampa entered into an agreement with Trafigura for the sale of assets related to the merger with Petrobras, a reorganization process which took place after the MTO and was completely to the Company’s R&D segment, including the RBB plant, located in Bahía Blanca, Province of Buenos independent from it, and in which FGS-ANSES did not take part given that, at that time, it was not Petrobras Aires; the lubricants plant, located in the district of Avellaneda, Province of Buenos Aires; the Caleta Paula Argentina’s shareholder. reception and dispatch plant, located in the Province of Santa Cruz; and the network of GS, operated by that time under Petrobras branding. At that time and in view of this judicial decision, Pampa expressed that the sale of Petrobras Argentina’s shares held by FGS-ANSES in the MTO has not had any connection with such merger, since even in the On May 9, 2018, the transaction was closed upon the meeting of all applicable precedent conditions it was hypothetical scenario that the allegedly questioned act in the criminal investigation had not occurred and FGS- subject to. It should be noted that the lubricants plant and the GS will be transferred along with the rebranding ANSES had kept its shares, participated in the shareholders’ meeting of Petrobras Argentina in February, 2017, process to the ‘Puma Energy’ brand, a process which is expected to conclude in 2019. and voted against the merger, the decision would had nevertheless been validly approved with 81.13% of the capital stock and votes of Petrobras Argentina. Following the application of the adjustments stipulated in the assets purchase and sale agreement, the transaction price amounted to US$124.5 million. Furthermore, the purchaser settled its US$56 million On April 19, 2018, the Criminal Court notified Pampa that it should “place in custody of this Court and as debt with Pampa on account of crude oil purchases. The price was paid by Trafigura to Pampa upon the a precautionary measure the amount of US$20 million, or its equivalent in securities, surety bonds or other closing of the transaction, except for the US$9 million advance payment disbursed upon the execution of registrable assets as a prior condition to void the order issued by this Court (Court No. 11) to the CNV on August the agreement and the US$13.5 million, which have been deposited in an escrow account and are being 25, 2017”, whereby it ordered the CNV to refrain from adopting any final measure or resolution on such merger. released along with the transfer of the network of GS. Consequently, on April 20, 2018 Pampa acted on the Court’s request by depositing a surety bond, and on Furthermore, the sale to Trafigura included the transfer of all contracts, permits and licenses held by the April 25, 2018, the Court notified the CNV of the lifting of the timely adopted decision. On April 26, 2018, the Company and deemed substantial for the ordinary course of business, together with the transfer of 1,034 CNV notified that its Board of Directors approved the merger, and on May 2, 2018, the Public Registry entered employees associated with the assets subject-matter of the sale, of which 67 are the Company’s corporate the merger and provided for the dissolution of the absorbed companies under its control. segment employees. In this way, the Company avoided making capital disbursements to fulfill the GS rebranding process, as well as for the construction and startup of a hydro treating unit, a regulatory requirement to adjust On May 21, 2018, the exchange of Petrobras Argentina’s shares for Pampa’s common shares in book- fuel quality parameters. entry form with a face value of AR$1 each and each granting the right to 1 vote was performed automatically through Caja de Valores S.A. Petrobras Argentina’s shareholders received 0.5253 Pampa’s shares for each This transaction is added to the sale to third parties of three lots having GSs operated by Pampa, which was Petrobras Argentina’s share, and 0.2101 Pampa’s ADRs for each Petrobras Argentina’s ADR, the proceeding made in 2017 for a total amount of US$41 million, and the sale of the Dock Sud storage facility in March 2019 to Raízen Argentina, a licensee of the Shell brand, for US$20 million plus US$1.4 million in product and adjustments.
82 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 83 ANNUAL REPORT being performed by JP Morgan as depositary bank. As a result, Pampa’s issued capital stock increased from The first Repurchase Program was completed on June 27, 2018, and the last repurchase transaction under 1,836,494,690 to 1,938,368,431, excluding the repurchase of shares performed since April 2018 and shares the second Repurchase Program took place on October 23, 2018, date on which the legal cap of 10% of the issued as a result of the 2017 Reorganization. treasury capital stocks was reached. Consequently, a total number of 202,929,825 common shares or 8,117,193 ADRs were repurchased, with a total disbursement of US$328 million.
Completion of the 2017 Reorganization Pampa’s General Extraordinary Shareholders’ Meeting held on October 2, 2018 resolved to approve a capital On June 1, 2018 the Final Merger through Absorption Agreement entered into between Pampa —as absorbing stock reduction through the cancellation of 182,820,250 common shares held by Pampa in treasury at that company— and Bodega Loma la Lata S.A., CTG, CTLL, Eg3, Inversora Diamante S.A., Inversora Nihuiles S.A., time, which represented 8.8% of the issued capital. The withdrawal of the repurchased shares will enable the Inversora Piedra Buena S.A., Pampa Participaciones II S.A. and PEPASA —as absorbed companies— and filed for Company to eventually continue repurchasing shares in the market, always with a view to adding value for registration before the applicable authorities. On July 20, 2018, the CNV granted its administrative consent to shareholders. Consequently, on November 28, 2018, the Argentine Public Registry of Organizations registered such merger, and on August 2, 2018, it was filed before the Public Registry, and therefore, on August 15, 2018, Pampa’s capital stock reduction, approving the stock cancellation. the exchange of CTG, PEPASA, Inversora Diamante S.A. and Inversora Nihuiles S.A.’s shares for Pampa’s shares with a face value of AR$1 each and each granting the right to 1 vote was performed, excluding shares directly As of today, Pampa’s total capital stock amounts to 1,899.9 million common shares, of which 20.1 million or indirectly held by Pampa and companies in which Pampa holds a 100% stake. are common treasury shares. Therefore, total outstanding shares amount to 1,879.8 million, equivalent to 75.2 million ADRs.37 CTG’s shareholders received 0.6079 Pampa’s shares for each share held; PEPASA’s shareholders, 2.2699 Pampa’s shares for each share held; Inversora Diamante S.A.’s shareholders, 0.1832 Pampa’s shares for each Finally, as of the closing of fiscal year 2018, Pampa held in treasury Series I CBs maturing in 2027 for a share held; and Inversora Nihuiles S.A.’s shareholders, 0.2644 Pampa’s shares for each share held. As a result, face value of US$9 million, repurchased between August and September 2018, at a clean average price of Pampa’s issued capital stock increased from 1,938,368,431 to 2,082,690,514, excluding share repurchases US$79.2 per US$100 face value. made since April 2018. Edenor Edenor’s Board of Directors approved Edenor’s Repurchase Program in two stages, on May 10 and December 7.8 4, 2018, under the following terms and conditions: Repurchase of Own Financial Securities Given the gap existing between the implicit value of assets and their market quotation, which the latter does not reflect either the value or the economic reality they currently or potentially have, this being detrimental EDENOR to shareholders’ interests, and taking into consideration the current strong cash position and fund availability, REPURCHASE PROGRAM I REPURCHASE PROGRAM II Pampa, Edenor and TGS’s Board of Directors approved programs for the repurchase of own shares. Maximum amount for repurchase US$40 million AR$800 million In this sense, as long as the repurchase programs are in effect, directors, statutory auditors and senior Maximum price AR$60/ordinary share or US$55/ADR US$1,5/ordinary share or US$30/ADR managers may not sell shares held in such companies or directly or indirectly managed by them during the applicable term. As of the issuance of this Annual Report, Edenor and TGS’s programs are still in effect. Period in force 120 days since May 11, 2018 120 days since Dec 6, 2018 Repurchases to date 645,891 ADRs @ US$43.93/ADR 412,176 ADRs @ US$26.99/ADR Pampa Progress 100% - Complete 53% - In process Pampa’s Board of Directors approved Pampa’s Repurchase Program in two stages, on April 27 and June 22, 2018, under the following terms and conditions: NOTE: Repurchases are deemed to be effected transactions.
The first program terminated on July 11, 2018, and the second program is still in effect. As of the date PAMPA of this Annual Report, a total 21,161,340 common shares or 1,058,067 ADRs were repurchased, and total REPURCHASE PROGRAM I REPURCHASE PROGRAM II disbursements amounted to US$39.5 million.
Furthermore, as of March 1, 2019, Edenor’s total capital stock amounts to 906.5 million common shares, of Maximum amount for repurchase US$200 million US$200 million which 29 million38 are common treasury shares. Therefore, total outstanding shares amount to 877.5 million, Maximum price AR$50/ordinary share or US$60/ADR AR$62/ordinary share or US$55/ADR equivalent to 43.9 million ADRs. Period in force 120 days since April 30, 2018 120 days since June 27, 2018 Repurchases to date 4,119,451 ADRs @ US$48.52/ADR 3,997,742 ADRs @ US$32.14/ADR TGS Progress 100% - Complete 64% - Complete TGS’s Board of Directors approved the Repurchase Program in two stages, on May 9 and September 7, 2018, under the following terms and conditions:
NOTE: Repurchases are deemed to be effected transactions.
37 For further information, see section 3 of this Annual Report. 38 Including 7.8 million common shares repurchased under a 2008 program, net of deliveries to Edenor’s key staff under the Compensation Plan.
84 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 85 ANNUAL REPORT
Pampa TGS US$750m REPURCHASE PROGRAM I REPURCHASE PROGRAM II @ 7½ Pampa 750 Maximum amount for AR$1.7 billion Increased to AR$1.8 billion US$500m repurchase @ 7⅜ Maximum price AR$95/ordinary share or US$20/ADR Increased to AR$130/ordinary share or US$17/ADR 513 TGS Period in force 120 days since May 10, 2018 180 days since September 7, 2018 Edenor US$500m Transener US$176m @ 6¾ Repurchases to date 2,103,082 ADRs @ US$15.19/ADR 617,074 ADRs @ US$13.63/ADR 311 US$99m @ 9¾ Progress 100% - Complete 100% - Complete 25 @ 9¾ 197 189 25 122 141 282 176 26 NOTE: Repurchases are deemed to be effected transactions. 166 93 8 18 13
2019 2020 2021 2022 2023 2024 2025 2026 2027 The last transaction was made on December 26, 2018, and the Repurchase Program’s term expired on March 5, 2019. Consequently, a total number of 13,600,780 common shares or 2,720,156 ADRs were repurchased, with Pampa Edenor Transener @ O/S TGS @ O/S Other affiliates @ O/S a total disbursement of US$40 million.
Furthermore, as of the date hereof, TGS’s total capital stock amounts to 794.5 million common shares, of which 13.6 million are common treasury shares. Therefore, total outstanding shares amount to 780.9 million, Finally, after the closing of fiscal year 2018, Pampa redeemed at maturity for a total amount of US$24 equivalent to 156.2 million ADRs. million, net of refinancing, pre-cancelled before maturity for a total amount of US$105 million, and refinanced a total amount of US$36 million with financial entities, under short-term maturities. Acquisition of Edenor and TGS’ Shares CBs Operations As of the date hereof, the Company acquired a total of 346,270 Edenor’s ADRs at an average acquisition cost of US$26.5 per ADR, the Company’s equity interest in Edenor amounting to 51.8% of its issued capital stock. On October 5, 2018 Pampa fully redeemed on maturity date 100% of Series A CBs for the principal of AR$282 million plus AR$26 million interest. Furthermore, as of the date hereof, Pampa acquired 77,500 TGS’s ADRs at an average acquisition cost of US$12.5 per ADR, Pampa’s equity interest in TGS amounting to 25.55% of its issued capital stock. Furthermore, as of the closing of fiscal year 2018, Pampa held in treasury Series I CBs maturing in 2027 for a face value of US$9 million, repurchased between August and September 2018, at a clean average price of US$79.2 per US$100 face value. 7.9 Issuance of CBs by TGS Debt Transactions On March 27, 2018, TGS’s Board of Directors approved the issuance of CBs for up to US$500 million (or its equivalent value in other currencies), in one or more series, under the short and medium term Global Pampa Energía Program for the Issuance of CBs (non-convertible into shares) for up to US$700 million (or its equivalent Bank Loans value in other currencies). In 2018, the Company had short-term debt maturities for approximately US$285 million. In order to maintain On April 26, 2018, Series 2 fixed-rate US$-denominated discount CBs were successfully issued for a face liquidity levels, Pampa resolved to refinance a large part of these maturities through short- and medium-term value of US$500 million, after receiving offers for more than 6 times the issued face value, at a 6.75% fixed financial loans and pre-export facilities with financial entities. As of December 31, 2018, Pampa stand-alone’s annual rate, with a 6.8% yield and maturing 7 years as from issuance. The banks leading the transaction were short-term principal maturities amounted to US$282 million. HSBC, Itaú BBA, J.P. Morgan and Santander, and as local underwriters, HSBC Bank Argentina S.A., Banco Itaú Argentina S.A. and Banco Santander Río S.A. As of December 31, 2018, at consolidated level, the average interest rate was 7% for debts denominated in US$, currency in which 99% of the Company’s gross debt is denominated, mostly at a fixed rate. Pampa’s Collected funds will be destined to investments by TGS, and have already been allocated and committed consolidated financial debt’s average maturity was 5 years. Pampa Group’s debt profile39 is disclosed below (in to the repurchase and redemption of Series 1 CBs at a 9.625% rate with an outstanding face value of US$192 million US$): million and maturing in 2020. In this sense, on April 27, 2018, TGS announced the results of the presentation and settlement of the cash repurchase offer for its Series 1 CBs for a face value of US$80 million, which was financed through the simultaneous issuance of CBs on May 2, 2018. On May 14, 2018, the remaining principal of US$37 million was redeemed, and on June 1, 2018 the remaining balance of US$74 million was redeemed at a price equivalent to 104.813% of the outstanding face value plus accrued interests.
39 It does not include interests, it considers Pampa stand-alone and Edenor at 100%, as well as the affiliates TGS, Transener, Greenwind and Refinor at our equity participation.
86 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 87 ANNUAL REPORT Pampa Group’s CBs Ratings the appointment of Mr. Diego Salaverri as non-independent regular director, as well as the appointment of Mr. Brian Henderson, Ms. Carolina Sigwald and Mr. Mauricio Penta as non-independent alternate directors, In February 2018, credit rating agency S&P upgraded the ratings of Transener’s CBs. The global rating was and of Mr. Enrique Luján Benítez as independent alternate director. Furthermore, Mr. Enrique Luján Benítez upgraded from ‘B’ to ‘B+’, whereas the local rating was upgraded from ‘raA+’ to ‘raAA’, in both cases with a was appointed as alternate member of the Audit Committee to replace Ms. Diana Mondino, who took office stable outlook, mainly on account of the general business improvement following the implementation of the as permanent member. RTI. Moreover, for the same reason as in the case of Transener, in April 2018 S&P upgraded the ratings of Edenor’s CBs. The global rating was upgraded from ‘B-’ to ‘B’, and the local rating from ‘raBBB’ with a stable Appointment of CEO and CFO outlook to ‘raAA-’ with a positive outlook. In its meeting held on December 14, 2018, Pampa’s Board of Directors appointed Gustavo Mariani as CEO In the case of TGS, within the framework of the redemption of Series 1 CBs and the issuance of Series 2 CBs, and Gabriel Cohen as CFO. Marcelo Mindlin continues to serve as the Chairman of Pampa’s Board of Directors. in April 2018 credit rating agencies S&P and Moody’s assigned a global rating of ‘B+’ and ‘B1’, and a local rating of ‘raAA’ with a stable outlook and ‘Aa2.ar’ with a stable outlook, respectively. On the other hand, in August Entry into +GC Panel 2018 credit rating agency FitchRatings downgraded the global rating of Pampa’s CBs from ‘B+’ to ‘B’, keeping the stable outlook, mainly due to the Company’s exposure to CAMMESA. The Company has joined the special stock quote panel called +GC Panel, launched by ByMA on December 18, 2018. Pampa is one of the three founding companies of the +GC Panel. Furthermore, in September 2018, S&P placed the ‘B+’ and ‘B’ ratings of 10 Argentine companies, including Pampa, TGS and Transener, on its CreditWatch list, with a negative outlook, mainly on account of risks inherent in The +GC Panel has no precedents in Argentina, and includes companies with one vote per share already the implementation of the economic adjustments. Furthermore, S&P adjusted global and local ratings of Edenor listed at ByMA that comply with the best corporate governance and transparency practices even beyond the CBs’ from positive to stable, reaffirmed the ‘B’ global rating and downgraded the local rating from ‘raA+’ to ‘raA’. required regulatory level, which Pampa entirely fulfills. These practices, which are periodically monitored for compliance, are aligned with the Corporate Governance principles of the Organization for Economic Co-operation Finally, in November 2018, and as a result of the downgrade in the global rating of the Argentine sovereign and Development (‘OECD’) adopted by the G20. debt from ‘B+’ to ‘B’ and in its local rating from ‘raAA’ to ‘raAA-’, S&P also downgraded Pampa, TGS and Transener’s global ratings from ‘B+’ to ‘B’ with a negative to stable outlook. It also discontinued local ratings The standards of the +GC Panel aim to provide investors with more information that can be useful when for TGS and Transener. It should be highlighted that credit rating agency Moody’s has kept its ratings of Pampa, investing or exercising their rights, enhancing the visibility and attractiveness of the Company to international Edenor and TGS unchanged since the end of December 2017. investors. Participating in the ByMA’s Sustainability Index and the +GC Panel implies a recognition to the Company’s continuing efforts for taking the best practices in Corporate Governance. Credit ratings for Pampa Group’s CBs are detailed below: 7.11
RATINGS IFRS: Restatement of Financial Information COMPANY AGENCY GLOBAL LOCAL IFRS standards require the FS of an entity with a functional currency that is hyperinflationary to be restated in terms of the measuring unit current at the end of the reporting period (IAS 29), whether they are based on Pampa S&P B na a historical cost or a current cost approach. Under IFRS, an economy is categorized as hyperinflationary if the Moody’s B2 na cumulative inflation rate over three years approaches, or exceeds, 100%. For this reason, under IAS 29 the FitchRatings B AA- Argentine economy should be considered hyperinflationary as from July 1, 2018.
Edenor S&P B raA However, as of the issuance of the Earnings Release for the third quarter of 2018, PEN Executive Order Moody’s B1 Aa3.ar No. 664/2003, which prohibited the presentation of restated FS before the CNV, was still in force. Therefore, TGS S&P B na pursuant to this Executive Order and the CNV rules, Pampa’s Management had not applied IAS 29 in the Moody’s B1 Aa2.ar preparation of its FS as of the end of September, 2018. Transener S&P B raAA- On December 4, 2018, Law No. 27,468, which abrogates PEN Executive Order No. 1269/2002 and its amendments, including PEN Executive Order No. 664/2003, was published in the BO. Consequently, on December 26, 2018, the CNV issued General Res. No. 777/2018, which establishes the standards applicable to the restatement of FS, the compliance with which is mandatory for annual FS or FS for special or interim periods closing as from and including December 31, 2018. 7.10 Corporate Governance Designation of Members in Pampa’s Board of Directors and Audit Committee On April 27, 2018, Pampa’s Ordinary and Extraordinary Shareholders’ Meeting approved the renewal of the terms of office of regular directors Marcelo Mindlin and Damián Mindlin as non-independent directors,
88 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 89 ANNUAL REPORT 08 POWER ELECTRICITY GENERATION DISTRIBUTION OIL & GAS (3)
Hidroelectric 938 MW Edenor 3.0 million Blocks 11 productive blocks Thermal 2,819 MW + 7 exploratory blocks Description (1) 3 398 MW 6.8 million m /d + Expansions Gas of production Co-Generation 14 MW Crude Oil 5.1k bbl/d News plants (2) 100 MW of Our Assets Wind energy 106 MW of production
Pampa is the largest fully integrated independent energy company in Argentina. Through our subsidiaries, as of December 31, 2018 we participate in the electricity and gas value chains (not including discontinued 40 4,375 MW 20% 44.8k boe/d businesses) : (View graphic on page. 91) TOTAL CAPACITY MARKET SHARE TOTAL PRODUCTION
As of December 31, 2018, our power generation segment had an installed capacity of approximately 3,871 MW, which represents 10% of Argentina’s installed capacity. By adding next 504 MW expansions developed by the Company, our total installed capacity would amount to 4,375 MW.
Our electricity distribution segment is composed of Edenor, the largest electricity distributor in Argentina, with 3.0 million customers and a concession area covering the Northern City of Buenos Aires and Northwestern Greater Buenos Aires. REFINING AND OTHER DISTRIBUTION PETROCHEMICALS BUSINESS Our oil and gas segment comprises both operated and not operated blocks held by Pampa Energía. In 2018, the total average production amounted to 44.8 thousand boe/day, with operations in 11 production Dock Sud 1.2 million bbl CAPACITY OF: TGS 9,184 km blocks and 892 production wells. Storage Styrene 160 k ton/year of gas pipelines Facility SBR 55 k ton/year NGL Capacity of 1 million ton/year Refining capacity In downstream, our refining and distribution segment includes the Dock Sud terminal, which has an installed Refinor Polystyrene 65 k ton/year Transener 20,944 km of high of 25.8k bbl/d capacity of 1.2 million oil bbl of light fuels and base lubricants, as well as a 28.5% direct interest in Refinor, with voltage lines 84 gas stations a refinery with an installed capacity of 25.8 thousand oil bbl/day and 84 GSs. Furthermore, our petrochemicals segment is made up of three high-complexity plants producing styrene, SBR and polystyrene, with a domestic market share ranging between 80% and 100%.
Finally, our holding and others segment is made up, among other holding companies, by our 25.5% indirect 80-100% interest in TGS, the country’s largest gas transportation company, owning a 9,184 km-long gas pipeline network MARKET SHARE and a NGL processing plant, General Cerri, with an output capacity of 1 million tons per year. Moreover, Transener, in which we have a 26.3% indirect interest, operates and maintains the Argentine high voltage transmission grid covering more than 14.5 thousand km of lines, as well as 6.5 thousand km of Transba-owned high voltage lines. Transener transports 85% of the electricity in Argentina. NOTES: segments correspond to business classifications in the FS. Greenwind, OldelVal, Transener, TGS and Refinor are co-controlled companies, which under IFRS are not consolidated in Pampa’s FS. (1) It includes 383 MW in CTGEBA and 15 MW in CTLL. (2) It includes PEPE II and III, with 53 MW each. (3) 2018 average production of blocks in Argentina.
40 For more information, please see section 7.6 of this Annual Report.
90 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 91 ANNUAL REPORT CORPORATE STRUCTURE AS OF DECEMBER 31, 2018
NOTES: (1) Each company solely hold one asset consisting in an agreement for the management of Termoeléctrica José de San Martín and Termoeléctrica Manuel Belgrano, respectively. Currently, both assets are owned by a Trust. PAMPA ENERGÍA (2) Calculated based on issued shares. It includes shares bought on the open 100% 100% market. (3) Petrobras Hispano Argentina is the sole beneficiary of the CIESA Trust. (4) Pampa Participaciones and Pampa Comercializadora hold each 0.0004% of Pampa Energía Bolivia. (5) Mixed companies. PAMPA PETROBRAS INVERSIONES PARTICIPAC.SL
100% 100%
PAMPA PETROBRAS PARTICIPAC. HISPANO ARG.
50% 98% 2% 98% 2% 98.12% 1.88% 100%
P.E. FIDEICOMISO GREENWIND P.E. DEL FIN TRANSELEC DEL MUNDO ARGENTINOS CIESA (3)
50% 10% 40%
CITELEC CIESA
52.04% 59% 2% 99.99% 0.01% 98% 2% 98% 2% 51.764% 52.65% 70% 0.05% 51% 2.1% 28.5%
HIDROELÉCTRICA HIDROELÉCTRICA C.T. PIEDRA CPB PAMPA OLEODUCTOS EDENOR (2) TRANSENER ENECOR TGS (2) REFINOR LOS NIHUILES DIAMANTE BUENA ENERGÍA COGENERACIÓN DEL VALLE
90%
2.44% 0.15% TRANSBA 0.02% 99.98% 51% 49% 49% 100% 4.6% TERMOELÉCTRICA TERMOELÉCTRICA TRANSPORTE 9.01% JOSÉ DE SAN MANUEL TELCOSUR Y SERVICIOS GAS LINK CTG ENERGÍA MARTÍN (1) BELGRANO (1) DE GAS EN UY
100% 100% 49% 100% PETROBRAS 36% PAMPA ENERGÍA (5) INVERSORA COROD ARGENTINA (4) PETROWAYU SUC. BOLIVIA BOLIVIA MATA PRODUCCIÓN
100% 100% 11.42% 99% 1% 100% 2.02% 97.95% 2% 95% 29.2% 10.8% 20% 29% 20% PETROBRAS OLEODUCTOS PETROBRAS PAMPA 3% TRENEREC 22% PETROLERA PE ENERGÍA 0.03% PETROLERA ENERGÍA DE CRUDOS ENERGÍA OPER. COMERCIALIZA- ENERGÍA PETRORITUPANO (5) PETROKARIÑA (5) COROIL SAN CARLOS ECUADOR LTD COROIL COLOMBIA LTD PESADOS LTD ECUADOR DORA BOLIVIA
65% 100% 99.995% 0.005% 100% 10.8% CÍA. ANÓNIMA OLEODUCTOS PETROBRAS 20% PETROVEN 29.2% MIXTA DE CRUDOS ENERGÍA PETROLERA ECUADOR TCL MATA BRAS (5) SAN CARLOS PESADOS ECUADOR SUC.
1% 99% 100% TRENEREC ELETRICIDADE COM
92 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 93 ANNUAL REPORT 8.1 HINISA In June 1994, HINISA was granted a 30-year concession for the generation, sale, and marketing of electricity Power Generation from the Los Nihuiles hydroelectric system. Located on the Atuel river, in the Province of Mendoza, HIDISA has an installed capacity of 265 MW, which represents 0.7% of Argentina’s installed capacity, and consists of three dams Pampa’s power generation assets include CTG, CTP, CTPP, CTLL, CTIW, CPB, CTGEBA, HPPL, EcoEnergía and and three hydroelectric power generation plants (Nihuil I, Nihuil II and Nihuil III), as well as a compensator dam. Los interests in HINISA, HIDISA and PEMC. The following table summarizes Pampa’s power generation assets: Nihuiles System extends for a total distance of approximately 40 km with a height differential between 440 m and 480 m. From 1990 to 2018, its annual average generation was 829 GWh, with a record high of 1,250 GWh in 2006 and a record low of 516 GWh in 2014.
SUMMARY HIDROELECTRIC WIND THERMAL TOTAL OF ELECTRICITY HIDISA GENERATION CT ECO- In October 1994, HIDISA was granted a 30-year concession for the generation, sale and marketing of electricity ASSETS HINISA HIDISA HPPL PEMC CTLL CTG CTP CPB CTPP CTIW GEBA ENERGÍA from the Diamante hydroelectric system. Located on the Diamante river, in the Province of Mendoza, HIDISA has
Installed Capacity (MW) 265 388 285 100 765 361 30 620 100 100 843 14 3,871 an installed capacity of 388 MW, which represents 1% of Argentina’s installed capacity, and consists of three dams New Capacity (MW) - - - 100 364 100 30 - 100 100 169 14 977 and three hydroelectric power generation plants (Agua del Toro, Los Reyunos, and El Tigre). The Diamante System Market Share 0.7% 1.0% 0.7% 0.3% 2.0% 0.9% 0.1% 1.6% 0.3% 0.3% 2.2% 0.04% 10.0% extends for a total distance of approximately 55 km, with a height differential between 873 m and 1,338 m. From 1990 to 2018, its annual average generation was 560 GWh, with a generation record high of 943 GWh in 2006 and Net Generation 2018 (GWh) 577 393 886 247 4,748 1,674 134 753 192 274 4,859 108 14,845 Market Share 0.4% 0.3% 0.6% 0.2% 3.5% 1.2% 0.1% 0.5% 0.1% 0,2% 3.5% 0,1% 10.8% a record low of 322 GWh in 2014. Sales 2018 (GWh) 577 393 886 247 4,748 2,227 134 753 192 274 5,457 110 15,999
Net Generation 2017 (GWh) 751 480 760 - 3,864 1,772 156 1,453 142 23 4,685 100 14,186 HPPL Variation 2018 vs. 2017 -23% -18% +17% na +23% -6% -14% -48% +35% na +4% +8% +5% Sales 2017 (GWh) 751 480 760 - 3,864 2,358 156 1,453 142 23 5,424 103 15,514 The HPPL plant started operating in the year 1999 under a 30-year concession. HPPL is located on the Limay River, in the Province of Neuquén. It has an installed capacity of 285 MW distributed in 3 Kaplan turbines, which Average Price 2018 (US$/MWh) 31 46 22 80 43 35 59 88 195 107 36 57 44 represents 0.7% of Argentina’s installed capacity. The dam is made up of loose materials with a waterproof concrete Average Price 2017 (US$/MWh) 24 33 22 na 38 32 52 32 98 42 27 69 32 side. It has a total length of 1,045 meters, a total height of 54 m at the deepest point of the foundation, and a Average Gross Margin 2018 20 32 15 71 37 20 na 46 164 85 18 15 29 (US$/MWh) crest at 480.2 meters above sea level. From 2000 to 2018, HPPL’s average annual generation was 968 GWh, with Average Gross Margin 2017 11 16 12 na 34 14 na 12 82 33 15 21 20 a generation record high of 1,430 GWh in 2006, and a record low of 494 GWh in 2016. (US$/MWh) CTG NOTE: Gross Margin before depreciation and amortization, values expressed in nominal terms. AR$/US$ exchange rate: 2018 – 28.13; 2017 – 16.57. CTG is located in Northwestern Argentina, in the City of General Güemes, Province of Salta. Privatized in 1992, it has a 261 MW open cycle thermal power generation plant with the addition, in September 2008, of a GE natural gas-fired turbo generator unit of 100 MW, totaling 361 MW, which accounts for 0.9% of Argentina’s installed The following chart shows Pampa’s market share in the power generation segment: capacity. From 1993 to 2018, its average annual generation was 1,789 GWh, with a generation record high of 1,903 GWh in 1996, and a record low of 1,030 GWh in 2003. 2018 NET POWER GENERATION 100% = 137,482 GWH CTP 10.8% CTP is located in Northwestern Argentina, in the small village of Piquirenda, Municipality of Aguaray, Department 1.1% PAMPA ENERGÍA of General San Martín, Province of Salta. Its construction started in early 2008 and finished in 2010. It has 30 MW IEASA of thermal power generation consisting of ten GE Jenbacher JGS 620 gas-fired motor-generators, which represent 4.7% 0.1% of Argentina’s installed capacity. From 2011 to 2018, the average annual generation was 129 GWh, with a NUCLEAR 8% 10.5% record high of 156 GWh registered in 2017 and a record low of 66 GWh registered in 2011. FONINVEMEN CEPU CTLL CTLL is located in Loma de la Lata, Province of Neuquén. The plant was built in 1994 and consists of three 10.2% GTs with an installed capacity of 375 MW, a 165 MW Siemens ST installed in 2011 for its closing to CC, a 105 MW 17% ENEL GE aeroderivative GT installed in May 2016, the incorporation in August 2017 of a 105 MW GE GT, and a 15 MW BI-NATIONAL HYDROS ST repowering carried out in January 2018, its total capacity thus amounting to 765 MW, which represents 2% of Argentina’s installed capacity. CTLL has a privileged location due to its proximity to one of the largest gas fields in 9.7% Latin America, also named Loma de la Lata. From 1997 to 2018, the average annual generation was 1,852 GWh, 22% AES OTHERS with a record high of 4,748 GWh registered in 2018 and a record low of 272 GWh registered in 2002. 6% YPF
SOURCE: CAMMESA. Hydroelectric power generation net of pumping.
94 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 95 ANNUAL REPORT CPB PEMC CPB is located in the port of Ingeniero White, close to the City of Bahía Blanca, Province of Buenos Aires. PEMC is located on Provincial Route No. 51, 18 km from the City of Bahía Blanca, Province of Buenos Aires. The plant consists of 2 STs of 310 MW each, totaling 620 MW, which represents 1.6% of Argentina’s installed The wind farm is made up of 29 V-126 Vestas wind turbines, each with a 3.45 MW power capacity and an capacity. The boilers can be indistinctly fed with natural gas or FO. 87-meter hub height. It was commissioned for service on June 8, 2018, and sells its energy to CAMMESA under the RenovAr program. From its commissioning and during 2018, PEMC generated 247 GWh, with represents an The supply of natural gas is made through a proprietary 22 km gas pipeline, which is also operated and approximate 50% dispatch factor. maintained by CPB, connecting with the main gas pipeline system of TGS. Furthermore, CPB has two tanks for the storage of fuel oil with a combined capacity of 60,000 m3. From 1997 to 2018, its average annual generation was 2,091 GWh, with a generation record high of 3,434 GWh in 2011, and a record low of 189 GWh in 2002. CURRENT EXPANSIONS
CTIW CTIW is located at Ingeniero White, district of Bahía Blanca, in a lot adjacent to CPB. This CT, which consists AWARDED PRICE of 6 cutting-edge dual-fuel (natural gas or FO) motor generators supplied by Wärtsilä, has a 100 MW installed power capacity, which represents 0.3% of Argentine installed capacity. PROJECT MW EQUIPMENT MARKETING POWER CA- VARIABLE TOTAL INVESTMENT DATE OF SUPPLIER PACITY US$/ US$/MWH US$/ IN US$ COMMIS- MW-MONTH MWH MILLION (1) SIONING The power plant is interconnected to the 132 kV grid through a substation owned by Transba. Liquid fuel is supplied using CPB’s discharge and storage facilities, and natural gas is also supplied from this power plant’s THERMAL internal facilities. CTLL 15 MAN SEE Res. No. 19/17 7,000 7 17 20 Q3 2019
Engines are high-efficiency, with a 46% performance rate. The power plant was commissioned on December 22, 2017, and in 2018 its generation amounted to 274 GWh. CTGEBA 383 Siemens 15-Year contract 20,500 6 34 350 GT: Q2 2019 in US$ CC: Q2 2020 CTGEBA RENEWABLE CTGEBA is located in Marcos Paz, in the Province of Buenos Aires. The plant began operating in 1999 and PEPE II and III 106 Vestas MAT ER n.a. n.a. n.a. 137 Q2 2019 has a CC with a 674 MW installed capacity, which consists of two GTs of 219 MW each and a 236 MW ST. On the same lot, a GT with a 169 MW power capacity, known as Genelba Plus, was commissioned for service in 2009 and TOTAL 504 507 is currently under expansion41. The total installed capacity of the CTGEBA complex amounts to 843 MW, which represents 2.2% of Argentina’s installed capacity. From 2000 to 2018, CTGEBA’s average annual generation was 4,722 GWh, with a generation record high of 5,449 GWh in 2012, and a record low of 3,438 GWh in 2001. NOTE: (1) Amounts do not include VAT. CTGEBA has a strategic location, since it is one kilometer away from the Ezeiza transforming station, a WEM reference node for the supply of electricity to the country’s highest demand zone. CTGEBA’s CC is sold in the spot market, whereas the Genelba Plus GT energy is sold in the Energía Plus market. ENECOR EcoEnergía 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 EcoEnergía is a co-generation power plant located in TGS’s General Cerri Complex in Bahía Blanca, Province lines from the Paso de la Patria transforming station, in the Province of Corrientes. It is under a 95-year of Buenos Aires. The plant, consisting of a ST with a power capacity of 14 MW, was commissioned in 2011. The concession, which is due to expire in 2088. plant sells electricity in the Energía Plus market. From 2011 to 2018, EcoEnergía’s average annual generation amounted to 87 GWh, with a generation record high of 108 GWh in 2018, and a record low of 20 GWh in 2011.
CTPP 8.2 CTPP is located in the Pilar Industrial Complex, in the district of Pilar, Province of Buenos Aires. Construction Electricity Distribution began in October 2016, and the plant was commissioned on August 29, 2017. The plant, which was built under SEE Res. No. 21/2016, has a total power capacity of 100 MW and is made up of 6 cutting-edge Wärtsilä engines Edenor with an approximate 43% performance rate. In 2018, its generation amounted to 192 GWh. Edenor is the largest electricity distribution company in Argentina in terms of number of customers and electricity sold (in GWh as well as in monetary terms). It holds a concession to distribute electricity on an Natural gas is supplied through a dedicated gas pipeline which is connected with TGN’s main gas pipeline, exclusivity basis in Northwestern Greater Buenos Aires and the Northern City of Buenos Aires, which covers an whereas the energy is evacuated through a 132 kV line connected to the Pilar substation owned by Edenor. The area of 4,637 square kilometers and a population of approximately 8.5 million inhabitants. power plant has storage tanks for FO, which may be used as alternative fuel.
41 For more information, please see section 5.1 of this Annual Report.
96 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 97 ANNUAL REPORT The following table summarizes Edenor’s electricity sales and customers: The following table summarizes Edenor’s main technical and financial indicators:
EDENOR’S 2018 2017 VARIATION TECHNICAL INFORMATION 2017 2018 SALES BY TYPE Transmission and distribution lines (Km) 39,012 39,699 OF CUSTOMER IN GWH PART. % CLIENTS IN GWH PART. % CLIENTS % GWH % CLIENTS Number of clients (million) 3.0 3.0 Electricity sales (GWh) 21,582 21,172 Residential (1) 8,948 42% 2,677,554 9,143 42% 2,579,705 -2% +4% FINANCIAL INFORMATION* 2017 2018 Commercial 3,478 16% 354,799 3,595 17% 362,607 -3% -2% Revenue from services 39,603 55,954 Industrial 3,646 17% 6,857 3,687 17% 6,866 -1% -0% Fiscal year’s results, attributable to company’s shareholders 5,081 4,297 Wheeling System 3,823 18% 699 3,966 18% 704 -4% -1% Assets 70,882 76,992 Liabilities 43,088 46,023 Others Shareholders’ equity 27,794 30,969 Public Lighting 724 3% 21 709 3% 21 +2% - Shantytowns and 553 3% 456 483 2% 426 +15% +7% Others * Annual FS figures under IFRS, adjusted by inflation, in million AR$.
TOTAL 21,172 100% 3,040,386 21,582 100% 2,950,329 -2% +3% Energy Demand NOTE: (1) Including 586,222 and 656,391 customers under the Social Tariff as of December 31, 2018 and 2017, respectively. Edenor’s energy demand as of December 31, 2018 was 25,906 GWh, which represents a slight 0.2% decrease compared to 2017, whereas the total WEM demand amounted to 132,925 GWh, just above that recorded in 2017. The fall in demand is explained by a combination of mild temperatures, price-demand elasticity and The following chart shows Edenor’s market share in 2018: economic activity levels.
Edenor purchased all the energy in the market at an average annual monomic price of AR$1,167.9/MWh, a 2018 TOTAL ELECTRICITY DISTRIBUTION price 105% higher than the AR$569.6/MWh recorded in 2017 on account of the update, as from December 2017 100% = 108,410 GWH and pursuant to several provisions, of prices payable by the seasonal demand which the distribution companies pay to CAMMESA42. In late December 2018, SGE Res. No. 366/18 was issued, which abrogated SEE Res. No. 1091/17 and set new updates for the February - October 2019 period.
80% 20% OTHERS EDENOR
SOURCE: CAMMESA and ADEERA.
42 For more information, please see “WEM Seasonal Programming” on section 7.3 of this Annual Report..
98 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 99 ANNUAL REPORT EVOLUTION OF PEAK POWER CAPACITY In this same line, 103,729 tariff 1 meter inspections were made, with a 51.6% efficiency. Regarding the 2000 – 2018 recovery of energy, besides the customers put back to normal with MIDE meters, 3,123 clandestine customers were recovered by installing conventional meters.
In MW However, despite higher activity levels, the loss benchmark levels set for 2018 could not be reached, and were additionally affected by a winter with lower average temperatures and a drop in large users’ consumptions. The following chart illustrates the evolution of the annual rates for energy losses since the EDENOR ARGENTINE GRID beginning of Edenor’s concession: 26,320 6,000 25,000 5,151 5,000 ENERGY LOSSES: ANNUAL ROLLING RATE 20,000 1992 - 2018 4,000 15,000 3,000 % 10,000 2,000 30 5,000 1,000 25
0 0 20 18.20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
SOURCE: Edenor. 15
10 Commercial Management 5 The sale of electricity evidenced a year-on-year 1.9% decrease in 2018. The residential demand, which plays a key role in the total volume of the demand behavior (42%), experienced a 2.1% decrease compared to 2017. The commercial segment demand, which represents 16% of the total demand, decreased by 3.3%, 0 whereas the large users, T3 and wheeling system demands, which represent a 35% share, recorded a 2.4% ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 decrease compared to 2017. SOURCE: Edenor. Energy Losses The rolling annual rate for total (technical and non-technical) energy losses reached 18.2% in 2018, experiencing Service Quality Management an increase compared to 2017 (17.1%). Technical losses are those which are a necessary consequence of electric power transmission and distribution, whereas non-technical losses are attributable to errors in customers’ In March 2018 the third semester of the RTI 2017 – 2021 five-year period started, which is governed by new consumption metering, whether on account of theft, defective installation or metering flaws. sub-annex IV to the Concession Agreement established in the RTI. Besides setting district- and commune- based service quality controls, a quality improvement path with increasing requirements is implemented, both During the winter season, in poor homes with no natural gas network access, energy consuming homemade regarding frequency limits and admissible times, and the cost of non-delivered energy. Additionally, an automatic devices continue to be used for room and water heating purposes. The massive and simultaneous use of such penalty scheme was established so that bonuses on account of deviations from the established limits should devices during the winter season has generated a substantial grid power demand. Electricity theft in poor be credited to customers within a term of 60 days as from the end of the controlled semester. The values of neighborhoods was the most influential factor in non-technical losses. final penalties require the ENRE to render judgment regarding the information submitted for each semester.
During 2018, it was continued the plan initiated in previous years with the purpose of putting back to normal Pursuant to Res. No. 198/18, the ENRE provided for 300 or 600 kWh supplementary penalties per user clandestine, inactive and chronically delinquent customers, with a substantial increase in the installation of based on the Feeder’s Semiannual Path Factor (FSSA) and the User’s Semiannual Path Factor (FSSU) as from MIDE (Energy Integrated Meter) self-managed meters. In 2018, 92,902 MIDE meters were installed and, as of the the fourth semester of the 2017 - 2021 RTI five-year period starting in September 2018. Applicable penalties closing of the fiscal year, a total 142,728 MIDE meters had been installed. should be calculated and informed to the ENRE within a term of 120 calendar days as from the end of the control semester, and deposited in a third-party escrow account. Additionally, a new type of MULCON (Multiple Concentric) grid was designed to leverage the MIDE meters functionality, enhancing invulnerability to electricity theft and, based on the good results obtained, it is being The average frequency and the total interruption times during the last five years are detailed below: implemented in neighborhoods having a high fraud rate.
100 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 101 ANNUAL REPORT As regards the ratings for CBs maturing in 2022, S&P upgraded global ratings from ‘B-’ to ‘B’ and local ratings from ‘raBBB’ to ‘raA’, both with a stable outlook. In turn, Moody’s Latin America maintained its ‘B1’ global and CHECKED BY CLIENT* 2014 2015 2016 2017 2018 ‘Aa3.ar’ local ratings, both with a stable outlook. SAIFI (frequency) 9.55 8.93 8.67 9.02 6.94 SAIDI (hours) 33.03 26.63 25.84 27.55 22.65 8.3 * Rolling annual rate as of December of each year. Oil and Gas Pampa is one of the leading hydrocarbon E&P companies in Argentina, with presence in the country’s major oil basins, from which it obtains natural gas and oil. In 2018, investments in nominal terms in this segment Investments amounted to AR$6,468 million, against AR$4,195 million in 2017. Investments made in 2018 amounted to AR$7,611 million in nominal currency and AR$8,550 in constant currency, as Edenor’s Board of Directors expressly decided to prioritize their execution to preserve the safety of The following table summarizes the E&P’s main technical indicators: the utility under concession.
In order to meet the demand, improve the service quality and reduce non-technical losses, most of the investments were used to increase the power capacity, install equipment with remote control in the medium- TECHNICAL INFORMATION* 2017 2018 voltage network, connect new supplies and install new energy meters compatible with prepaid sales. Furthermore, Number of productive wells in Argentina 904 892 Edenor continued making investments to preserve the environment and safety on the streets. Average gas production in Argentina (thousand m3/day) 7,018 6,753 Average oil production in Argentina (thousand bbl/day) 7,561 5,065 In comparative terms, there was a significant increase in investments in the last few years, which experienced Average total production in Argentina (thousand bbl/day) 48.9 44.8 a AR$3,474 million increase in 2018 compared to 2017. The following chart illustrates its annual distribution:
* Continuing operations. Production considers 100% of Medanito La Pampa, an area serviced until October 2017, and does not consider foreign volumes. EDENOR’S ANNUAL INVESTMENTS 1992 – 2018 Production In 2018, the E&P segment’s production levels reached 44.8 thousand boe per day, 89% corresponding to gas AR$ MILLION production and 11% to oil production.
8,000 7,611 The monthly evolution of the E&P segment’s production is detailed below: 7,000 6,000 E&P SEGMENT’S PRODUCTION* | IN THOUSAND BOE/DAY 5,000
4,000 45.5 46.3 46.0 46.9 45.7 45.2 45.7 44.7 44.5 43.4 41.6 42.3
3,000 4.7 4.8 4.6 5.0 5.1 2,000 4.3 5.6 5.0 5.4 5.7 5.4 5.1 1,000
0 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 40.9 41.5 41.4 41.9 40.6 40.9 40.1 39.7 39.1 37.6 36.2 37.2 SOURCE: Edenor. Values expressed in nominal terms.
Financial Debt JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC As of December 31, 2018, Edenor’s total financial liabilities amounted to US$219.4 million; Edenor’s debt is 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 denominated in US$, and includes CBs maturing in 2022 and accrued interest, as well as the loan granted by ICBC in October 2017 in the amount of US$50 million. As of fiscal year 2018’s closing date, CB’s outstanding Gas Oil capital, net of repurchases, amounted to US$166.2 million.
SOURCE: Pampa.
102 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 103 ANNUAL REPORT Pampa’s production was 8% lower than in 2017, mainly due to the termination of services at Medanito La having a significant potential in the Vaca Muerta formation’s gas window. Consequently, the exploration of the Pampa in October 2017, and the natural decline and the lower drilling rate in the Rincón del Mangrullo gas block, Vaca Muerta formation started with the drilling of two pilot vertical wells in El Mangrullo block targeting shale which was partially offset by production increases in the El Mangrullo gas block. gas, both wells with a depth of more than 2,800 m and a projected 2,500-meter horizontal branch.
With a strong presence in the Neuquina Basin, during 2018 Pampa’s investment plan involved the drilling of Furthermore, in the second half of 2018, the Los Blancos X-2001 exploratory well was drilled in line with our 68 production and injection wells: 29 gas wells and 39 oil wells. Pampa focused its natural gas drilling activities commitment with the El Chirete block. On November 29, 2018, the joint venture El Chirete, made up of High on the Neuquina Basin, in the El Mangrullo, Río Neuquén and Rincón del Mangrullo blocks; and its oil drilling Luck Group Limited and Pampa, announced the discovery of oil in Las Breñas formation, at a 2,705 m depth, activities in the Gobernador Ayala (Neuquina Basin) and El Tordillo (Golfo San Jorge Basin) blocks. where 48.3 m3 of oil at 36.6 API degrees was recovered in 15.5 hours. Based on these positive initial results, the survey stage will continue to define the final recoverable volume and, therefore, its commercial feasibility. In 2018, El Mangrullo block reached an average gas production of 2.8 million m3/day, with monthly increases from 2.6 million m3/day, and reaching its peak in December with 3.3 million m3/day, mainly due to the increased Finally, it should be highlighted that the exploration permits for the Río Atuel and Parva Negra Este blocks drilling activity and the performance of the drilled tight gas wells. In total, 9 wells were drilled and 8 were have been extended until March 13 and April 3, 2019, respectively. Furthermore, an extension for the El Chirete completed. Out of the 9 drilled wells, 7 were for tight gas targeting the Agrio and Mulichinco formations, and 2 block has been granted until November 18, 2019. In addition, in the Las Tacanas Norte block the exploratory were for shale gas targeting the Vaca Muerta formation. agreement for a term of 4 years for the drilling of 8 wells targeting the Vaca Muerta formation and other exploratory surveys entered into effect on January 4, 201945. Furthermore, in the Río Neuquén block, in 2018 Pampa’s average gas production reached an average of 1.2 million m3/day (corresponding to our working interest), recording peaks of 1.3 million m3/day during the winter Reserves period, mainly due to the drilling of 11 tight gas well and the works for the extension in the processing capacity in our facilities. Pampa estimates its reserves at least once a year. Proven reserves are estimated by the Company’s reservoir engineers. Reserve engineering is a subjective process consisting of estimating underground accumulations Regarding the Rincón del Mangrullo block, Pampa’s average gas production in 2018 amounted to 1.8 million m3/ of hydrocarbons that cannot be precisely measured; this process depends on the quality of the available day. In 2018, 6 wells were drilled and 9 wells were completed targeting the Mulichinco formation (tight gas reservoir). information and on engineering and geological interpretation and judgment. Accordingly, reserves estimates, as well as future production profiles, are often different from the quantities of hydrocarbons that are ultimately In Sierra Chata block, gas production reached 0.6 million m3/day in 2018 corresponding to our working recovered. The validity of estimates largely depends on the underlying assumptions. Such reserves estimates interest, thus maintaining production levels of 2017. In Sierra Chata, investment activities are expected for 2019 were prepared according to the rules for the Modernization of Oil and Gas Reporting Presentation issued by the as the extension of the concession experienced some delays and was finally granted in July 2018. SEC in late 2008.
Lastly, regarding oil blocks, 29 wells were drilled in Gobernador Ayala. Oil production levels in this block Gaffney Cline & Associates, international technical consultants, carried out an independent assessment were similar to those in 2017, with an annual average of 0.7 thousand boe/day. Lastly, 9 wells were drilled of our reserves, auditing 83% of Pampa’s estimated proven reserves, and concluded that oil and natural gas in El Tordillo block, partially offsetting the field natural decline and reaching an average production level of 3 reserve volumes subject to independent technical assessment are reasonable. thousand boe/day in 2018. Pampa’s total proven reserves as of December 31, 2018, both developed and undeveloped, are Concession Extension for El Mangrullo and Sierra Chata Blocks – Province of Neuquén43 detailed below: On June 18, 2018, the Province of Neuquén granted the ENIM an unconventional exploitation license over El Mangrullo block for a 35-year period. In turn, the ENIM extended its agreement with Pampa for the same period, Pampa acting as operator with a 100% interest in the block, which has a 194-km2 surface with important reserves and resources in the Agrio, Mulichinco and Vaca Muerta formations. PAMPA’S TOTAL PROVEN RESERVES | AS OF DECEMBER 31, 2018 100% = 130 million boe Furthermore, on July 27, 2018, the new 35-year hydrocarbon unconventional exploitation concession in the Sierra Chata block entered into effect. Pampa is the operator of the Sierra Chata block and holds a 45.6% stake, jointly with Mobil Argentina S.A. and Total Austral S.A., Argentina Branch, which hold a 51.0% and 3.4% 100% stake, respectively. The Sierra Chata has an 864-km2 surface and important reserves and resources targeting ARGENTINA the Mulichinco and Vaca Muerta formations. 12% 41% LIQUIDS Gas Export Authorization44 UNDEVELOPED In December 2018 and January 2019, Pampa was authorized by the SGE to export natural on an interruptible basis for up to 2 million m3/day to Chile and 0,6 million m3/day to Uruguay, respectively, from the Río Neuquén 59% and Rincón del Mangrullo blocks. DEVELOPED 88% NATURAL GAS Exploration Activities Pampa considers that exploration is the main vehicle for reserves replacement. In 2018, a 35-year extension was granted for unconventional exploitation concessions of El Mangrullo and Sierra Chata blocks, both blocks
43 For more information, please see “Extension of Concessions” on section 7.4 of this Annual Report. 44 For more information, please see “Gas Export Authorization” on section 7.4 of this Annual Report. 45 For more information, please see “Extension of Concessions” on section 7.4 of this Annual Report.
104 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 105 ANNUAL REPORT Hydrocarbon Transportation RESERVES PROVED DEVELOPED PROVED UNDEVELOPED TOTAL PROVED RESERVES OldelVal
OIL(1) NATURAL OIL(1) NATURAL OIL(1) NATURAL As of December 31, 2018, Pampa holds a 2.1% direct interest in OldelVal. Oldelval operates main oil pipelines GAS(2) GAS(2) GAS(2) providing access to Allen, in the Comahue area, and the Allen - Puerto Rosales oil pipeline, which allow for the Argentina 9,179 409,778 5,818 282,180 14,997 691,958 evacuation of the oil produced in the Neuquina Basin to Puerto Rosales (a port in the City of Bahía Blanca) and Venezuela ------the supply of the Plaza Huincul distillery located in the pipeline’s area of influence.
Total as of December 31, 2018 9,179 409,778 5,818 282,180 14,997 691,958 In 2018, oil transportation from Allen to Puerto Rosales reached 20,737 m3/day, and transportation to the refineries located in the Province of Neuquén totaled an average 2,576 m3/day. The total transported volume was 24,145 m3/day, equivalent to 55.4 million bbl transported in 2018, representing a 7.2% increase compared to 2017. SOURCE: Pampa. NOTES: (1) In thousand bbl. (2) In million cubic feet. In 2018, Oldelval managed to maintain uninterrupted transportation services, ensuring operational continuity and a reliable pumping system. Furthermore, planned objectives were achieved in terms of safety and investments. The evolution of Pampa’s proven reserves as of December 31, 2018, both developed and undeveloped, is detailed below: 8.4 -42 -16 22 R&D The sale of the R&D segment’s assets to Trafigura was closed on May 9, 2018, a decision aligned with the 167 125 130 Company’s decision to focus its investments and human resources on its core businesses: the generation of electricity and natural gas E&P.
It is worth highlighting that, due to its strategic and operational utility, the Dock Sud storage facility is STOCK @ DISCONTINUED STOCK @ (-) (+) CONCESSION STOCK @ excluded from that sale, as well as Pampa’s 28.5% stake in Refinor. DEC 31, 2017 OPERATION DEC 31, 2017 PRODUCTION EXTENSION/ DEC 31, 2018 CONTINUING ADDITIONS The following table summarizes the R&D’s main indicators for fiscal years ended December 31, 2017 and 2018: OPERATIONS
Estimated reserves in the Republic of Argentina are shown before deduction of royalty payments, since royalties TECHNICAL INFORMATION* 2017 2018 have characteristics similar to taxes on production and, therefore, are treated as operating costs. Revenues (thousand m3): As of December 31, 2018, Pampa’s proven reserves amounted to 130 million boe, 4% higher compared to the Crude Oil 16.6 24.3 volumes recorded as of December 31, 2017, and, taking into consideration continuing operations and the 2018 GO 811.0 344.5 production and concession extensions, the reserve-replacement ratio was 1.3. Out of proven reserves as of the Gasoline 455.0 195.8 closing of fiscal year 2018, 88% corresponded to natural gas. FO, IFOs and Asphalts 297.2 138.0 Ohers 263.5 126.5 Venezuela
In Venezuela, oil and gas production corresponding to interests in mixed companies Petroritupano S.A., * For 2018, only volumes until June 30, 2018 are considered. Petrowayú S.A., Petroven-Bras S.A. and Petrokariña S.A. averaged 0.3 thousand boe/day, compared to the 1.3 thousand boe/day recorded in 2017. Dock Sud Terminal In this line, it is informed that, as of the issuance of this Annual Report, the Company has not obtained the The Dock Sud Terminal, in the Province of Buenos Aires, has an approximate storage capacity of 228 timely requested authorizations regarding the change in indirect control. Notwithstanding that, the Company has thousand m3 of light fuels and base lubricants distributed in 43 tanks. The Terminal is interconnected via submitted the requested technical, legal and financial information, as well as development plans and financing pipelines with all players in the area, and has entered into agreements to operate in DAPSA and YPF piers for proposals, to the consideration of CVP (Corporación Venezolana de Petróleo S.A.)’s majority shareholder, without the reception and delivery of products transported by tankers. obtaining a favorable answer. On March 6, the sale of the Terminal to Raízen Argentina, a licensee of the Shell brand, was agreed46. Furthermore, CVP has expressed that, in view of the time elapsed, Pampa should begin a new process for the presentation of plans under the guidelines to be provided by the Ministry of People’s Power for Oil of the Bolivarian . Republic of Venezuela, which have not yet been informed to the Company. Given these circumstances, Pampa has expressed to the Venezuelan Government’s authorities that it is no longer interested in submitting investment and/or financing proposals in mixed companies and that it is willing to negotiate the transfer of its shares to CVP. 46 For more information, please see “Sale of assets from the R&D segment” on section 7.6 of this Annual Report.
106 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 107 ANNUAL REPORT Refinor As a result of the falling demand and with the purpose of optimizing business results, in April 2018 the Company decided to discontinue operations of the BOPS plant, with a production capacity of 14 thousand tons, Pampa has a 28.5% interest in Refinor, a company that owns the only refinery in the Northern region of as well as of the San Lorenzo ethylene plant, with a production of 19,000 tons/year, in January 2019. Argentina and which is located at Campo Durán, Province of Salta. The nominal processing capacity of the topping unit is 25.8 thousand bbl per day, whereas the two turboexpander plants’ nominal processing capacity The following table shows the petrochemicals segment’s main indicators for fiscal years ended December reaches 20.3 million m3 of gas per day. 31, 2017 and 2018:
RCD receives condensed and crude oil from the Noroeste Basin in Argentina, and natural gas from the Noroeste Basin in Argentina and from Bolivia. These operations are conducted through two oil pipelines and three gas pipelines. In 2018, the average daily processing of crude oil amounted to 6,086 bbl. In turn, gas TECHNICAL INFORMATION 2017 2018 processing reached a daily average of 15.5 million m3. Revenues (in thousand ton): In 2012, an agreement was executed with IEASA whereby Refinor would provide compression services Styrene (incl. propylene and ethylene) 67 64 for the gas IEASA imports from Bolivia. This agreement was later amended to increase the gas compression SBR 33 26 capacity (up to a volume of 26 million m3/day), and to extend its term until April 2019. Polystyrene (incl. BOPS) 67 50 Others 291 215 Besides, Refinor operates a 1,108 km multiproduct pipeline extending from RCD (Salta) to Montecristo Sales Destination* (Córdoba), which supplies the Banda Río Salí (Tucumán) fuel dispatch plant, and the Güemes (Salta) and Leales Argentina 74% 70% (Tucumán) LPG dispatch plants. In Montecristo, it connects to a YPF multiproduct pipeline which reaches the Abroad 26% 30% town of San Lorenzo (Santa Fe). This multiproduct pipeline, which is the most important distribution path for all liquid fuels generated in the Noroeste Basin in Argentina, transports GO, gasoline for petrochemical use, components of gasoline for automotive use, butane and propane. * Percentage calculated from sales in nominal terms.
As of December 31, 2018, Refinor had a commercial network of 84 GSs in the Provinces of Tucumán, Salta, Santiago del Estero, La Rioja, Jujuy, Catamarca, and Chaco. The network offers a high-performance fuel line: Styrene’s Division Premium Max (97 octanes), Super Max (95 octanes), Eco Diesel Max and Eco Diesel Premium Max. In 2018, monomer styrene sales totaled 49 thousand tons, a figure 6% lower than that recorded in 2017, with In 2018, sales of gasoline, GO, raw gasoline and other liquid fuels amounted to 533 thousand m3, which a 10% decrease in domestic sales associated with lower consumption, mainly in the polyester resin and emulsions represents a 6% year-on-year decrease. LPG sales amounted to approximately 194 thousand tons in 2018, market. Polystyrene sales volumes reached 46 thousand tons, experiencing a 19% decrease in domestic sales experiencing a 7% increase compared to the previous year. associated with the fall in the refrigeration market, and a 36% decrease in exports. BOPS sales volumes amounted to 3.2 thousand tons in 2018, 58% lower than in 2017. With the purpose of optimizing business results, the Company decided to discontinue operations of the BOPS and polyesterene plant in Zárate as from April 2018.
8.5 In 2018, Pampa sold 26 thousand tons of rubber, of which 10 thousand tons were for the domestic market and 16 thousand tons for exports. Sales volumes in 2018 experienced a 23% decrease compared to 2017, Petrochemicals mainly on account of lower sales to tire manufacturers. The petrochemicals segment takes part in Pampa’s vertical integration with gas operations. The Company’s goal is to maintain its position in the styrene’s market by capitalizing on current conditions and maximizing the use Gasoline Reforming Division of its own petrochemical raw materials. Our assets’ production covers a wide range of products, such as octane Sales of the Reforming division decreased by 25% compared to 2017 due to the lower availability of raw bases for gasoline, benzene, aromatic solvents, hexane and other hydrogenated paraffinic solvents, propellants for gasoline as a result of the closing of the Oil Combustible plant. the cosmetic industry, monomer styrene, rubber, and polystyrene for the domestic and foreign markets. In 2018, octane bases and gasolines sales totaled 153 thousand tons, a volume 33% lower than in 2017, The petrochemicals market where Pampa competes is influenced by the supply and demand of petrochemical which is accounted for by a 53% decrease in domestic sales associated with the lower return of octane bases to products in the global market, which has a strong impact on our results. Pampa is the only producer of monomer Oil Combustibles. Sales of hexane, paraffin solvents and aromatics during 2018 totaled 52 thousand tons, which styrene, polystyrene and elastomers in Argentina, as well as the only integrated producer of goods ranging represent an 8% increase compared to 2017. In 2018, propellant sales totaled 7.6 thousand tons, experiencing from oil and natural gas to plastics. As part of its efforts to integrate operations, it uses an important volume a 22% decrease associated with lower production volumes. of its own benzene production to obtain styrene and, in turn, a substantial volume of styrene to manufacture polystyrene and SBR. As of December 31, 2018, Pampa’s estimated share in the Argentine styrene, polystyrene and rubber markets amounted to 100%, 92% and 80%, respectively. Currently, the petrochemicals segment consists of the PGSM integrated petrochemical complex, in the Province of Santa Fe, with an annual production capacity of 50 thousand tons of gases (LPG, which is used as raw material, and propellants), 155 thousand tons of aromatics, 290 thousand tons of gasoline and refined products, 160 thousand tons of styrene, 55 thousand tons of SBR, 180 thousand tons of ethyl benzene and 31 thousand tons of ethylene. This segment also includes a polystyrene plant in Zárate, Province of Buenos Aires, with a production capacity of 65 thousand tons.
108 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 109 ANNUAL REPORT 8.6 Investments During 2018, Transener made investments in the amount of AR$2,272 million47. The following chart illustrates Other Businesses its annual distribution: Transener Transener is the leading company in the utility service of high voltage electric energy transmission in TRANSENER’S ANNUAL INVESTMENTS Argentina. It holds a concession over 14,489 kilometers of transmission lines and 57 transforming stations, and 1999 – 2018 directly operates 85% of high-voltage lines in the country.
In turn, its subsidiary Transba holds a concession over 6,455 km of transmission lines and 99 transforming In million AR$ stations, which make up the Main Distribution Transmission System of the Province of Buenos Aires. 2,272
The following table summarizes Transener’s most relevant technical and financial indicators:
TECHNICAL INFORMATION 2017 2018 Transener Transmission Lines (Km) 14,489 14,489 Transba Transmission Lines (Km) 6,228 6,455 706 FINANCIAL INFORMATION* Revenues 9,746 9,838 393 350 Fiscal year’s results, attributable to company’s shareholders 3,848 3,055 217 257 108 Assets 17,717 19,869 11 14 21 15 13 30 20 51 88 76 47 54 76 Liabilities 7,726 8,313
Shareholders’ Equity 9,991 11,556 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18
SOURCE: Transener. Values expressed in nominal terms. * Annual consolidated FS figures under IFRS, adjusted by inflation, in million AR$.
Operation and Maintenance Business Development The extra high voltage power transmission’s grid SADI, operated and maintained by Transener, is subject to Engineering Services –Works higher and higher load conditions every year. In 2018, there was a record-breaking demand for power capacity, which reached 26,320 MW, a value 2.7% higher than the record peak for the year 2017 (25,628 MW). Regarding power grid expansion works, Transener has focused its activity on those works in which it has competitive advantages, prioritizing the works to be executed on the 500 kV and 132 kV systems. Despite the great number of power grid requests, in 2018 service quality has been wholly acceptable for the values required from a company like Transener, which ended the year with a rate equal to 0.35 failures per each The development of an important work program for replacing equipment and installing new reserves 100 kilometer-line, consistent with international parameters accepted for companies which operate and maintain within the transmission system has entailed the demand for other services, such as the preparation of bidding extra high voltage transmission systems. The following chart shows the failure rate for the service provided: documents, feasibility studies, the implementation of power generation and demand monitoring systems (DAG and DAD systems), and the testing and commissioning of transforming stations. Transener’s technical team extensive expertise has been a key factor in the customers’ decision to entrust it with the performance of FAILURE RATE | RATE PER EACH 100 KM OF LINES critical works. Bidding documents for the expansion of the transmission system under the RenovAr I and II
2.50 Programs, as well as other expansions to be executed by different WEM agents, have been prepared. Among FAILURE LIMIT: 2.50 the most important projects, we can mention expansion works in the 25 de Mayo ET, Viborata ET, Ezeiza ET 2.00 and Ramallo ET, as well as 132 kV extension works for power input from wind farms.
1.50 Power Transmission-Related Services
1.00 Operation, maintenance and other services, such as specific testing hired by private customers owning FAILURE TRANSENER 0.35 transmission facilities for both private and public use (independent transporters and international transporters) 0.50 have been provided since the creation of Transener.
0 Among the works performed by Transener, we can mention the replacement of bushings, the performance ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18
SOURCE: Transener. 47 Amount in nominal terms.
110 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 111 ANNUAL REPORT of oil analyses, diagnostic trials, OPGW repairs, and FO connections in repeater junction boxes, the cleaning of The following table summarizes TGS’s main technical and financial indicators: isolators, measurements of electric and magnetic fields, automation implementation, maintenance of lines and equipment in transforming stations, among others.
All service agreements include provisions to maintain actual values for Transener’s remuneration; and most TECHNICAL INFORMATION 2017 2018 agreements have been uninterruptedly renewed since their commencement, which confirms the quality of the service provided by Transener and the level of satisfaction of its clients. GAS TRANSPORTATION Average firm capacity contracted (in million m3 per day) 79.1 81.7 Communications Average delivery (in million m3 per day) 66.0 69.6 PRODUCTION AND COMMERCIALIZATION OF LIQUIDS In 2018, Transener continued providing infrastructure services to several communications companies, Total liquids production (in thousand ton) 908.9 1,063.1 including the assignment of dark fiber optics to its own system (Line IV), and the rent of space in microwave Gas processing capacity (in million m3 per day) 47.0 47.0 stations and in their antenna-supporting structures. The growing demand from mobile communication Storage capacity (in ton) 58,988 58,988 companies has led to a significant increase in revenues both in terms of volume and better prices involved, also offering internet services to wind farms. Besides, Transener continued providing support services for operational FINANCIAL INFORMATION* communications and data transmission to WEM agents. Revenues 19,953 34,063 Fiscal year’s results 5,751 11,416 Financial Situation Assets 44,853 61,943 Liabilities 19,574 30,998 In 2018, Transener and Transba’s financial surpluses were managed on a prudential basis by means of Shareholders’ Equity 25,279 30,945 different instruments available in the market to maximize the portfolio yield and hedge Transener and Transba’s foreign-currency denominated liabilities through an optimal combination of currencies. In this sense, foreign-
currency investments reached a level which allowed to minimize the negative effect of the depreciation of the * Annual consolidated FS figures, adjusted by inflation, in million AR$. AR$, mainly as regards obligations resulting from the financial debt.
As of December 31, 2018, the consolidated financial debt amounted to US$98.5 million as principal, corresponding exclusively to Series 2 CBs at a 9.75% rate. Since these bonds are fully redeemable in August Description of Business Segments 2021, there is no additional financial debt maturing before that date. Regulated Segment: Gas Transportation Regarding Transener’s risk rating, in 2018 S&P maintained its ‘B’ global and ‘raAA-’ local ratings, both with a stable outlook. In 2018, revenues from this business segment amounted to AR$15,462 million, showing a 107% increase compared to the AR$7,456 million recorded in 2017, in real terms. This increase is mainly due to: (i) the full entry into effect of the tariff increase resulting from the RTI, granted by ENARGAS Res. No. 310/18 and effective as TGS from April 1, 2018, (ii) the increase granted under ENARGAS Res. No. 265/18 as from October 1, 2018, and (iii) TGS is the most important gas transportation company within the country, and it operates the largest to a lesser extent, improved margins in the NGL segment, both in terms of prices and sold volumes, which was 48 pipeline system in Latin America. It is also a leading company in the production and commercialization of NGL partially offset by the restatement of FS . for both domestic and export markets, conducting this business from the General Cerri Complex located in Bahía Blanca, Province of Buenos Aires. TGS also provides comprehensive solutions in the natural gas area and, Revenues from this business segment result mainly from firm natural gas transportation agreements, since 1998, it has also landed in the telecommunications area through its controlled company Telcosur. As of whereby the gas pipeline capacity is reserved and paid for regardless of its actual use. Besides, TGS provides December 31, 2018, Pampa holds a 25.5% indirect interest in TGS through CIESA. an interruptible service, where the transportation of natural gas is subject to the gas pipeline’s available capacity. Furthermore, 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 by trusts created to such effect. For this service, TGS receives from customers with incremental natural gas transportation capacities the CAU established by ENARGAS, which remained unchanged since its creation in 2005 until its first update in May 2015.
In 2018, the daily average injection of natural gas into the gas pipeline system operated by TGS amounted to 69.6 million m3/day, a volume 5.8% higher than in fiscal year 2017. In this scenario, TGS’s gas pipeline system was fairly responsive to meet demand needs.
In the commercial area, in 2018 TGS participated in two firm transportation tenders allowing for the allocation of 305.5 thousand m3/day of remaining capacity in the Neuquén - Greater Buenos Aires route, as well as the allocation of the incremental capacity obtained through the execution of certain adaptation works in the General San Martín gas pipeline, equivalent to 271 thousand m3/day in the Tierra del Fuego – Buenos Aires route. The firm transportation service was commissioned on January 1, 2019 for a 35-year term.
48 For more information, please see section 7.11 of this Annual Report.
112 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 113 ANNUAL REPORT Non-Regulated Segment: Production and Commercialization of NGL the Household Gas Bottles’ Program and the Propane for Grids Agreement, whereby the SGE issued a set of resolutions to regulate the price of sold propane. As in previous periods, under the Household Gas Bottles’ Unlike the gas transportation business, the production and commercialization of NGL is not regulated by Program TGS is obliged to sell these products at prices ostensibly lower than market prices, which, under ENARGAS. In 2018, this segment’s revenues accounted for 48.8% of TGS’s total revenues. Revenues from sales certain conditions, results in negative operating margins. Furthermore, as a result of the participation in these in the NGL production and commercialization segment reached AR$16,627 million in the fiscal year ended programs, the Federal Government had to reimburse to TGS an economic compensation denominated in December 31, 2018 (AR$11,174 million higher than those recorded in 2017). The main reason of the increase Argentine pesos, which was collected with delays. in revenues was the effect of the exchange rate on US$-denominated sales, which was partially offset by the restatement of the FS. As regards ethane sales, on September 6, 2018 and with retroactive effects to May 1, 2018, TGS concluded negotiations with Polisur and executed a sales agreement which will be effective for a term of 10 years. Thanks NGL production and commercialization activities are conducted at the Cerri Complex, located close to the to this agreement, prevailing sales conditions have remained in effect until renewal. This agreement not only City of Bahía Blanca, which is supplied by all of TGS’s main gas pipelines. Ethane, propane, butane and natural guarantees the supply of this product to the only customer for ethane production in Argentina, but also allows gasoline are recovered at this industrial complex. TGS sells NGL to both domestic and foreign markets. In the the company to derive sales margins in line with those obtained in the last few years. This agreement sets forth domestic market, propane and butane are sold to reseller companies. In the foreign market, the sale of these commercial guidelines in keeping with those stipulated in the previous agreement, and introduces improvements products and natural gasoline is made at current international market prices. On the other hand, ethane is sold guaranteeing an increase in sales volumes for TGS, which will be gradually implemented during the first 5 years 49 to Polisur at a price agreed by the parties . of the agreement’s term. In 2018 and on account of a very competitive price offer for incremental tons made by TGS, 396,772 tons of ethane were supplied to Polisur, reaching a record daily delivery of 1,352 tons. During 2018, the production of NGL amounted to 1,063,057 tons (17% higher than in 2017), reaching the highest level since 2006. This was mainly due to the higher levels of natural gas reaching the Cerri Complex Furthermore, the portfolio of logistic services provided from the Puerto Galván facilities continues growing. for its processing and the larger number of ethane tons produced. Moreover, in 2018 no production restrictions In 2018, thanks to the works performed in the Cerri complex and the port facilities, TGS continued selling LPG by were recorded during the winter period on account of the higher supply of domestic gas from unconventional inland transport, dispatching approximately 12,080 trucks with a total 272,672 tons of own products, compared gas developments. to approximately 12.353 trucks for a total 279,040 tons dispatched during fiscal year 2017 as a consequence of a warmer winter. The dispatched volumes are detailed below: As regards natural gas prices, measured in US$, acquired as RTP for processing in the Cerri Complex, even though they recorded a decrease in the last quarter of 2018 due to the increase in the available natural gas supply, in 2018 the average price was slightly above that recorded in fiscal year 2017, mainly on account of DISPATCHED VOLUME (IN TON) 2017 2018 the increases set by the Federal Government in the natural gas price within the PIST until September 2018. Ethane 282,850 396,772 Furthermore, during the first months of 2018, there was a strong competition in the purchase of gas with the Propane 320,748 303,776 power generation segment. Butane 236,521 237,167 Natural gasoline 121,384 120,031
Total dispatched volume 961,503 1,057,746 SALES OF NATURAL GAS LIQUIDS BY DESTINATION MARKET | 2013-2018 In Thousands of Tons,
942 937 912 961 1,058 In 2018, average sales prices of propane, butane and natural gasoline for export experienced 8%, 1% and 26% increases, respectively. However, as from November and as a result of excess inventories and geopolitical conflicts among producing countries, prices have experienced sharp falls. 348 313 339 316 359 Furthermore, on September 3, 2018, PEN Executive Order No. 793/18 (later amended by PEN Executive Order No. 865/18) set a AR$4 withholding on each exported US$, with a maximum 12% rate, for all Common Mercosur Nomenclature goods, including, but not limited to, products exported by TGS50. 628 710 TGS has managed to optimize business margins as a result of the coordinated efforts by its different areas, 598 595 602 thus meeting production and sales objectives. It is worth highlighting that TGS has entered into agreements for the export of NGL for the 2018/2019 summer period which not only allow for an improvement in prices compared to the expired agreements, but will also bring short-term certainty for the sale of these products. 2014 2015 2016 2017 2018 Furthermore, TGS makes inland transport exports via trucks to Chile and Paraguay. Even though volumes exported under this modality are lower than those exported by sea, they have grown in the last few years, which allows TGS to capitalize on a higher operating margin. Domestic Market Foreign Market
In the domestic market, during 2018 TGS continued participating in different programs developed by the SOURCE: TGS. Government for the supply of propane and butane at prices lower than market prices. This is the case of
49 For more information, please see “Long-term ethane sales agreement” on section 7.5 of this Annual Report. 50 For more information, please see “New export duty” on section 7.5 of this Annual Report.
114 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 115 ANNUAL REPORT Non-Regulated 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. These services may also include gas extraction and transportation in the fields, construction services, inspection and maintenance of compression plants and gas pipelines, as well as steam generation services for the production of electricity. This segment also includes revenues from telecommunication services provided through its subsidiary Telcosur.
This segment represented 5.8% of TGS’s total revenues in 2018, and revenues from sales have experienced an increase mainly on account of the growth of natural gas compression and treatment services, as well as, although to a lesser extent, higher operating and maintenance services, the effect of the exchange rate on sales denominated in US$, and engineering services provided during fiscal year 2018.
In 2018, the Province of Neuquén awarded TGS the necessary concessions for the building of a 147-km gathering gas pipeline with a total transportation capacity of 60 million m3/day, which will include a treatment plant in the town of Tratayén with an initial capacity of 5 million m3/day, expandable in consonance with the increase in gas volumes transported through the Vaca Muerta formation, and allowing for the transportation and conditioning of extracted natural gas into the gas pipeline system currently operated by TGS51.
TGS will invest approximately US$250 million towards the startup of this transportation and conditioning capacity. As of the issuance of this Annual Report, the associated works are in the execution stage, and commissioning will take place in stages from the second quarter of 2019 to the fourth quarter of the same year.
This business segment is particularly important for TGS in view of the role it has decided to play in energy development in Argentina. Therefore, as of the date hereof TGS has a portfolio of projects under assessment which will contribute to the development of unconventional resources in Vaca Muerta, including the following: • The execution of a Memorandum of Understanding with Excelerate Energy LP for the joint assessment of a liquefaction project in the City of Bahía Blanca, Province of Buenos Aires, Argentina; • The construction of a gas pipeline with an extension of more than 1,000 km to allow for the transportation of natural gas from Vaca Muerta to the North of the Province of Buenos Aires; and • The expansion of the above-mentioned conditioning plant located in the town of Tratayén, with the possible installation of a natural gas processing plant and all necessary facilities.
Regarding telecommunication services provided by Telcosur, in 2018 several agreements were entered into which allowed for an increase in the sold capacity and a consolidation of these operations.
51 For more information, please see “Midstream project in Vaca Muerta” on section 7.5 of this Annual Report.
116 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 117 ANNUAL REPORT 9.3 Human Resource Planning At Pampa we develop this process by conducting a professional analysis of our employees, taking into consideration their academic and work experience background, their career within the Company and performance assessments, so as to have profiles aligned with each business’ needs. 09 9.4 Compensation and Benefits Pampa’s policy on Compensation and Benefits is based on ensuring external competitiveness and maintaining in-house equity. In this line, at Pampa we work with different surveys which allow us to adjust our benefit Human Resources packages and wage structure to those offered in the market. In 2018 the Company granted increases equivalent to those offered by the labor market to personnel not subject to collective bargaining agreements, and salaries At Pampa, we work with passion and enthusiasm. Guided by our values, we strive for excellence were adjusted according to collective bargaining agreements for unionized employees. and continuous improvement to meet the market demands and continue growing on a daily basis. The Company supports several practices aimed at human resources training, development, attraction, loyalty and management, thus creating a favorable work environment to achieve organizational results. 9.5 In 2018, the strategy of the Human Resources Department was oriented towards furthering integration throughout the Company; boosting cultural transformation by reinforcing values such as agility, teamwork, Trade Union Relations efficiency and safety; taking a close look at talent quality and development; maximizing efficiency in administration and management systems; and enhancing productivity by maintaining work relationships Throughout the years, Pampa has developed a relationship channel based on dialog and constructive based on respect for people and a positive work environment. negotiation with unions from the different industries where it operates, thus strengthening a consolidated liaison which allows us to anticipate joint work in order to face constant challenges and context changes, both at the social and economic level. 9.1 In 2018, we have actively participated in business chambers conducting labor and conventional negotiations, both at national and regional levels, and have monitored negotiation processes of our subsidiaries. Recruitment and Selection At Pampa, we encourage internal development. Therefore, whenever there is a vacancy, we first make an internal survey looking for the proper profiles to cover it. In case this is not feasible, we conduct an external 9.6 market search looking for candidates who not only have the necessary technical profile, but also the skills profile fostered by the Company. We find it essential that employees should feel comfortable with Pampa’s culture Staff Management and play a leading role in it. In 2018, we continued consolidating our communication channel (NEXO) in our daily management: this channel aims to establish a permanent contact at the service of our internal customers to be able to answer 9.2 their concerns and meet their needs. As regards medical coverage, we have started the voluntary unification process for CTLL, CTG, HIDISA and Professional Practice / Internships HINISA’s Staff Not Covered By Collective Bargaining Agreements. During the first semester of 2019, we will conduct the same process at CPB and at the Pampa Building. In 2018, the Company continued conducting professional practices jointly with technical schools so that students should get acquainted with the professional and work environment. This practice has allowed As regards projects, we have launched and developed the first stage of Success Factors (Employee Central students to take part in selection processes for positions similar to actual professional functions, and some module) and Payroll Consolidation. This last project will allow for a more functional and efficient payroll and of them were finally hired by the Company. accounting records’ operational management as from its implementation in 2019.
During the course of 2019, we will continue incorporating other technological tools into our processes to foster a greater information exchange with our employees within the framework of more agile and effective processes, such as the implementation of the digital payslip, and the working hours’ control management in our power plants following the installation of the LENEL system by these plants’ Assets Security area.
118 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 119 ANNUAL REPORT 9.7 Training and Development Aiming to accompany the development of our employees, during 2018 we developed different training programs, including the following: • Pampa Skills Development Program, targeted at all our Company’s assets, in onsite and virtual formats, reaching approximately 400 employees from professional, administrative and technical levels, who were trained in six competencies of our model by means of different modules involving training and experience-based activities; and • Leadership Development Program, which consisted of the training of all Pampa leaders, arranged in three 10 groups: Managers, Heads and Supervisors. This program was conducted locally in each of the assets. In total, more than 380 leaders took part in these initiatives, with the investment of more than 130 hours in training, and more than 500 hours of coaching for Managers
Furthermore, we accompanied the academic training of employees who participated in Master Degree Corporate and Specialization Programs, and we organized technical training courses and participated in congresses, both locally and abroad. Responsibility
9.8 At Pampa, we understand Corporate Social Responsibility as a strategic comprehensive management model applicable to our business, our activities and relationships with all our stakeholders. We develop our social Internal Communications, Working Environment investment actions and programs jointly with the Foundation. With a strong commitment to society, which goes beyond energy demand satisfaction, we develop programs contributing to people’s quality of life improvement and Culture and strengthening the capabilities of organizations in the communities where we have a presence. Pampa’s culture is based on an integrated, professional and flexible model which articulates diversity and integrates our values, practices and objectives. In 2018 we conducted several actions focused on In 2018, we continued reinforcing our social investment and community-bonding strategy through three consolidating integration and the values of Pampa’s culture through: main working areas: education and professional training, corporate social responsibility in our assets, and corporate volunteering. • The definition of an internal communication strategy based on a Cultural Integration Plan providing us with a common channel for all messages transmitted through corporate and business campaigns, and Human Resources actions; • The performance of onsite communication events to foster and drive cultural change: Family Day at 10.1 Pampa (employees’ relatives visits to offices and plants), Integration Space - Floor 13 (creation of common use areas to generate encounters and new conversations), Leaders’ Community (direct exchange and Education and Professional Training communication meetings with partners), among others; and We believe that education is the key to development and social and labor market inclusion. Under the programs • The administration of the 1st Survey on Organizational Environment, which constituted an important developed by the Foundation, we seek to provide equal opportunities to children and young people in vulnerable milestone for the Company as it evidenced our commitment with listening to all our employees’ views situation throughout the country and to accompany students and institutions along their educational paths. and working together in short-, medium- and long-term actions. The survey was administered by the Mercer consulting firm using the Mercer|Sirota tool, which guaranteed the confidentiality of results and allowed for report generation and interaction for the later analysis of results. The survey was anonymous, Primary Level confidential and optional, 100% online and mobile-device compatible for the entire population. An 80% Since 2011, we have sought to arise and spark an interest for science in students with the Energy Researchers participation level was reached Company-wise, with an 84% commitment level. Program, creating awareness on the responsible use of energy in different public institutions.
During 2018 we worked together with the National University of Comahue to update the course design and contents, which were provided to teachers so that they may work with their students. Topics are associated with different phenomena related to energy, its sources, efficiency, and benefits associated with the different types of energy.
Secondary Level Professional Training Programs aim to accompany students along each stage of their academic training comprehensively so that, once this training process is completed, young students may become trained professionals who are qualified to integrate in the labor world.
120 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 121 ANNUAL REPORT On the one hand, we support the completion of technical secondary studies by accompanying and providing Open Doors Program opportunities to young students during the last three years of Secondary Technical School so that they may complete their studies and develop their life project, instilling in them the importance of education as an To contribute to the training of students of all the different educational levels and awake interest in the essential tool to improve their living conditions. In 2018 we accompanied 899 students. energy sector, we organize tours and visits to our plants so that neighbors may get to know Pampa’s productive processes, facilities and working methodology. On the other hand, since 2013 and with the assistance of the Human Resources area, we have been working on the implementation of professional practices for students attending the last year at technical schools of Volunteer guides have invested a total 389 hours to open the doors to the community and explain power communities close to our assets. In 2018, 251 students from 31 technical schools participated in the program, generation processes at Pampa. A total 1,802 people were guided by 66 employees in our assets, including of which 189 are grantees at secondary level of the Foundation. CPB, CTG, CTGEBA, CTLL, CTPP, HIDISA, HINISA, the Dock Sud terminal and the PGSM Petrochemical Complex, among others. College and University Level Local Efforts to Improve Infrastructure With the purpose of fostering educational equity through higher education, we provided support for professional development by offering financial grants and tutoring so that young students of engineering or We have launched the ‘Mucho Más que una Compu’ (More than just a computer) campaign, under which other college courses associated with our business may have possibilities for development, thus advancing their in 2018 we donated 281 desktops and 121 laptops set up by the Company’s IT team to 32 social organizations, education and future employability. schools, community centers and other public welfare organizations of the Provinces of Buenos Aires, Mendoza, Salta and Neuquén. In 2018, we accompanied a total of 13 college students and 209 university students throughout the country, attending more than 20 colleges and universities in our communities. We also accompanied 33 employees’ Furthermore, under the educational project sponsored by the Department of Schools of the Province of children attending or willing to start attending an engineering or an associated course of studies at universities. Buenos Aires called ‘Red de 2.000 Escuelas para el Aprendizaje’ (2,000 Schools Network for Education), we supported educational development through school infrastructure public policies based on the refurbishment of Additionally, we have supported the supervised professional practices program, which seeks to provide work buildings to provide a dignified and functional space for the proper development of educational projects in the development opportunities to grantees attending studies associated with our business and need to complete a 8 schools covered by the project, prioritizing schools which had a previous relationship with the Pampa Group 200-hour practice to get a university degree. In total, 7 students, accompanied by 7 voluntary tutors, completed in Pilar, La Matanza, Morón, San Miguel and Marcos Paz. their professional practices at CPB. Productive Chain Programs Professional Level The Productive Chain program, coordinated by the Chamber of Commerce, Industry and Services of San th Fourth-year and above university students sponsored by the Foundation have the opportunity to join the Lorenzo, trains 7 grade students on the productive processes of the San Lorenzo Industrial Area and its Company through an internship program. Throughout 2018, 14 university grantees have made internships in our importance for the development of our country, by theoretical and practical lectures given by volunteers during assets to have their first work experience, 3 of them at the Pampa Building, 1 at CTG, 2 at CPB and 8 at Edenor. tours through industrial plants.
We conduct several employability workshops so that high school students in their senior year may have In 2018, we offered 6 lectures for 150 students and 17 teachers from 4 schools in the area, thus enhancing access to necessary tools to join the labor world: CV preparation, individual and group interviews, and first the program’s total impact, which reached 2,000 students in the area. employment search counseling. Environmental Protection Furthermore, jointly with professionals from Edenor and CTGEBA’s Human Resources area, we have conducted five First Employment and Job Placement workshops for 106 grantees and students of 7th year of Jointly with other leading companies operating in the districts of Zárate and Campana, we are members technical schools. Furthermore, jointly with the AceraRSE group, we have participated for the second year in a of the AcercaRSE group for sustainable development. We have conducted the ‘La Basura Sirve’ (Garbage Is workshop for 400 students in their senior year of secondary schools of Zárate and Campana. Useful) program since 2012, and in 2018, 5,000 children from 11 schools in Zárate and Campana took part in this program.
On the other hand, in support of the Municipality of Bahía Blanca’s environmental efforts in its green 10.2 locations project, we donated a mobile recycling station for its recycling and awareness programs. Corporate Social Responsibility in Our Assets Moreover, under an agreement with the Argentine Association of Wind Power (AAEE), the Foundation and Vestas Argentina have jointly donated a low-power 350 W wind turbine to Rural School in the town of We seek to strengthen our bond with the communities where our assets are located with the commitment to Calderón, which supplies sustainable electric power to Rural Kindergarten No. 4 and Rural Primary School No. contribute to the social, economic and environmental development, improving the life quality of our employees 6 in Calderón, District of Coronel Rosales. and their families, as well as the community. Promotion of Healthy Habits In 2018, the Company continued consolidating Corporate Social Responsibility Committees with the purpose of planning and developing sustainable local management programs, aligned with the values of each business, We accompanied the sports development of girls aged 6 – 17 from Morón through the Solidarity Hockey the Company and the community. We currently have 8 committees in place with the participation of 100 Clinic led by Fernando Ferrara, former coach of the Italian Selection, and Argentine players Tiago Sacchetti and voluntary employees. In 2018 we conducted 37 work meetings, 26 projects were submitted, out of which we Pipo Sarto, at Club Ciudad de Buenos Aires, in the first Argentine Hockey Forward Tournament. have already developed 11, and we expect to move forward with the remaining ones in 2019. On the other hand, jointly with the Health and Human Resources team, the first Workshop on Addictions was The actions and programs developed by our assets are focused on different work areas, based on needs organized for employees of our Neuquina Basin assets and their families, with the attendance of more than 50 identified by the committees through permanent dialog with each of our communities. employees and their families.
122 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 123 ANNUAL REPORT Furthermore, a group of volunteer yogini masters offered yoga classes on all Wednesdays throughout 2018, As a year closing activity, volunteers from the PGSM Petrochemical Complex set their hands to the recovery with a total of 50 hours of classes, to 195 employees of the Pampa Building, as well as two workshops on and improvement of a festive area at Hogar Anide, an institution devoted to the protection of neglected or emotional intelligence for 60 university grantees of the Foundation and Company’s employees. at-risk young people. The transformation of this space into a festive area was made possible by the two-day commitment of more than 30 volunteers. 10.3 Activities to Improve Educational Quality High school grantees of the Foundation joined CTGEBA, the Dock Sud Terminal and other assets’ volunteers Pampa’s Volunteering Actions to enhance creative play in neighboring educational institutions through educational games, interactive murals and wooden furniture. Also, games in poor condition were removed and repaired by CTGEBA’s volunteers and We are convinced that employees are our best asset, and we believe that each of them can commit their energy later donated to Paraje La Colorada Rural School, together with a wooden house built by them. In total, 77 and knowledge to the service of those needing them most. That is why we launched the ‘Pampa Volunteering’ volunteers took part in this initiative. program, a participative space for all employees willing to engage in actions of solidarity in their communities. Under the Proyectar Program, in 2018 we provided a space for 35 students attending the 5th- and 6th-year By channeling these actions through Corporate Social Responsibility Committees, we generate a space for at school and 4 PGSM teachers, where corporate volunteers visited schools to give lectures on employability involvement and coordination of actions reflecting the volunteers’ interests and addressing the bond between and real-life testimonies on professional careers. the asset and its community. Furthermore, to promote schooling completion, we provided support and counseling to 4 contractor Throughout 2018, we performed 69 volunteering activities with the participation of 1,034 employees, with employees at Pampa Building so that they may successfully complete their studies. Our professionals offered volunteers dedicating more than 18,600 hours to help other people. lectures and workshops, placing their knowledge at the service of other people, both at the Oil & Gas Patagonia 2018 event and in lectures for students at Jauretche University. A Christmas Eve for Everyone Every December 5, as part of the celebration of the international volunteer day, we performed ‘A Christmas Eve for Everyone’ action under the motto ‘a minute of your time, everyone’s commitment’. The purpose of this action, replicated in all our assets, is that families in need in our country receive, together with our best wishes, a gift box with products they can share for a complete holiday season dinner. In 2018, we donated 1,000 Christmas gift boxes which reached approximately 4,000 people in our country.
Together against Cold Weather The Together against Cold Weather campaign was a comprehensive proposal fostered by the Province of Buenos Aires to assist homeless people. At the Pampa Building we performed several actions in coordination with Fundación Sí and the Haciendo Lío organization: Hands On Cooking Pots, On-Street Assistance In Cold Weather, Solidarity Wardrobe and the delivery of donated items. In Bahía Blanca, the focus of the Campaign against Cold Weather was the donation of winter clothing by all employees to the ENVION organization and School No. 40 of Saladero Neighborhood.
Children’s Day We celebrated Children’s Day in several business units by delivering toys, sweets and entertainment for kids at kindergartens, health centers and soup kitchens. We also accompanied this celebration of childhood with the Family Day at Pampa, where Pampa Volunteers assembled 17 bicycles that were donated to 5 grantees of the Foundation, as well as to 9 organizations and institutions from the communities where we operate.
Accompanying Our Communities Together with our supplier HUSAL, we celebrated the 133th anniversary of Ingeniero White together with its community, and 4 CPB’s volunteers received students from School No. 40 of Saladero Neighborhood and School No. 21 of Boulevard, to enjoy the ‘Voces en el Tren’ (Voices in the Train) theater play in a recreational activity at the power plant.
Furthermore, San Rafael’s volunteers installed the lighting for the sports area of the Automotive Mechanics Vocational Training Center and the Pascual Iacarini School, which was in poor condition, thus adding more value to a community space and reaching more than 800 young people who play different sports there.
124 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 125 ANNUAL REPORT 11 12 Information Technology Quality, Safety,
In 2018, the Systems, Applications and Products (SAP) was updated to the latest functional version, with the migration of its database to the HANA standard. This provided more agility for the configuration of new functionalities, as well as a substantial improvement in processing times. Furthermore, several projects were Environment and implemented in line with each business segment.
In the power generation business, a control panel was implemented for the follow up of business strategic initiatives and indicators, as well as a monitoring and follow-up tool for works associated with the expansion and Labor Health construction of new assets. Furthermore, several confined space inspections were performed with the use of drones.
At CTGEBA, a predictive maintenance system was developed based on the analysis of turbine vibrations, Pampa considers that economic progress will only be sustainable to the extent performance is attained and this system is expected to be implemented in other assets to attain higher efficiency. The technology used through the implementation and improvement of a management system committed to all stakeholders: at the Headquarters’ dispatch room and CTGEBA’s operating room was refurbished, and a new operating and shareholders, customers, employees, community, suppliers and control bodies, with a focus on quality, personal monitoring room was equipped for the Bahía Blanca’s wind farms. health and safety, environmental care and energy efficiency.
In the E&P business, a cutting-edge room was equipped at Headquarters for the remote monitoring of fields’ With the purpose of reaffirming this vision, in 2018 Pampa implemented the new QSELH policy, which was activities, and a panel was developed, which provides real-time access to production information of each well issued in 2017 and is applicable to all its business segments. This policy makes an integral part of its management from mobile devices. system and operates at all levels of the organization through the setting and follow-up of objectives and goals, furthering projects, plans, programs, trainings, audits and assessments. The QSELH policy is deployed through On the other hand, a control panel was implemented to optimize the wells’ closing process, and generate guidelines which establish good practices, create a common identity, point the way forward to improve QSELH drilling and completion reports. Furthermore, a Geosteering solution was implemented to follow up geological, performance, and enable the Company to be a safe, reliable, high-quality and eco-efficient company which petrophysical and geophysical properties during drilling, allowing for an optimization of the target area. optimizes its resources and contributes to the quality of life of its employees and the community welfare, guaranteeing at all times compliance with requirements set by national, provincial and municipal entities, In corporate areas, in the case of the Human Resources Department, the SAP SuccessFactors functionality control over different hazards and issues, and impact and risk minimization. was extended in the compensations and performance modules, and the implementation of the Learning and Employee Central modules was launched. For the Procurement Department, SAP Ariba was implemented for The internal dissemination of these guidelines throughout all the businesses by fourteen leaders’ workshops the purpose of improving efficiency in the management of purchase transactions and achieving real-time concluded in 2018, and the first assessment and improvement cycle was launched in the assets to leverage its collaboration with suppliers to streamline negotiations. Furthermore, in the Legal Department, MyBIG was progressive implementation. CTG, CTGEBA, CTP, HIDISA, HINISA, HPPL, and the Zárate and PGSM plants were implemented as a legal management and collaborative work platform, and the migration of files was performed. assessed. These assessments allowed for the identification of improvement opportunities, which were used as On the other hand, SAP BPC was implemented as the corporate consolidation platform, and budget a reference to plan actions in each of the assets for the year 2019. preparation and follow-up processes were streamlined through the development of customized applications. Furthermore, the institutional website and a volunteering actions site for the Foundation were created. Furthermore, in 2018 Pampa continued advancing management programs in all its operations by allocating important resources, both at the corporate and asset level, to staff training; besides, it furthered the development Finally, as regards information security, a vulnerability analysis was conducted to detect risks for the E&P and and strengthening of Pampa’s culture in QSELH aspects through an integrated and aligned QSELH management. Power Generation plants’ control systems. Based on the gathered information, a gap analysis was conducted in respect of the best practices in the industry (NIST 800-82, NERC 1300, ISA99/IEC62443, ISO 27001), and a remediation plan was launched which will be completed in 2020.
Furthermore, with the purpose of raising our employees’ awareness on risks associated with information security, promoting the responsible use of the Internet and strengthening cybersecurity aspects in technical areas, an information security awareness program was conducted. The program closed with the Information Security Week event, where several workshops and lectures on the topics covered throughout the year were organized.
126 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 127 ANNUAL REPORT As regards industrial hygiene, we continued focusing on quality improvements in hygiene risk maps, covering 12.1 chemical, physical and ergonomic risks. Assessments were conducted, and measurements of both work environments and individual dosimetries were optimized, resulting in several plant improvements geared at Quality minimizing risks.
Pampa furthers its management quality using international ISO standards and the National Quality Prize model as references, seeking continuous improvement in all its activities. The main methodologies 12.3 applied for quality management are certified management systems, standards, anomalies and audits’ management, and improvement teams. Environment
In 2018, all Pampa assets maintained their third-party certifications from the Argentine Accreditation Pampa’s operations are conducted within a context of sustainable development. Pampa is committed to the Organization under ISO 14001 (environmental management), and OHSAS 18001 (occupational health and protection of the environment and endeavors to make a rational use of natural resources in each of its projects safety management) standards. The Generation, Downstream and Petrochemicals segment’s assets are by applying proper and economically viable technologies. certified under the ISO 9001 standard, and, specifically, CTGEBA has also been certified under the ISO 50001 (energy management) standard. Pursuant to the implemented model, external audits are conducted Pampa continues managing environmental risks to prevent the occurrence of undesirable events and/or on an annual basis to guarantee adherence to the requirements of the above-mentioned international to minimize their impact by developing actions and programs such as that for the integrity of aerial and standards. Furthermore, each asset has a management program in place which promotes continuous underground pipelines and tanks. In addition, monitoring and environmental studies are performed to become performance improvement. acquainted with different environmental situations. All these programs are encompassed within integrated management systems and contribute to environmental performance sustainability and enhancement. During 2018, Pampa successfully completed the Certification Program under these standards, thus demonstrating the efficiency in reaching the set goals and its commitment with customers, suppliers, Furthermore, in line with the country’s energy requirements and aiming to have an active participation in the 52 shareholders, employees and the community. The program includes internal and external maintenance diversification of the Argentine energy matrix, in 2018 Pampa inaugurated PEMC , with an installed capacity of audits and re-certifications, as well as the implementation of new certifications. External audits were 100 MW. Furthermore, Pampa began the construction of PEPE II and PEPE III, with a total power capacity of 106 53 54 conducted by renowned institutions such as TÜV Rheinland, IRAM and Bureau Veritas. Internal audits were MW , and is moving forward with the expansion project and the closing to combined cycle at CTGEBA , which conducted by qualified Pampa staff. Furthermore, in 2018 we completed the upgrade of ISO 9001 (quality will add an additional 383 MW power capacity. management) and ISO 14001 (environmental management) standards under their new 2015 versions in all our operations. Furthermore, in 2018 we certified the management system under three standards (ISO 14001, 9001, 18001) at CTPP, inaugurated in August 2017. 12.4 In 2018, the Company continued the Standards Management, updating according to each need, and strengthened its Anomalies Management, with a special emphasis on the handling of anomalies resulting Response to Emergency from forced operational downtimes aiming to promote quality throughout the organization on a daily basis. Pampa endeavors to prevent undesirable events; even so, it is fully prepared to provide a prompt and These processes are operated through applications developed in the SharePoint technological environment, effective response to emergencies in order to minimize possible consequences. In 2018, the Company continued an in-house development which provides a simpler, easier to use and more modern solution. making periodic emergency response simulations in terrestrial and aquatic scenarios. These practices promote the observance of established practices, as well as specific improvements which are incorporated into the With the purpose of improving operations and results through teamwork, Pampa continues developing integrated management system. Improvement Teams, an initiative launched in 2012 with the purpose of improving efficiency, productivity, costs, quality, safety and environment enhancements. Since 2013, selected Pampa’s Improvement Teams Furthermore, in order to develop the skills and competencies necessary to execute emergency plans and have participated in the National Annual Meeting for Continuous Improvement organized by Sociedad coordinate the necessary activities to be deployed should an undesirable event occur, consistently practices and Argentina Pro Mejoramiento Continuo (Argentine Society for Continuous Improvement), where knowledge training are organized based on the roles established in the Emergency Response Plans. and experiences are shared.
12.2 12.5 Safety Labor Health In 2018, Pampa continued implementing the policy on the use of alcohol, drugs and psychoactive As part of the management programs for all its operations, Pampa advanced with the definition and follow- substances. A communication and awareness campaign was conducted in association with CAPLA (Argentine up of safety objectives and goals, which are periodically monitored through the QSELH indicator board, and Center for the Labor Prevention of Addictions) and Fundación Convivir consisting of the dissemination of continued developing initiatives to sustain and improve safety management and performance in each asset. the Policy, awareness lectures for employees and contractors, managerial meetings to analyze the policy, and handouts for employees. In Power Generation business, a comprehensive review of dangerous energy blocking systems was launched to guarantee safety during maintenance procedures in our facilities. Furthermore, in the E&P business, the pilot evaluation of the safety culture launched in 2017 was developed. In 2018, improvement plans were developed under the monitoring of the business’ high leadership. 52 For further information, see section 7.1: ‘First WFP’s Commercial Commissioning’ of this Annual Report. 53 For further information, see section 7.1: ‘Construction of New WFPs’ of this Annual Report. 54 For further information, see section 8.1: ‘Current Expansions’ of this Annual Report.
128 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 129 ANNUAL REPORT The Company started administering Health Preventive Examinations (HPE), including random tests measuring alcohol levels in exhaled breath, to employees and contractors. Tests for measuring metabolites of psychoactive substances in the saliva were performed at the Dock Sud, PGSM, Zárate and Mendoza facilities during periodical checkups for the granting of the Certificate of Physical Fitness. At CPB and E&P, these tests were conducted during random controls to the staff. Furthermore, indicators for monitoring the policy on the use of alcohol, drugs and psychoactive substances were defined and implemented.
During 2018, Pampa advanced the Occupational Health Management process to promote the biopsychosocial health of all Pampa members, contributing to improving each workers’ quality of life. Occupational and risk medical exams were performed to more than 3,500 employees, and individual feedback was provided for the granting of the Certificate of Physical Fitness. This process was concluded with the Labor Health qualification for contractors. 13 In 2018, we also made progress with the Ergonomics Program regarding information for the identification of risks workers are exposed to: reports by the employee or his/her supervisors, background of incidents and non-conformities, medical records, etc. The frequency and impact of cumulative trauma incidents in specific positions or sectors were analyzed, and an investigation was conducted on the onset of symptoms, such as Results localization, length and exacerbation of symptoms suggestive of conditions associated with ergonomic risk factors and early manifestations. As regards prevention, Pampa continues implementing the physical activity program, as well as flu and for the Fiscal Year tetanus immunization campaigns. Furthermore, the cardio-protection program aims to train staff so that they may provide immediate assistance through Cardiopulmonary Resuscitation (CPR) and the use of the automated external defibrillator (AED). In 2018 and jointly with EXPERTA ART, CPR courses were given in all Pampa assets Pampa, the largest independent energy integrated company in Argentina, focuses its business on the with the use of AED and First Aid training, and we expect to be certified as a Cardiac-safe company in 2019. electricity value chain by participating in the generation, transmission and distribution of electricity, as well as in the gas value chain by taking part in E&P and midstream. Through its subsidiaries and share participations On the other hand, together with the Pampa Foundation, voluntary blood donation campaigns were in joint businesses, and based on the business nature, customer portfolio and risks involved, we were able to 55 organized in the different assets. The blood donation campaign was held at the Pampa Building, in certain E&P identify the following business segments for continuing operations : assets, and at HINISA and HIDISA. This practice continues being organized on a systematic basis in all our assets • Power Generation, consisting of the Company’s direct and indirect interests in CPB, HINISA, HIDISA, to strengthen the bonds between the Company, its staff and the community. PACOSA S.A., Greenwind S.A., Parques Eólicos del Fin del Mundo S.A., Parques Eólicos Argentinos S.A., TMB, TJSM; as well as power generation activities through CTG, CTLL, CTGEBA, CTPP, CTIW and EcoEnergía power plants and the HPPL dam, and its equity interest in Enecor;
• Electricity Distribution, consisting of Pampa’s indirect interest in Edenor;
• Oil and Gas, consisting of the Company’s own interests in oil and gas blocks, as well as interests in its associates OldelVal and OCP;
• R&D, consisting of its interest in its associate Refinor;
• Petrochemicals, comprising styrene and the catalytic reformer unit’s own operations developed in plants in Argentina; and
• Holding and Others, consisting of financial investment transactions, holding activities, interests in joint businesses CITELEC and CIESA and their respective subsidiaries holding the concession over the high voltage electricity transmission nationwide and over gas transportation in the south of the country, respectively.
It should be pointed out that the analysis of results for fiscal years 2018 and 2017 has been made for continuing operations.
55 For further information, see section 7.7 of this Annual Report.
130 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 131 ANNUAL REPORT 13.1 Consolidated Income Statement by Segment, 2018 Fiscal Year (AR$ Million)
CONSOLIDATED PROFIT AND LOSS INFORMATION POWER ELECTRICITY OIL REFINING AND PETRO- HOLDING ELIMINATIONS CONSOLIDATED AS OF DECEMBER 31, 2018 GENERATION DISTRIBUTION AND GAS DISTRIBUTION CHEMICALS AND OTHERS
Revenue 22,763 55,954 17,261 - 12,748 1,354 - 110,080 Intersegment sales 62 - 2,377 - - - (2,439) - Cost of sales (10,274) (42,839) (10,822) - (12,602) (4) 2,380 (74,161) Gross profit (loss) 12,551 13,115 8,816 - 146 1,350 (59) 35,919
Selling expenses (54) (5,033) (721) (159) (484) (1) 1 (6,451) Administrative expenses (1,535) (2,872) (2,110) - (212) (1,022) - (7,751) Exploration expenses - - (45) - - - - (45) Other operating income 405 322 5,320 281 205 309 - 6,842 Other operating expenses (640) (1,648) (4,304) - (752) (210) 28 (7,526) Impairment of property, plant and equipment and intangible assets (7) - - - (1,188) - - (1,195) Results for participation in joint businesses and associates (414) 2 1,421 (138) - 3,593 - 4,464 Results from sale of equity share in companies - - 1,052 - - - - 1,052 Operating profit (loss) 10,306 3,886 9,429 (16) (2,285) 4,019 (30) 25,309
RECPAM - Results from net monetary position 8,789 8,504 4,037 (15) 1,850 464 67 23,696
Financial income 1,949 672 594 - 50 519 (33) 3,751 Financial expenses (3,218) (4,977) (2,978) - (566) (237) 32 (11,944) Other financial results (13,772) (1,879) (19,288) 32 (1,481) 4,023 - (32,365) Financial results, net (6,252) 2,320 (17,635) 17 (147) 4,769 66 (16,862) Profit (loss) before income tax 4,054 6,206 (8,206) 1 (2,432) 8,788 36 8,447
Income tax (107) (1,865) 2,124 (32) 471 (1,249) - (658) Profit (loss) for the year from continuing operations 3,947 4,341 (6,082) (31) (1,961) 7,539 36 7,789
Discontinued operations - - 1,868 1,167 - - (16) 3,019
Profit (loss) for the year 3,947 4,341 (4,214) 1,136 (1,961) 7,539 20 10,808 Owners of the Company 3,734 2,273 (4,306) 1,136 (1,961) 7,539 20 8,435 Non - controlling interest 213 2,068 92 - - - - 2,373
Depreciation and amortization 2,488 2,611 3,472 20 222 3 - 8,816
132 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 133 ANNUAL REPORT 13.2 Consolidated Income Statement by Segment, 2017 Fiscal Year (AR$ Million)
CONSOLIDATED PROFIT AND LOSS INFORMATION POWER ELECTRICITY OIL REFINING AND PETRO- HOLDING ELIMINATIONS CONSOLIDATED AS OF DECEMBER 31, 2017 GENERATION DISTRIBUTION AND GAS DISTRIBUTION CHEMICALS AND OTHERS
Revenue 13,250 39,603 16,695 - 11,825 635 - 82,008 Intersegment sales 61 - 707 - - - (768) - Cost of sales (7,335) (30,117) (11,695) - (10,915) (27) 750 (59,339) Gross profit (loss) 5,976 9,486 5,707 - 910 608 (18) 22,669
Selling expenses (161) (3,568) (600) - (471) - 24 (4,776) Administrative expenses (1,189) (2,505) (2,053) - (622) (1,118) 6 (7,481) Exploration expenses - - (71) - - - - (71) Other operating income 725 158 4,123 - 103 505 (6) 5,608 Other operating expenses (357) (1,261) (1,410) - (363) (501) - (3,892) Results for participation in joint businesses and associates (73) 10 41 (113) - 1,948 - 1,813 Operating profit (loss) 4,921 2,320 5,737 (113) (443) 1,442 6 13,870
RECPAM - Results from net monetary position 654 5,457 (687) (276) 58 6,272 - 11,478
Financial income 1,453 441 209 - 16 286 (72) 2,333 Financial expenses (2,618) (2,607) (2,932) - (387) (278) 72 (8,750) Other financial results (1,265) 19 (3,493) - (241) 1,206 - (3,774) Financial results, net (1,776) 3,310 (6,903) (276) (554) 7,486 - 1,287 Profit (loss) before income tax 3,145 5,630 (1,166) (389) (997) 8,928 6 15,157
Income tax (137) (449) 893 - 728 (50) - 985 Profit (loss) for the year from continuing operations 3,008 5,181 (273) (389) (269) 8,878 6 16,142
Discontinued operations - - (1,328) (599) - - 34 (1,893)
Profit (loss) for the year 3,008 5,181 (1,601) (988) (269) 8,878 40 14,249 Owners of the Company 2,841 2,719 (2,422) (988) (269) 8,878 40 10,799 Non - controlling interest 167 2,462 821 - - - - 3,450
Depreciation and amortization 2,029 2,198 3,273 - 152 87 - 7,739
134 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 135 ANNUAL REPORT As regards the amount of electricity sold, it remained without substantial variations (15,599 GWh for fiscal 13.3 year ended December 31, 2018, compared to 15,514 GWh for fiscal year 2017) since the power generation of the new thermal power plants was offset by downtimes at CTGEBA, a lower dispatch at CPB and lower water Income Statement Analysis for Fiscal Year ended flow and input at HIDISA and HINISA.
December 31, 2018, compared to Fiscal Year ended The following table shows net electricity sales (in GWh) for power generation plants: December 31, 2017
As a result of the macroeconomic situation, the cumulative inflation rate over three years exceeded FOR THE FISCAL YEAR ENDED DECEMBER 31, 100% and, therefore, the Company’s FS as of December 31, 2018, including figures for the previous fiscal year, were restated to reflect changes in the purchasing power of the AR$ currency pursuant to the applicable accounting standards and regulatory framework in force. Consequently, the figures disclosed 2018 2017 below are presented in terms of the current measuring unit at the closing of the reporting period. IN GWH NET GENERATION PURCHASES TOTAL SALES NET GENERATION PURCHASES TOTAL SALES
HYDROELECTRIC POWER GENERATION SEGMENT HINISA 577 - 577 751 - 751 HIDISA 393 - 393 480 - 480 HPPL 886 - 886 760 - 760
POWER GENERATION SEGMENT THERMAL CTG 1,674 553 2,227 1,772 586 2,358 CTLL 4,748 - 4,748 3,864 - 3,864 12.31.2018 12.31.2017 VARIATION IN $ VARIATION % CTP 134 - 134 156 - 156 CPB 753 - 753 1,453 - 1,453 Sales revenue 22,825 13,311 9,514 71% CTPP4 192 - 192 142 - 142 Cost of sales (10,274) (7,335) (2,939) 40% CTIW5 274 - 274 23 - 23 Gross profit (loss) 12,551 5,976 6,575 110% CTGEBA 4,859 598 5,457 4,685 739 5,424 2 110 103 Selling expenses (54) (161) 107 (66%) EcoEnergía 108 100 3 Administrative expenses (1,535) (1,189) (346) 29% WIND Other operating income and expenses, net (235) 368 (603) (164%) PEMC 247 - 247 - - - Results for participation in joint businesses (414) (73) (341) 467% Property, plant and equipment impairment (7) - (7) (100%) Total 14,845 1,154 15,999 14,186 1,328 15,514 Operating profit (loss) 10,306 4,921 5,385 109% RECPAM - Results from net monetary position 8,789 654 8,135 1,244% Financial income 1,949 1,453 496 34% Financial expenses (3,218) (2,618) (600) 23% Cost of sales increased by 40%, to AR$10,274 million for fiscal year ended December 31, 2018, against Other financial results (13,772) (1,265) (12,507) 989% AR$7,335 million for fiscal year 2017, mainly due to: (i) gas purchases for power generation; (ii) the impact of the Financial results, net (6,252) (1,776) (4,476) 252% exchange rate on energy purchases; (iii) the higher depreciation of property, plant and equipment, and higher Profit (loss) before income tax 4,054 3,145 909 29% maintenance costs and materials consumption resulting from the commissioning of the new power plants. Income tax (107) (137) 30 (22%) Selling expenses from our power generation segment decreased by 66%, to AR$54 million, for fiscal year Profit for the year 3,947 3,008 939 31% ended December 31, 2018, compared to AR$161 million for fiscal year 2017, mainly due to lower charges for Owners of the Company 3,734 2,841 893 31% taxes, rates and contributions, and doubtful accounts resulting from the application of IAS 9. Non - controlling interest 213 167 46 28% Administrative expenses from our power generation segment increased by 29%, to AR$1,535 million, for fiscal year ended December 31, 2018, from AR$1,189 million for fiscal year 2017, mainly due to an increase in labor costs and fees for third-party services.
Sales from our power generation segment increased by 71%, to AR$22,825 million, during fiscal year ended Other net operating incomes and expenses decreased by AR$603 million, to a AR$235 million loss, for fiscal December 31, 2018, compared to AR$13,311 million for the same period in 2017. The segment’s AR$9,514 million year ended December 31, 2018, compared to a profit of AR$368 million for fiscal year 2017, mainly attributable to: rise in electricity sales was mainly due to: (i) the increase in the exchange rate applied to dollarized tariffs, (ii) (i) the recovery of receivables and others, mainly from tax credits resulting from the merger of subsidiaries and tax the commissioning of new thermal power plants (CTPP and CTIW), (iii) the incorporation of installed capacity contingencies resulting from the adhesion to the regularization regime (moratorium) set forth by Law No. 27,260 in CTLL (new LMS100 power plant and expansion of the closing of the cycle), and (iv) the recognition of the regarding certain claims by tax authorities associated with the import of a power generation turbine and certain spare generation cost with own fuels as from November 2018. parts, which provides for benefits consisting of the waiver of tax fines and a reduction of compensatory interest during fiscal year 2017; (ii) the provision for the guarantee for the construction of PEPE IV; (iii) all of which offset by insurance recoveries recorded in fiscal year 2018 on account of the accident which took place at CTGEBA in 2017.
136 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 137 ANNUAL REPORT The power generation segment’s operating results accounted for a profit of AR$10,306 million for Sales from our electricity distribution activities increased by 41%, to AR$55,954 million, for fiscal year fiscal year ended December 31, 2018, 109% higher than the AR$4,921 million profit recorded in fiscal year ended December 31, 2018, compared to AR$39,603 million for fiscal year 2017, mainly due to the application 2017. This variation includes a lower result from the participation in joint businesses corresponding to the of the new tariff schemes pursuant to ENRE Res. No. 33/18 and No. 208/18, in the months of February and investment in Greenwind S.A. August 2018, respectively.
Net financial results from power generation activities accounted for a AR$6,252 million loss for fiscal year The cost of sales for the electricity distribution segment increased by 42% to AR$42,839 million for fiscal ended December 31, 2018, compared to a loss of AR$1,776 million for fiscal year 2017, mainly due to: higher losses year ended December 31, 2018, compared to AR$30,117 million for fiscal year 2017, mainly due to increases in in other financial results in the amount of AR$12,507 million, mainly generated by exchange differences and, to a energy purchases and increase in sanctions and penalties resulting from: (i) the change of the valuation date for lower extent, the loss resulting from the restatement of the value of receivables from CAMMESA, partially offset kWh, which should be that of punitive event, and (ii) the application of the new punitive proceeding for breaches by a AR$8,135 profit resulting from the exposure to changes in the purchasing power of the currency. in reading and billing terms, which were offset by a decrease in labor costs.
Power generation activities recorded an income tax charge of AR$107 million for fiscal year ended December The electricity distribution segment’s selling expenses increased by 41%, to AR$5,033 million, in the fiscal 31, 2018, compared to a charge of AR$137 million for fiscal year 2017. year ended December 31, 2018, compared to AR$3,568 million for fiscal year 2017, mainly due to an increase in sanctions and penalties, the impairment of financial assets and taxes, rates and contributions, and fees Power generation activities recorded a net profit of AR$3,497 million for fiscal year ended December 31, for third-party services. 2018, of which AR$3,734 million are attributable to the owners of the Company, compared to a profit of AR$2,841 million attributable to the owners of the Company for fiscal year 2017. The electricity distribution segment’s administrative expenses increased by 15%, to AR$2,872 million, for fiscal year ended December 31, 2018, compared to AR$2,505 million for fiscal year 2017, mainly due to the increase in fees for third-party services. ELECTRICITY DISTRIBUTION SEGMENT Other net operating incomes and expenses for fiscal year ended December 31, 2018 amounted to a net loss of AR$1,326 million, compared to a net loss of AR$1,103 million in fiscal year 2017, mainly explained by an increase in the provision for contingencies and tax on bank transactions. ELECTRICITY DISTRIBUTION The operating results from our electricity distribution segment accounted for a profit of AR$3,886 million for the fiscal year ended December 31, 2018, representing a 68% increase compared to the AR$2,320 million profit 12.31.2018 12.31.2017 VARIATION IN $ VARIATION % for the fiscal year ended December 31, 2017.
Sales revenue 55,954 39,603 16,351 41% Net financial results related to our electricity distribution activities represented a profit of AR$4,673 million Cost of sales (42,839) (30,117) (12,722) 42% for fiscal year ended December 31, 2018, compared to a AR$3,310 million profit for fiscal year 2017, mainly due Gross profit (loss) 13,115 9,486 3,629 38% to: a AR$3,047 million increase in profits resulting from the exposure to changes in the purchasing power of the currency, offset by higher losses in financial expenses for AR$2,370 million and other financial results for AR$1,898 Selling expenses (5,033) (3,568) (1,465) 41% million mainly on account of interest and exchange differences generated by the commercial debt with CAMMESA. Administrative expenses (2,872) (2,505) (367) 15% Other operating income and expenses, net (1,326) (1,103) (223) 20% Our electricity distribution operations recorded an income tax charge of AR$1,865 million in the fiscal year Results for participation in joint businesses 2 10 (8) (80%) ended December 31, 2018, compared to a AR$449 million charge for fiscal year 2017. Operating profit (loss) 3,886 2,320 1,566 68% Electricity distribution activities disclosed a net profit of AR$4,341 million for fiscal year ended December 31, RECPAM - Results from net monetary position 8,504 5,457 3,047 56% 2018, of which AR$2,273 million are attributable to the owners of the Company, compared to a net profit of Financial income 672 441 231 52% AR$5,181 million, of which AR$2,719 million are attributable to the owners of the Company for fiscal year 2017. Financial expenses (4,977) (2,607) (2,370) 91% Other financial results (1,879) 19 (1,898) (9,989%) Financial results, net 2,320 3,310 (990) (30%) Profit (loss) before income tax 6,206 5,630 576 10%
Income tax (1,865) (449) (1,416) 315%
Profit (loss) for the year 4,341 5,181 (840) (16%) Owners of the Company 2,273 2,719 (446) (16%) Non - controlling interest 2,068 2,462 (394) (16%)
138 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 139 ANNUAL REPORT OIL AND GAS SEGMENT The following table shows our production for the oil and gas segment for the periods shown, including the production of discontinued operations:
OIL AND GAS FOR THE FISCAL YEAR ENDED DECEMBER 31, 12.31.2018 12.31.2017 VARIATION IN $ VARIATION % 2018 2017
3 Sales revenue 19,638 17,402 2,236 13% OIL (IN THOUSAND M /D) (1) 1.2 Cost of sales (10,822) (11,695) 873 (7%) Pampa 0.8 Gross profit (loss) 8,816 5,707 3,109 54% Total 0.8 1.2
Selling expenses (721) (600) (121) 20% GAS (IN MILLION M3/D) Administrative expenses (2,110) (2,053) (57) 3% Pampa 6.8 4.2 Exploration expenses (45) (71) 26 (37%) PEPASA(1) 0.0 2.8 Otros ingresos y egresos netos 1,016 2,713 (1,697) (63%) Total 6.8 7.0 Results for participation in associates 1,421 41 1,380 3,366% Results from sale of equity share in companies 1,052 - 1,052 100% Operating profit (loss) 9,429 5,737 3,692 64% NOTE: (1) Considering the volume of Medanito La Pampa for the benefit of PEPASA. RECPAM - Results from net monetary position 4,037 (687) 4,724 (688%) Financial income 594 209 385 184% The cost of sales from our oil and gas segment’s continuing operations decreased by 7%, to AR$10,822 Financial expenses (2,978) (2,932) (46) 2% million, for fiscal year ended December 31, 2018, compared to AR$11,695 million for fiscal year 2017, mainly due Other financial results (19,288) (3,493) (15,795) 452% to lower amortizations in 2018 on account of the extension of concessions at Rincón del Mangrullo in August Financial results, net (17,635) (6,903) (10,732) 155% 2017 and at El Mangrullo in June 2018, partially offset by an increase in royalties. Profit (loss) before income tax (8,206) (1,166) (7,040) 604% Selling expenses from our oil and gas segment’s continuing operations increased to AR$721 million for Income tax 2,124 893 1.231 138% fiscal year ended December 31, 2018, with no significant variations compared to the AR$600 million recorded during fiscal year 2017. Profit (loss) for the year from continuing operations (6,082) (273) (5,809) 2,128%
Discontinued operations 1,868 (1,328) 3.196 (241%) Administrative expenses from our oil and gas segment’s continuing operations amounted to AR$2,110 million for fiscal year ended December 31, 2018, with no significant variations compared to fiscal year 2017 (AR$2,053 million). Loss for the year (4,214) (1,601) (2,613) 163% Exploration expenses from our oil and gas segment’s continuing operations decreased by 37%, to AR$45 Owners of the Company (4,306) (2,422) (1,884) 78% million, during the fiscal year ended December 31, 2018, compared to AR$71 million in fiscal year 2017, mainly Non - controlling interest 92 821 (729) (89%) due to lower results on account of wells retirement.
Other net operating incomes and expenses from continuing operations decreased by 63%, to a profit of AR$1,016 million, for fiscal year ended December 31, 2018, compared to a profit of AR$2,713 million for fiscal year 2017. This decrease was mainly a result of the decrease in Plan Gas compensations and a higher Ship or Pay charge, partially offset by profits from the settlement agreement in EcuadorTLC and a lower charge Sales from continuing operations in our oil and gas segment amounted to AR$19,638 million for fiscal year resulting from agreements with provincial treasuries regarding royalties, in line with the decrease of the Plan ended December 31, 2018, a figure 13% higher than the AR$17,402 million disclosed in fiscal year 2017. The Gas compensations. AR$2,236 million increase was mainly due to the increase in the exchange rate exceeding inflation in gas and crude oil’s sales, the increase in US$-denominated prices of crude oil and a slight decrease in gas sales volumes, The operating results from our oil and gas segment’s continuing operations accounted for a profit of AR$9,429 mainly from the Rincón del Mangrullo block, partially offset by an increase in El Mangrullo, Río Neuquén and million for fiscal year ended December 31, 2018, a 64% increase compared to the AR$5,737 million profit for Parva Negra blocks. fiscal year 2017. This variation includes: (i) a AR$1,305 million profit resulting from participation in affiliates in OCP, as a result of the settlement agreement entered into with the Republic of Ecuador terminating all claims and legal actions regarding divergent interpretations on tax issues in favor of the Ecuadorian Government; and (ii) a AR$1,052 million profit resulting from the sale to ExxonMobil Exploration Argentina S.R.L. of shares representing 21% of OldelVal’s capital stock.
The net financial results from the oil and gas segment’s continuing operations accounted for a loss of AR$17,635 million for fiscal year ended December 31, 2018, compared to a loss of AR$6,903 million for fiscal year 2017, mainly due to: higher losses in other financial results, in the amount of AR$15,795 million, mainly due to exchange differences, changes in the fair value of financial instruments and current value of receivables from gas distributors, partially offset by a higher profit of AR$4,724 million resulting from the exposure to changes in the purchasing power of the currency.
140 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 141 ANNUAL REPORT Our oil and gas segment’s continuing operations recorded an income tax benefit of AR$2,124 million for The following table shows sales volumes in the petrochemicals segment during the specified periods: fiscal year ended December 31, 2018, compared to a benefit of AR$893 million for the same period in 2017.
Our oil and gas segment’s continuing operations recorded a total loss of AR$6,082 million for fiscal year ended December 31, 2018, compared to a AR$273 million loss for the same period in 2017. SELLING VOLUME IN THOUSAND TON 2018 2017 Our oil and gas segment recorded a total profit of AR$1,868 million for discontinued operations in the fiscal Styrene and Polystyrene 113 134 year ended December 31, 2018, compared to a AR$1,328 million loss for the same period in 2017. SBR 26 33 Others 215 291 Finally, our oil and gas segment recorded a total loss for continuing and discontinued operations in the Total 355 458 amount of AR$4,214 million for fiscal year ended December 31, 2018, of which AR$4,306 million are attributable to the owners of the Company, compared to a total loss of AR$1,601 million recorded for fiscal year 2017, of which AR$2,422 million were attributable to the owners of the Company.
The petrochemicals segment’s cost of sales increased by 15%, to AR$12,602 million, for fiscal year ended December PETROCHEMICALS SEGMENT 31, 2018, compared to AR$10,915 million for fiscal year 2017, mainly due to higher inventory purchase prices.
Selling expenses from the petrochemicals segment amounted to AR$484 million for fiscal year ended December 31, 2018, with no significant variations compared to the AR$471 million recorded in fiscal year 2017. PETROCHEMICALS Administrative expenses decreased to AR$212 million during fiscal year ended December 31, 2018, compared 12.31.2018 12.31.2017 VARIATION IN $ VARIATION % to AR$622 million in fiscal year 2017, mainly due to lower fees for third party services.
Sales revenue 12,748 11,825 923 8% Other net operating incomes and expenses recorded a loss of AR$547 million for fiscal year ended December 31, Cost of sales (12,602) (10,915) (1,687) 15% 2018, compared to a AR$260 million loss during fiscal year 2017, mainly on account of higher idle capacity charges. Gross profit (loss) 146 910 (764) (84%) The petrochemicals segment’s operating results accounted for a loss of AR$2,285 million for fiscal year Selling expenses (484) (471) (13) 3% ended December 31, 2018, 416% higher than the AR$443 million loss for fiscal year 2017. This variation includes Administrative expenses (212) (622) 410 (66%) losses resulting from the impairment of property, plant and equipment in the amount of AR$1,188 million as a Other operating income and expenses, net (547) (260) (287) 110% consequence of the drop evidenced in the segment’s margins resulting from the steady increase in operating Property, plant and equipment impairment (1,188) - (1,188) (100%) costs, mainly impacted by the cost of raw material processed in the Catalytic Reform unit and the drop in Operating profit (loss) (2,285) (443) (1,842) 416% international reference prices. RECPAM - Results from net monetary position 1,850 58 1,792 3,090% Financial income 50 16 34 213% The net financial results from the petrochemicals segment recorded a loss of AR$147 million during fiscal Financial expenses (566) (387) (179) 46% year ended December 31, 2018, compared to a loss of AR$554 million for fiscal year 2017, mainly due to: Other financial results (1,481) (241) (1,240) 515% higher losses in other financial results, in the amount of AR$1,240 million, mostly generated by the exchange Financial results, net (147) (554) 407 (73%) difference, offset by a higher profit of AR$1,792 million resulting from the exposure to changes in the purchasing Profit (loss) before income tax (2,432) (997) (1,435) 144% power of the currency.
Income tax 471 728 (257) (35%) Our petrochemicals activities have recorded an income tax benefit for fiscal years ended December 31, 2018 Loss for the year (1,961) (269) (1,692) 629% and 2017 in the amount of AR$471 million and AR$728 million respectively.
The petrochemicals segment disclosed a net loss of AR$1,961 million for fiscal year ended December 31, 2018, all of which is attributable to the owners of the Company, compared to a net loss of AR$269 million attributable to the owners of the Company for fiscal year 2017. Sales from our petrochemicals segment amounted to AR$12,748 million during fiscal year ended December 31, 2018, a figure 8% higher than the AR$11,825 million disclosed for fiscal year 2017. The AR$923 million increase was mainly due to the increase in the exchange rate exceeding inflation and the rise in average US$-denominated prices, offset by a decrease in the Reforming unit’s domestic sales upon the termination of the agreement with Oil Combustibles S.A., lower polystyrene sales and a decrease in rubber domestic sales.
142 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 143 ANNUAL REPORT HOLDING AND OTHERS SEGMENT
HOLDING AND OTHERS
12.31.2018 12.31.2017 VARIATION IN $ VARIATION %
Sales revenue 1,354 635 719 113% Cost of sales (4) (27) 23 (85%) Gross profit (loss) 1,350 608 742 122% 14 Selling expenses (1) - (1) (100%) Administrative expenses (1,022) (1,118) 96 (9%) Other operating income and expenses, net 99 4 95 2,375% Results for participation in joint businesses 3,593 1,948 1,645 84% Operating profit (loss) 4,019 1,442 2,577 179% RECPAM - Results from net monetary position 464 6,272 (5,808) (93%) Dividend Policy Financial income 519 286 233 81% Financial expenses (237) (278) 41 (15%) On November 9, 2018, Pampa’s Board of Directors approved the Company’s Dividend Policy, which outlines Other financial results 4,023 1,206 2,817 234% Financial results, net 4,769 7,486 (2,717) (36%) the guidelines to be followed to reach a proper balance between distributed amounts and Pampa’s investment Profit (loss) before income tax 8,788 8,928 (140) (2%) plans, with the purpose of establishing a clear, transparent and consistent practice allowing shareholders to make informed decisions, all of this in consonance with the Company Bylaws and the applicable legal and Income tax (1,249) (50) (1,199) 2,398% regulatory framework in force. Profit (loss) for the year 7,539 8,878 (1,339) (15%) In observance of this policy’s guidelines, every year the Board of Directors assesses the possibility of paying dividends to Pampa’s shareholders on a prudential basis within each fiscal year, and examines thoroughly the economic circumstances prevailing at the time. Net sales from our holding and others segment amounted to AR$1,354 million for the fiscal year ended December 31, 2018, a figure 113% higher than the AR$635 million disclosed for fiscal year 2017. These sales In 2018, we are not planning to pay cash dividends on our common shares or ADSs, thus retaining all mostly correspond to fees collected from related parties. available funds and profits in order to apply them to the operation and expansion of our business. Cost of sales of the holding and others segment amounted AR$4 million for the fiscal years ended December 31, 2018 and AR$27 million for the same period in 2017.
No significant selling expenses were recorded in our holding and others segment during fiscal year ended December 31, 2018 and 2017.
Administrative expenses decreased by 9%, to AR$1,022 million, during fiscal year ended December 31, 2018, compared to AR$1,118 million for fiscal year 2017. This increase was explained by lower charges from compensation agreements, offset by higher fees for third-party services.
Other operating income and expenses net recorded a profit of AR$99 million for the fiscal year ended December 31, 2018, compared to AR$4 million profit during the fiscal year ended December 31, 2017.
Our holding and others segment’s operating profits amounted to AR$4,019 million for fiscal year ended December 31, 2018, a figure 179% higher than the AR$1,442 million profit for fiscal year 2017. This variation includes higher profits resulting from the participation in joint businesses in the amount of AR$1,645 million, mainly on account of higher profits resulting from the equity investment in CIESA for AR$1,902 million, offset by lower results from the equity investment in Citelec for AR$260 million.
Net financial results from our holding and others activities recorded a profit of AR$4,769 million during fiscal year ended December 31, 2018 compared to a AR$7,486 million profit for fiscal year 2017, mainly due to a lower profit of AR$5,808 million resulting from the exposure to changes in the purchasing power of the currency, offset by higher losses in other financial results in the amount of AR$2,817 million mainly on account of net foreign exchange differences.
Our holding and others segment recorded an income tax charge of AR$1,249 million for fiscal year ended December 31, 2018, compared to a AR$50 million charge for fiscal year 2017.
Our holding and others segment registered a net profit of AR$7,539 million for fiscal year ended December 31, 2018 attributable to the owners of the Company, compared to a net profit of AR$8,878 million recorded in fiscal year 2017, attributable to the owners of the Company.
144 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 145 ANNUAL REPORT Appendix I: 15 Corporate Governance Board of Directors’ Report
PRINCIPLE I: Ensuring Transparency in the Relationship between the Issuer, Proposal the Business Group of which it is a Leader and/or a Part, and its Related Parties
As we have informed in section 14, in 2018 the Company is not planning to pay dividends so as to retain all RECOMMENDATION I.1: Ensuring Board disclosure of applicable policies to the Issuer’s funds and profits in order to apply them to and/or to have them available for: relationship with the business group of which it is a leader and/or a part, and its related parties
i. The operation and expansion of our business, taking into consideration planned extraordinary Compliance: Total investments, including CTGEBA’s closing to CC, PEPE II and III projects, and the drilling of wells targeting Inform or Explain: Pampa has a policy on Related-Party Transactions Approval in place whereby all transactions the Vaca Muerta formation at El Mangrullo and Sierra Chata blocks; and (i) deemed high-value transactions, that is, with a value equal to or higher than 1% of Pampa’s Shareholders Equity; (ii) made with individuals and/or legal entities which, pursuant to Section 72 of the CMA, are considered ii. In a year that is already showing certain volatility in its first months, taking actions, if necessary, to related parties, should be subject to a specific prior authorization and control procedure carried out under the safeguard the value of our shareholders’ investment. coordination of Pampa’s executive legal department with the participation of both Pampa’s Board of Directors and its Audit Committee (as applicable). This Policy strictly follows the guidelines set out in the applicable laws Consequently, and given that results for the fiscal year recorded a AR$8,435 million profit and that retained and regulations in this matter (Section 72 of the CMA). earnings increased by AR$6,758 million as a result of the application of IAS 29, totaling AR$15,193 million as of December 31, 2018, the Board of Directors unanimously resolves to propose as follows: Additionally, Pampa presents itemized information on any contract entered into with related parties in its annual and quarterly FS; furthermore, in compliance with the regulations in force, all high-value transactions executed i. That 5% of this total amount AR$760 million should be allocated to the legal reserve; and by Pampa with related parties are subject to the consideration of the Audit Committee and promptly reported ii. That the balance of AR$14,434 million should be destined to constitute a voluntary reserve. under the caption ‘relevant event’ to both the CNV and the markets where the Company quotes its shares.
These amounts are subject to the adjustments provided for by RG CNV 777, which will be calculated and informed as the applicable indexes become available before the Shareholders’ Meeting. RECOMMENDATION I.2: Ensuring the existence of mechanisms to prevent any conflict of interest Finally, we would like to express our gratitude to all the people who shape Pampa Energía into the largest independent energy integrated company in Argentina. To all of them, to our shareholders who rely on us, to our Compliance: Total advisors, to our customers and suppliers, a warm vote of thanks. Inform or Explain: Pampa has a Code of Business Conduct in place stating the ethical principles that constitute the groundwork for the relationship between Pampa, its Directors and Statutory Auditors, as well as its employees and third parties (customers, suppliers, shareholders, the public sector and the community). These guidelines provide that individuals within the scope of the Code of Business Conduct should avoid any situation resulting in a conflict between their own personal interests and the company’s, thus preventing their personal or family interests from exerting any influence on their decisions and/or professional performance.
City of Buenos Aires, March 11, 2019. Any infringement of a provision of the Code of Business Conduct may be reported through Pampa’s Ethics Hotline.
RECOMMENDATION I.3: Preventing misuse of insider information
THE BOARD OF DIRECTORS Compliance: Total Inform or Explain: The Code of Business Conduct provides that all information generated, transmitted or stored by Pampa will be considered confidential and private, and may not be disseminated in the absence of
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an express authorization. It also provides that the collected information may not be used for any personal or II.1.1.5 third party’s benefit. Compliance: Partial Inform or Explain: The CEO and the vice-presidents are in charge of assigning responsibilities to senior managers. Additionally, in regards to insider trading practices, Pampa has a Policy on Best Securities Trading Practices The Company does not have specific policies regulating the allocation of responsibilities to senior managers. which provides that any person deemed a Covered Individual may not use material non-public information about Pampa, its controlled companies, subsidiaries, affiliates, and related companies to derive any personal or II.1.1.6 third party’s benefit when trading marketable securities. Compliance: Partial Inform or Explain: The CEO, together with vice-presidents and the human resources department, are in charge In this regard, the policy provides that, at all times, all Covered Individuals should require the compliance of of designing succession planning for senior managers. The Company does not have specific policies regulating an officer’s express authorization to conduct any trading operation involving Pampa, its controlled companies, the succession planning for senior managers. subsidiaries, affiliates and related companies’ securities. Furthermore, the policy provides for ‘restricted periods’ within which no covered individual is authorized to conduct any operation. II.1.1.7 Compliance: Total Inform or Explain: At Pampa, we understand Corporate Social Responsibility as a strategic management model which is implemented through the Foundation, with a strong commitment to society that goes beyond energy PRINCIPLE II: Laying the Groundwork for Sound Management and demand satisfaction, by developing programs oriented towards improving the life quality of our employees, Supervision by the Issuer their families and the communities we are part of.
RECOMMENDATION II.1: Ensuring that Board takes on the Issuer’s management, Since 2016, with the incorporation of new assets and their communities of influence, the Foundation has adopted a new strategic focus: education as a fundamental right, local management of Corporate Social supervision and strategic direction Responsibility for relationships between the asset and the community, and corporate volunteering.
II.1.1 Since 2008, the Foundation has promoted programs that contribute to strengthening the abilities of people and II.1.1.1 social organizations, showing a clear sustainable commitment with the communities Pampa Energía is part of. Compliance: Total Inform or Explain: Pampa’s Board of Directors approves the Company’s annual budget, strategic management II.1.1.8 goals and administrative matters, taking into consideration the specific circumstances of the Company and the Compliance: Total industries where it operates. It also monitors the strategic goals pursued by Pampa’s subsidiaries. Inform or Explain: Regarding risk management, in 2007 Pampa implemented a risk management methodology as a useful working tool to identify the main risks affecting Pampa. Such methodology provides for adequate II.1.1.2 risk response solutions, as well as formal risk disclosure channels. Later on, in 2008, Pampa’s Board of Directors Compliance: Total approved the ‘Risk Management Handbook’, which in December 2010 was updated and restated as the ‘Business Inform or Explain: Pampa has a Finance Executive Department in charge of implementing procedures and Risk Management Policy’. monitoring the Company’s financial transactions in order to ensure the transparency, clarity, and real-time availability of information. In turn, the articulation of investment policies is supervised by the Company’s CEO The key aspect of this policy is the establishment of responsibilities, duties and methods for the prevention and and executive directors. detection of risks arising from activities conducted by the Company, and affecting its business or operations.
Furthermore, Pampa has an Investment Project Management Policy in place aimed at systematizing and Based on these policies’ guidelines, the internal control management updates Pampa’s risk map in accordance standardizing the steps to be followed by the Company’s different areas involved in the management of with the administered businesses on a yearly basis. investment projects so as to provide an analysis, authorization and control mechanism enhancing Pampa Energía Group’s economic value. Regarding internal controls, Pampa’s Internal Audit area has Bylaws regulating its activities and aligned with the most relevant standards issued by the Institute of Internal Auditors. This document has been approved by the II.1.1.3 Audit Committee. Compliance: Total Inform or Explain: On an annual basis, the Board of Directors approves the Corporate Governance report Moreover, Pampa has an Anti-Fraudulent Practices Policy and a Procedure for handling complaints. These pursuant to CNV General Res. No. 606/12. documents contain a detailed description of how to file a complaint, and the process to be followed from its reception to the conclusion of the investigation and the application of any pertinent corrective action. At least II.1.1.4 quarterly, the Internal Audit area reports the received cases and the adopted decisions to the Audit Committee. Compliance: Total The Audit Committee supervises the channel’s operations and the resolution of complaints in issues within its Inform or Explain: The appointment of Pampa’s senior managers is the result of a joint and coordinated authority. This regulation is complementary to the Code of Business Conduct. recruitment process by the Company’s CEO, vice-presidents and the human resources department. Pampa has II.1.1.9 an employment policy in place which describes the selection process for any candidate irrespective of his or Compliance: Partial her category or position. Inform or Explain: Pampa has implemented a training policy geared at supporting professional and academic development, as well as allowing for the development of programs to attract, develop and retain its human Furthermore, the Company has a procedure coordinated by the human resources department whereby all the resources. This policy is not formally approved or supervised by Pampa’s Board of Directors, but is approved by employees are evaluated on an annual basis on the level of performance and fulfillment of goals previously set the CEO and administered by the human resources department. by more senior officers. Based on the degree of fulfillment of corporate goals, among other factors, an annual variable compensation (performance bonus), and potential promotions and salary increases are determined in II.1.2 accordance with market parameters and the company’s internal criteria. Compliance: Total Inform or Explain: There is no other relevant corporate governance policy not previously mentioned in this report.
148 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 149 ANNUAL REPORT II.1.3 Historically and generally, Pampa’s General Shareholders’ Meetings transacting the Directors’ annual performance Compliance: Total assessment have generally approved such business without any qualification or specification. As of the date of Inform or Explain: Pampa’s executive legal department supplies all Pampa’s Directors and Statutory Auditors, this report, no Pampa shareholder present at these meetings has ever requested to have the performance of as early as possible, with all the information on business to be transacted at any Board meeting. Moreover, directors assessed based on the compliance levels specified in this Recommendation. by way of Pampa’s executive legal department, any Director and/or Statutory Auditor may ask the relevant managers’ office questions on issues that are submitted to them for consideration. Moreover, it is Pampa’s Ensuring that the number of external and independent members internal practice to submit quarterly management reports to the Board of Directors stating all relevant business, RECOMMENDATION II.4: technical, regulatory, financial and accounting information related to Pampa and its subsidiaries. constitutes a significant share of the Board
II.1.4 II.4.1 Compliance: Total Compliance: Total Inform or Explain: Every Pampa’s significant ordinary business affair or administrative matter to be approved Inform or Explain: Pampa considers that the ratio of regular Directors who are independent (40% - 4 out of by its Board of Directors is supported by the relevant reports written by Pampa managers’ offices involved, as 10), who perform executive functions (50% - 5 out of 10) and who are external (10% - 1 out of 10) is adequate well as their opinions on the risks inherent in such matters. If applicable, all these procedures are conducted based on its structure. within the framework of the Business Risk Management Policy. Furthermore, all members of Pampa’s Audit Committee are independent pursuant to the U.S. SOX provisions.
RECOMMENDATION II.2: Ensuring effective Corporate Management Control II.4.2 Compliance: Total II.2.1 Inform or Explain: It is not necessary to implement any type of internal policy to ensure that at least 20% of Compliance: Total Board members are independent because under the applicable laws and regulations in force, and as provided by Inform or Explain: Pampa’s Board of Directors, either on its own behalf or by delegating its functions to the the Company Bylaws, the Board of Directors has a greater proportional number of independent directors than that various Company managers’ offices, regularly verifies compliance with, deviations from, or adjustments to the specified in this Recommendation. Also, there are no shareholders’ agreements regarding the designation of Board annual budget, on a quarterly basis, as well as the business plan. members. To date, the independence of the members of Pampa’s Board of Directors has never been challenged.
II.2.2 Besides, Pampa’s Directors holding Company’s shares and participating in the Company shareholders’ meetings Compliance: Total refrain from discussing and voting on any matter relating to their management. Inform or Explain: As specified in Recommendation II.1.1.4, the Company conducts an employee performance process, coordinated by the human resources department, whereby every employee is evaluated on the level of performance and fulfillment of goals set by more senior officers on an annual basis. Based on the degree RECOMMENDATION II.5: Ensuring the existence of standards and procedures for of fulfillment of these goals, among other factors, an annual variable compensation (performance bonus), recruitment and proposed appointment of directors and senior managers and potential promotions and salary increases are determined in accordance with market parameters and the company’s internal criteria. II.5.1 Compliance: Total RECOMMENDATION II.3: Ensuring disclosure of the Management Body’ performance Inform or Explain: In 2018, Pampa created a Nominations Committee, the primary aims of which are: a) to set the general guidelines regarding independence, incompatibilities and diversity in the Board of Directors; and b) assessment and its impact to describe the process for the identification and evaluation of Board of Directors’ nominees, both by the Board and shareholders, to be presented for consideration by the Shareholders’ Meeting; all of this in compliance with II.3.1 the applicable legal provisions and, especially, section 12 of Pampa’s Bylaws, which sets out the method for the Compliance: Total selection of directors, who are elected upon candidate lists, thus guaranteeing enhanced transparency in the Inform or Explain: Pampa Board of Directors’ performance is subject to the provisions set forth in the Bylaws, recruitment process. the board rules, and any other applicable laws and regulations. II.5.1.1 In 2012, Pampa’s Board of Directors approved its internal rules, which primarily regulate issues concerning the Compliance: Partial directors’ powers and responsibilities and the holding of board meetings. Inform or Explain: The Nominations Committee reports to Pampa’s Board of Directors, and is made up of Moreover, every Director completes a self-assessment on an annual basis to evaluate the Board of Directors’ three regular members and an equal or smaller number of alternate members, the Chairman being independent performance. This self-assessment is submitted to the executive legal department, which is responsible for director pursuant to the independence criteria stipulated by the CNV rules. analyzing results and, if necessary, suggesting actions aiming to improve this body’s operations. II.5.1.2 II.3.2 Compliance: Total Compliance: Total Inform or Explain: Please refer to Principle II.5.1.1. above. Inform or Explain: Simultaneously with the approval of audited annual FS, as well as quarterly FS with limited review, Pampa’s CEO, on behalf of the Board of Directors and the Investor Relations Area, organizes a conference II.5.1.3 call for all Pampa’s shareholders and other stakeholders generally, with a view to sharing information on Compliance: Total management and financial results, giving reasons for such results, and answering any questions and queries. Inform or Explain: Even though the members of the Nominations Committee do not necessarily need to have an orientation or specialization in human capital management in their CVs, they should demonstrate proper competence to hold the offices for which they have been appointed and have extensive corporate experience.
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II.5.1.4 II.5.2.7 Compliance: Total Compliance: Total Inform or Explain: The policy regulating the Nominations Committee provides that it should meet as frequently Inform or Explain: As previously explained in Principle II.5.2.1, due to the short time span since its creation, as deemed necessary, but at least once a year. Pampa finds that this periodicity is sufficient to comply with the Committee’s action has been limited to purely formal issues. However, every year the Board of Directors, the Committee’s main function, which is to assist the Board of Directors in the nomination of directors, which with the assistance of the executive legal department, identifies directors whose terms of office are due and happens once a year before the General Ordinary Shareholders’ Meeting. evaluates the possibility of their reelection pursuant to the applicable regulations in force and, if the reelection is not deemed appropriate or in case there is legal impossibility to do so, the search for nominees is launched II.5.1.5 so that the Board of Directors may later submit its proposal to the Shareholders’ Meeting. Compliance: Total Inform or Explain: The policy regulating the functions of the Nominations Committee specifically provides in II.5.3 its section 8.4. that the Committee’s opinion will not be binding on the Board of Directors or the Shareholders’ Compliance: Total Meeting, but its recommendations will be informed to the Shareholders’ Meeting at the time of conducting the Inform or Explain: There is no other relevant policy not previously mentioned in this report. ballot for the appointment of directors.
II.5.2 RECOMMENDATION II.6: Assessing the suitability that directors, and/or statutory auditors, II.5.2.1 and/or Supervisory Committee members may perform functions at different issuers Compliance: Total Inform or Explain: The Nominations Committee was created at the end of 2018, and as of the date of this Compliance: Total Annual Report, due to the short time span since its creation, the Committee has neither reviewed its rules nor Inform or Explain: It is not necessary to limit the participation of Pampa’s Directors and/or Statutory Auditors assessed its performance, which it will do in due course. As of the date hereof, the Committee has only held its in other companies that are part of other business groups. We understand that the existing legal limitations on first meeting, where it approved its internal rules, among other formal issues. this matter, in addition to the liability system applicable to directors and statutory auditors and the pertinent provisions of the Code of Business Conduct, are sufficient and ensure an adequate performance of duties by II.5.2.2 Pampa’s Directors and Statutory Auditors. Compliance: Total Inform or Explain: The Policy on Nominations provides that the Committee will evaluate, inter alia, factors such as the nominees’ independence, diversity, age, skills, experience, and knowledge of the company’s businesses RECOMMENDATION II.7: Ensuring training and development of the Issuer’s directors and and the industry in order to provide its recommendations to the Board of Directors. The Committee will perform senior managers this evaluation for the first time when assessing the nominees to be recommended to the General Shareholders’ Meeting which will be held at the beginning of 2019. II.7.1 Compliance: Partial II.5.2.3 Inform or Explain: In 2018, training programs aimed at further strengthening the integration of leaders and Compliance: Partial employees into Pampa’s culture and main values. Inform or Explain: Pursuant to Section 12 of Pampa’s Bylaws and the provisions of the Policy on Nominations, the Board of Directors (or shareholders holding at least 3% of Pampa’s capital stock) submit a list of candidates To such end, managers participated in the Leaders Development Program, which was based on a corporate to the Committee for their assessment and the issuance of a recommendation. The Nominations Committee leadership model deeply grounded in the main features of our culture. does not provide recommendations regarding senior managers. In this sense, please refer to Principle II.1.1.4. With a high level of participation, leaders enhanced their skills in the four axes of the model and had the II.5.2.4 possibility to receive subsequent specialization in one of these dimensions based on their interests and concerns. Compliance: Non-Compliance The axes underpinning these contents were self-leadership, entrepreneur leadership, developer leadership and Inform or Explain: The Nominations Committee’s only function is to analyze nominees to be proposed for transformational leadership. election as directors, but not to suggest the appointment of directors in the different Company committees. This training was in turn integrated with educational visits to the Company assets to strengthen knowledge on II.5.2.5 the different businesses. Compliance: Total Inform or Explain: As previously explained in Principle II.5.2.1, due to the short time span since its creation, the Furthermore, the process was complemented with individual coaching by all the Company managers to Committee’s action has been limited to purely formal issues. However, following an organizational restructuring consolidate the training’s contents, approaches and individual development possibilities. process and in line with the highest corporate governance standards, at the end of 2018 a CEO not holding office as chairperson was appointed. On the other hand, the Audit Committee approves an annual training plan for non-audit-related issues (for example, auditing and internal control according to international accounting standards, among other issues). II.5.2.6 In this sense, during fiscal year 2018 its members received training on the 3-line defense model, the internal Compliance: Total audit’s policy framework. Inform or Explain: As previously explained in Principle II.5.2.1, due to the short time span since its creation, the Committee’s action has been limited to purely formal issues. However, a brief outline of all Company II.7.2 directors’ CVs, including their terms of office, is available at Pampa’s website, even prior to the creation of the Compliance: Total Nominations Committee. Inform or Explain: Pampa generally provides financial support for master degree programs and postgraduate education to its employees.
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PRINCIPLE III: Endorsing an Effective Policy for Identifying, Measuring, PRINCIPLE IV: Safeguarding Integrity of Financial Information with Managing and Disclosing Business Risk Independent Audits
RECOMMENDATION III: The Board of Directors must provide for a comprehensive business RECOMMENDATION IV: Ensuring independence and transparency of the duties assigned risk management policy and monitor its proper implementation to the Audit Committee and the External Auditor
III.1 IV.1 Compliance: Total Compliance: Total Inform or Explain: Please refer to Principle II.1.1.8 Inform or Explain: Pursuant to the Bylaws, the CNV rules and the Audit Committee’s Regulations, this committee consists exclusively of independent members. III.2 Compliance: Total IV.2 Inform or Explain: The Policy mentioned in Principle II.1.1.8 sets out responsibilities and methods for business Compliance: Total risk assessment, and the procedure is conducted with the assistance of the Audit Committee, which is in charge Inform or Explain: At Pampa, the Internal Audit area reports functionally to the Audit Committee, and of supervising assessment procedures and implementing related measures. administratively to the Executive Committee made up of the chairperson, the CEO and the vice-presidents.
The key business risk factors taken into consideration by Pampa include, inter alia: At the beginning of every fiscal year, the Internal Audit area submits a proposed annual audit plan to the Audit Committee for its evaluation and approval. The plan’s performance is followed up on quarterly basis, i. Strategic economic and political risks; and the progress report is submitted to the Audit Committee. This report summarizes the completed tasks ii. Risks associated with competitors and joint ventures; and main findings. iii. Risks associated with natural disasters; iv. Risks relating to social issues; On an annual basis, the Audit Committee evaluates the independence level and performance of the Internal v. Corporate governance risks; Audit function in issues within its authority, and discloses its assessment in its annual report. vi. Compliance risks; vii. Process risks, including, but not limited to, those associated with human resources, fraud, IT and As a member of the Institute of Internal Auditors, the Company uses the standards it considers reasonable and/ operations; and or applicable without expressly adhering to them. viii. Financial and reporting risks. IV.3 III.3 Compliance: Total Total Compliance: Inform or Explain: Upon the presentation and publication of Pampa’s annual FS, the Audit Committee conducts Inform or Explain: The Policy also provides for the role of a Risk Manager, who is responsible for: (i) including an annual assessment of the external auditors’ performance and issues an informed opinion pursuant to in its annual programs all the necessary tests for detecting business risk indicators and signals; (ii) monitoring Section 18, Title V, Chapter III of CNV Rules (Text Restated in 2013) and the Audit Committee’s Internal Rules. the effectiveness of the process as a whole, and safeguarding compliance with and oversight of this policy; (iii) informing the CEO and the Audit Committee of the risk management process; and (iv) following up on the implementation of action plans to ensure that corrective measures are taken once a risk is detected. Moreover, IV.4 the manager in charge of internal control assists the Board to keep the risk matrix updated, identifying and Compliance: Total assessing risks, as well as following up with the action plan, if required, and keeping the CEO and Audit Inform or Explain: Pampa has no specific policy in place regarding turnover of members of the Supervisory Committee informed of this process. Committee and/or the External Auditor, as it considers that no such policy is necessary as it fully complies with the applicable provisions in force. III.4 Compliance: Total Inform or Explain: The Business Risk Management Policy is reviewed on an annual basis to detect improvement PRINCIPLE V: Respecting the Rights of Shareholders possibilities, and updated if necessary. The risk manager submits any applicable improvement possibilities to the consideration of the Audit Committee. RECOMMENDATION V.1: Ensuring that shareholders have access to the Issuer’s information
III.5 V.1.1 Compliance: Total Compliance: Total Inform or Explain: The results from this risk assessment procedure are communicated to the different Inform or Explain: Pampa’s CEO, on behalf of the Board of Directors and the investor relations area, organizes departments and disclosed in the Annual Report. a conference call upon each closing and presentation of the Company’s annual and quarterly FS. In these conference calls, which may be attended by all shareholders willing to participate and the general investing public, information is provided on profits and losses and relevant events for the applicable period, and answers on specific doubts and queries are provided.
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V.1.2 RECOMMENDATION V.4: Setting out protection mechanisms for all shareholders vis-à-vis Compliance: Total company takeovers Inform or Explain: Pampa has a special area within its organization that receives questions and/or queries from its shareholders and/or the general investing public. Compliance: Total Inform or Explain: Pursuant to the provisions set forth in section 90 of the CMA, the application of the Besides, Pampa’s website has a special ‘Investors’ section containing all material information (FS, filings before Public Acquisition Offer system is universal, thus comprising every company listing its shares on the stock regulatory authorities —including the SEC and the NYSE—, relevant events, corporate governance policies, exchange, such as Pampa. Furthermore, the Bylaws establish certain mechanisms applicable to the acquisition etc.) for its shareholders and the general investing public. In turn, this special website section facilitates the of controlling or significant interests. channeling of queries.
RECOMMENDATION V.5: Encouraging the Issuer’s shareholding dispersion RECOMMENDATION V.2: Promoting active participation by all shareholders Compliance: Total V.2.1 Inform or Explain: Pursuant to information supplied to the market in compliance with the requirements Compliance: Total set forth in section 62 of the ByMA Listing Rules, as of December 31, 2018, there is a controlling group at Inform or Explain: Shareholders are given notice of meetings through the formal means set out in the Bylaws Pampa holding 19.38% of its issued capital stock and voting rights. Consequently, the remaining percentage of and applicable regulations. Observance of these formalities to call for meetings is effective, and it does not capital stock is scattered among the investing public, largely exceeding the 20% specification contained in this undermine the principle of equal treatment to shareholders. recommendation.
V.2.2 Moreover, in the last three years, it has been confirmed that more than 20% of the Issuer’s capital stock Compliance: Total is dispersed in the market. Thus, in compliance with section 62 of the ByMA Listing Rules, the following Inform or Explain: Pampa considers it is unnecessary and inappropriate to implement any kind of rules to percentages were identified in relation to the controlling group: (i) as of 12/31/18, 19.38%; (ii) as of 12/31/17, ensure disclosure requirements before shareholders’ meetings since the Company strictly complies with the 17.89%; and (iii) as of 12/31/16, 20.16%. effective regulations in this matter. Along this line, Pampa guarantees shareholders the unrestricted exercise of the right to information, making available within the times specified in the applicable regulations, at its home office and also posted on its website, all relevant information and/or any information especially RECOMMENDATION V.6: Ensuring transparency of the Company’s dividend policy requested by a shareholder. V.6.1 V.2.3 Compliance: Total Compliance: Total Inform or Explain: In 2018, Pampa’s Board of Directors approved the Company’s Dividend Policy, which Inform or Explain: Pursuant to the provisions set out in the applicable laws and regulations, the Bylaws outlines the guidelines to reach a proper balance between distributed amounts and Pampa’s investment plans expressly state that, upon written request, shareholders representing at least 5% of capital stock may call for with the purpose of establishing a clear, transparent and consistent practice allowing shareholders to make a meeting, specifying its purpose and reasons. These requests will be handled in such a way that the Board of informed decisions, all of this in consonance with the Company Bylaws and the applicable legal and regulatory Directors or the Supervisory Committee will convene the meeting for it to take place within 45 days of the date framework in force. Based on this policy, the Board of Directors assesses the possibility of paying dividends the notice of call is received. to Pampa’s shareholders on a prudential basis within each fiscal year, and evaluates thoroughly the economic circumstances prevailing at the time. To date, no shareholder or shareholder group representing at least 5% of Pampa’s capital stock has expressly called for a meeting. V.6.2 Compliance: Partial V.2.4 Inform or Explain: Although the Company has not put in place documented procedures to prepare the Issuer’s Compliance: Non-Compliance proposal for appropriation of retained earnings, Pampa’s Board of Directors draws up an informed proposal in Inform or Explain: Pampa has no policies in place to encourage the participation of major shareholders, thus conformity with legal requirements, which is included in the Annual Report. abiding by the principle of equal treatment to shareholders, whether actual or potential. The Shareholders’ Meeting held on April 27, 2018 resolved that profits recorded in the fiscal year ended V.2.5 12/31/2017, amounting to AR$3,382 million, should be allocated as follows: (i) AR$116 million to the constitution Compliance: Non-Compliance of the Legal Reserve; and (ii) the balance, to increase the Voluntary Reserve. Inform or Explain: When directors are nominated for office, shareholders do not usually require them to state their position for or against the adoption of a Corporate Governance Code. PRINCIPLE VI: Maintaining Direct and Responsible Bonds of Trust with RECOMMENDATION V.3: Ensuring the one share one vote principle the Community Compliance: Total Inform or Explain: The implementation of a policy to promote the one share one vote principle is not applicable RECOMMENDATION VI: Providing the community with information on the Issuer’s to the Company. This is because, pursuant to the Bylaws, shares are not divided into classes, and all of them affairs, and a direct communication channel with the Company confer the right to one vote.
156 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 157 ANNUAL REPORT VI.1 VII.1.3 Compliance: Total Compliance: Total Inform or Explain: Pampa’s website, www.pampaenergia.com, is a user-friendly and permanently updated Inform or Explain: Even though the members of the Compensation Committee do not necessarily need browser tool, which includes complete and accurate information on the member companies of the business to have an orientation or specialization in human resources in their CVs, they should demonstrate proper group led by Pampa and their respective businesses. This website also enables users to ask questions and competence to hold the offices for which they have been appointed and have extensive corporate experience. send queries. VII.1.4 VI.2 Compliance: Total Compliance: Total Inform or Explain: The policy regulating the functions of the Compensation Committee provides that it should Inform or Explain: In 2018 we published our first Sustainability Report in accordance with the essential meet at least annually, or more frequently if the circumstances so require and upon request of any of its option of the Global Reporting Initiative (GRI) Standards, under the AA1000 SES standard. The Sustainability members. Pampa finds that this periodicity sufficient to comply with the Committee’s main function, which is Report contains information resulting from the internal control systems implemented at Pampa Energía, which to assist the Board of Directors in compensation matters. contribute to the integrity and credibility of the information provided in the report and, therefore, has not been subject to an external verification process. The Sustainability Report is published on an annual basis and covers VII.1.5 the period from January 1 to December 31, 2017. Compliance: Total Inform or Explain: Pampa’s Policy on Compensation provide that every year the Board of Directors will submit The information disclosed in the 2017 Sustainability Report includes programs and actions conducted by Pampa to the approval of the Shareholders’ Meeting a global amount of compensations payable to directors, all of this Energía together with the Pampa Foundation and only considers data of the Company’s operations in Argentina with the assistance of the Committee, which decisions will not be binding. resulting from Pampa Energía’s Consolidated Financial Statements as of December 31, 2017, with the exception of Edenor, the Sustainability Report of which can be found in its website www.edenor.com.ar. VII.2 In case it has a Compensation Committee:
Furthermore, all Pampa assets are subject to third-party certification accredited by the OAA, under ISO VII.2.1 14,001 (environmental management), and OHSAS 18,001 (occupational health and safety management) Compliance: Total standards. The power generation, R&D and petrochemicals segment’s assets are certified under the ISO 9,001 Inform or Explain: Pursuant to Pampa’s Policy on Compensation, the Compensation Committee renders its standard, and especially, the Lubricants Plant and CTGEBA are also certified under the ISO 50,001 (energy previous opinion so that Directors’ compensations are in line with those received by Directors of similar companies management) standard. at the domestic level and pursuant to the limitations set forth by the applicable laws and the CNV rules.
Pursuant to the implemented model, external audits are conducted on an annual basis to guarantee adherence to VII.2.2 the requirements of the above-mentioned international standards. Furthermore, each asset has a Management Compliance: Total Program which promotes continuous performance improvement. Inform or Explain: Please refer to the answer to Principle VII.2.1 above.
VII.2.3 PRINCIPLE VII: Providing for Fair and Equitable Compensation Compliance: Partial Inform or Explain: Please refer to the answer to Principle VII.2.1 above. RECOMMENDATION VII: Setting out clear-cut policies for compensation of directors and VII.2.4 senior managers, specifically focusing on conventional or bylaws-imposed limitations Compliance: Total depending on the existence of profits Inform or Explain: As previously mentioned in Principle II.1.1.4, Pampa has an employment policy in place which describes the processes for employee recruitment, selection and onboarding, as well as resignations and VII.1 dismissals or requested modifications, allowing it to detect, attract and retain qualified employees for each Compliance: Total position, also taking into consideration each employee’s requirements, irrespective of his or her category or Inform or Explain: In 2018, Pampa created a Compensation Committee which will assist the Board of Directors position. This policy is administered by the human resources department and the leader of each specific area. and/or the Shareholders’ Meetings in the preparation and follow-up of compensation policies and/or plans and/ or benefits for Pampa’s main officers who also serve as directors. VII.2.5 Compliance: Total VII.1.1 Inform or Explain: As previously mentioned in Principle VII.2.1, the Compensation Committee renders its Compliance: Total opinion on directors’ fees. The Compensation Committee does not issue an opinion on compensations received Inform or Explain: The Compensation Committee reports to Pampa’s Board of Directors, and is made up of by main executives who do not serve as directors. The Company has a procedure coordinated by the human three regular members and an equal or smaller number of alternate members, who may not exercise executive resources department whereby all the employees are evaluated annually on the level of performance and functions at Pampa. Currently, the majority of its members are independent. fulfillment of goals set by more senior officers. Based on the degree of fulfillment of corporate goals, among other factors, an annual variable compensation (performance bonus), and potential promotions and salary VII.1.2 increases are determined in accordance with market parameters and the company’s internal criteria. Compliance: Total Inform or Explain: Currently, the Compensation Committee’s chairperson is independent pursuant to the criteria set out by the CNV.
158 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 159 ANNUAL REPORT
VII.2.6 PRINCIPLE IX: Deepening the Scope of the Code Compliance: Total Inform or Explain: Due to its recent creation, the Compensation Committee has still not informed of its actions to the Board of Directors. Beyond this, pursuant to its Rules, the Committee will report its conclusions, RECOMMENDATION IX: Fostering the inclusion of good corporate governance practices recommendations and any other issue deemed necessary to the Board of Directors at least once a year. in the Bylaws
VII.2.7 Compliance: Total Compliance: Total Inform or Explain: The Board of Directors approves the Code Report, which is drafted in accordance with the Inform or Explain: No Shareholders’ Meeting for the approval of compensations has been held yet since applicable CNV rules on an annual basis. However, Pampa’s Board of Directors believes that at present the the creation of the Compensation Committee. However, the Committee’s Rules provide that its chairperson’s provisions of the Code should not necessarily be reflected in whole in the Bylaws. Given that the Bylaws, as functions will include attending Board of Directors and Shareholders’ Meetings on behalf of the Committee. well as the Report, are publicly available information through the CNV web page, Pampa fully complies with the capital market transparency principle. VII.3 Compliance: Total Inform or Explain: There is no other relevant policy not previously mentioned in this report.
VII.4 Compliance: Total Inform or Explain: Not applicable.
PRINCIPLE VIII: Promoting Business Ethics
RECOMMENDATION VIII: Ensuring ethical behavior within the Issuer
VIII.1 Compliance: Total Inform or Explain: Pampa has a Code of Business Conduct in place which states the ethical principles constituting the groundwork for the relationship between Pampa, its employees, customers, suppliers, shareholders, investors, the public sector and the community at large. Moreover, it provides means and instruments to ensure transparency in the handling of matters and issues that may affect Pampa’s adequate management.
The Code of Business Conduct is publicly available at the Company’s website and should be expressly accepted by all Company employees, directors and members of the Supervisory Committee. Furthermore, the Code is included as part of the general recruitment conditions.
VIII.2 Compliance: Total Inform or Explain: Pampa offers the Ethics Hotline, an exclusive channel to report, on a strictly confidential basis, any suspected misconduct or breach to the Code of Business Conduct. This tool is available through different channels (toll-free telephone number, e-mail or web page) and is managed by a third-party supplier to ensure higher transparency and information integrity. Additionally, the Company has policies and procedures in place prescribing the way in which received complaints should be analyzed and dealt with. The responsibility over this channel rests with the Audit Committee, which delegates its administration to the internal audit area.
VIII.3 Compliance: Total Inform or Explain: Pampa has an Anti-Fraudulent Practices Policy and a Procedure for handling complaints. Both documents contain a detailed description of the process to be followed from the reception of the complaint to the conclusion of the investigation and the application of the pertinent corrective action. At least quarterly, the Internal Audit area reports the received cases and the adopted decisions to the Audit Committee. The Audit Committee supervises the channel’s operations and the resolution of complaints in issues within its authority, and approves related regulations.
160 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 161 Consolidated Financial 02 Statements CONSOLIDATED FINANCIAL STATEMENTS Glossary of Terms
The following are not technical definitions, but they are helpful for the reader’s understanding of some terms used in the notes to the consolidated financial statements of the Company. TERMS DEFINITIONS TERMS DEFINITIONS HI Hydroelectric HIDISA Hidroeléctrica Diamante S.A. ADR American Depositary Receipt H HINISA Hidroeléctrica Los Nihuiles S.A. AFIP Federal Administration of Public Revenue Albares Albares Renovables Argentina S.A. A APCO Oil APCO Oil & Gas international Inc IASB International Accounting Standards Board IEA.SA IEASA S.A. IGJ Inspección General de Justicia - General Inspection of Justice BCBA Buenos Aires Stock Exchange IGMP Minimum Notional Income Tax BLL Bodega Loma La Lata S.A. INDISA Inversora Diamante S.A. BO Official Gazette I INNISA Inversora Nihuiles S.A. B ByMA Argentine stock exchange and markets IPB Inversora Piedra Buena S.A. IPIM Índice de Precios Internos al por Mayor CAMMESA Compañía Administradora del Mercado Eléctrico Mayorista S.A. CC Combined Cycle LNG Liquefied Natural Gas CGU Cash-Generating Units LVFVD Sales Liquidations with Maturity Date to be Defined CIESA Compañía de inversiones de energía S.A. CINIIF/IFRIC International Financial Reporting Interpretations Committee L Citelec Compañía Inversora en Transmisión Eléctrica Citelec S.A. CNCD National Commission for the Defense of Competition MAT WEM’s Forward Market CNV Comisión Nacional de Valores – Argentine Securities Commisssion MAN Engines MAN B & W Diesel model 18V32/40PGI Corod Corod Producción S.A. MECON Ministry of Economy CPB Central Piedra Buena S.A. MEGSA Mercado Eléctrico de Gas S.A. C CPD Own Distribution Costs M MEyM Ministry of Energy and Mining CPF Previous Fusion Commitment MINEM Ministerio de Energía y Minas CTG Central Térmica Güemes S.A. CTLL Central Térmica Loma La Lata S.A. NIC/IAS International Accounting Standards CTP Central Térmica Piquirenda NIIF/IFRS International Financial Reporting Standards CSJN Supreme Court of Justice of the Nation NYSE New York Stock Exchange CVP Variable Production Costs N
OED Organismo Encargado del Despacho EASA Electricidad Argentina S.A. Oldelval Oleoductos del Valle S.A. Ecuador TLC EcuadorTLC S.A. Edenor Empresa Distribuidora y Comercializadora Norte S.A. O Edesur Empresa Distribuidora Sur S.A. Eg3 Red Eg3 Red S.A. PACOSA Pampa Comercializadora S.A. EGSSA EMDERSA Generación Salta S.A. PDVSA Petróleos de Venezuela S.A. E ENARGAS National Regulator of Gas PEB Pampa Energía Bolivia S.A. (Ex “PBI” - Petrobras Bolivia Internacional S.A.) ENARSA / IEASA Integración Energética Argentina S.A. (ex Energía Argentina S.A.) PEISA Petrobras Energía Internacional S.A. EBISA Emprendimientos Energéticos Binacionales S.A. PELSA Petrolera Entre Lomas S.A. ENRE National Regulatory Authority of Electricity PEN Federal Executive Power PEPASA Petrolera Pampa S.A. FACPCE Federación Argentina de Consejos Profesionales de Ciencias Económicas P PEPCA PEPCA S.A. FGS – ANSES Fondo de Garantía de Sustentabilidad – Administración Nacional de la Petrobras Petrobras Argentina S.A. Seguridad Social PHA Petrobras Hispano Argentina S.A. F FOTAE Works Administration Trust Transport for Electricity Supply PISA Pampa Inversiones S.A. PP Pampa Participaciones S.A. PP II Pampa Participaciones II S.A. GE General Electric PPSL Petrobras Participaciones S.L. Greenwind Greenwind S.A. GUMA, GUME, GUDI Gran Usuario Mayor, Gran Usuario Menor, Gran Usuario del Distribuidor G GyP Gas y Petróleo de Neuquén S.A.P.E.M.
164 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 165 TERMS DEFINITIONS
Refinor Refinería del Norte S.A. RDSA Ribera Desarrollos S.A. RT Technical Resolution R RTI Tariff Structure Review RTT Temporary Tariff Regime
SE Secretary of Energy SEC Security and Exchange Comission SEE Secretary of Electrical Energy S SGE Secretary of Government of Energy
TG Gas Turbine TGS Transportadora de Gas del Sur S.A. The Company / Pampa Pampa Energía S.A. The Group Pampa Energía S.A. and its subsidiaries TJSM Termoeléctrica José de San Martín S.A. T TMB Termoeléctrica Manuel Belgrano S.A. Transba Empresa de Transporte de Energía Eléctrica por Distribución Troncal de la Provincia de Buenos Aires Transba S.A. Transelec Transelec Argentina S.A. Transener Compañía de Transporte de Energía Eléctrica en Alta Tensión Transener S.A. TV Vapor Turbine
U$S U.S. dollar UTE Senillosa Senillosa Petrolera Pampa S.A. – Rovella Carranza – Gas y Petróleo de U Neuquén, Unión Transitoria de Empresas Senillosa
VAD Distribution Added Value V VAT Value Added tax
WACC Weighted Average Cost of Capital WEM Wholesale Electricity Market W WEBSA World Energy Business S.A. Y YPF YPF S.A.
166 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement Consolidated Statement of Comprehensive Income (Loss) (Continuation) of Comprehensive Income For the years ended December 31, 2018 and 2017 (In millions of Argentine Pesos (“$”) – unless otherwise stated – See Note 3)
NOTE 12.31.2018 12.31.2017 NOTE 12.31.2018 12.31.2017
Revenue 8 110,080 82,008 Total income of the year attributable to: Cost of sales 9 (74,161) (59,339) Owners of the company 8,435 10,799 Gross profit 35,919 22,669 Non - controlling interest 2,373 3,450 10,808 14,249 Selling expenses 10.1 (6,451) (4,776) Administrative expenses 10.2 (7,751) (7,481) Total (loss) income of the year attributable to owners Exploration expenses 10.3 (45) (71) of the company: Other operating income 10.4 6,842 5,608 Continuing operations 5,506 12,867 Other operating expenses 10.4 (7,526) (3,892) Discontinued operations 2,929 (2,068) Impairment of property, plant and equipment (1,195) - 8,435 10,799 Share of profit from associates and joint ventures 5.3 4,464 1,813 Income from the sale of companies 5.1.2 1,052 - Total comprehensive income of the year attributable to: Operating income 25,309 13,870 Owners of the company 8,474 10,588 Non - controlling interest 2,527 3,230 RECPAM 23,696 11,478 11,001 13,818 Finance income 10.5 3,751 2,333 Finance costs 10.5 (11,944) (8,750) Total comprehensive (loss) income of the year attributable Other financial results 10.5 (32,365) (3,774) to owners of the company: Financial results, net (16,862) 1,287 Continuing operations 5,297 12,940 Profit before income tax 8,447 15,157 Discontinued operations 3,177 (2,352) 8,474 10,588 Income tax 10.6 (658) 985
Profit of the year from continuing operations 7,789 16,142 (Losses) earnings per share attributable to the equity holders Profit (loss) of the year from discontinued operations 5.2 3,019 (1,893) of the company during the year Basic and diluted earnings per share from continuing operations 13.2 2.8106 6.6462 Profit of the year 10,808 14,249 Basic and diluted earnings (losses) per share from discontinued operations 13.2 1.4952 (1.0682) Other comprehensive income (loss) Total basic and diluted earnings per share 13.2 4.3058 5.5780 Items that will not be reclassified to profit or loss Results related to defined benefit plans (160) (13) The accompanying notes are an integral part of these consolidated financial statements. Income tax 41 4 Share of loss from joint ventures 5.3 (19) - Items that may be reclassified to profit or loss Exchange differences on translation 19 111
Other comprehensive income (loss) of the year from continuing (119) 102 operations Other comprehensive income of the year from discontinued operations 5.2 312 (533)
Total comprehensive income of the year 11,001 13,818
168 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 169 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement Consolidated Statement of Financial Position (Continuation) of Financial Position As of December 31, 2018 and 2017 (In millions of Argentine Pesos (“$”) – unless otherwise stated – See Note 3)
NOTE 12.31.2018 12.31.2017 NOTE 12.31.2018 12.31.2017
ASSETS LIABILITIES NON-CURRENT ASSETS NON-CURRENT LIABILITIES Property, plant and equipment 11.1 125,005 111,571 Investments in joint ventures and associates 5.3 153 - Intangible assets 11.2 6,080 6,354 Provisions 11.5 5,499 6,549 Deferred tax assets 11.3 80 1.928 Income tax and minimum notional income tax provision 11.6 1,034 1,274 Investments in joint ventures and associates 5.3 15,333 11,875 Deferred revenue 275 287 Financial assets at fair value through profit and loss 12.1 422 286 Taxes payables 11.7 542 540 Other assets 33 9 Deferred tax liabilities 11.3 15,354 16,686 Trade and other receivables 12.2 9,521 7,444 Defined benefit plans 11.8 1,175 1,464 Total non-current assets 156,474 139,467 Salaries and social security payable 11.9 163 177 Borrowings 12.4 69,189 54,816 CURRENT ASSETS Trade and other payables 12.5 8,162 9,457 Inventories 11.4 5,169 4,266 Total non-current liabilities 101,546 91,250 Financial assets at amortized cost 1,330 37 Financial assets at fair value through profit and loss 12.1 15,273 21,576 CURRENT LIABILITIES Derivative financial instruments 12.6 3 6 Provisions 11.5 871 1,179 Trade and other receivables 12.2 26,489 28,267 Deferred revenue 5 5 Cash and cash equivalents 12.3 9,097 1,179 Income tax and minimum notional income tax provision 11.6 1,084 1,392 Total current assets 57,361 55,331 Taxes payables 11.7 2,052 2,901 Assets classified as held for sale 5.2 - 18,457 Defined benefit plans 11.8 162 179 Total assets 213,835 213,255 Salaries and social security payable 11.9 2,726 3,180 Derivative financial instruments 49 122 SHAREHOLDERS´ EQUITY Borrowings 12.4 12,901 8,623 Share capital 13.1 1,874 2,080 Trade and other payables 12.5 24,756 26,655 Share capital adjustment 13.1 9,826 10,906 Total current liabilities 44,606 44,236 Share premium 13.1 18,499 18,496 Liabilities associated to assets classified as held for sale 5.2 - 3,499 Treasury shares 13.1 25 2 Total liabilities 146,152 138,985 Treasury shares cost 13.1 (1,490) (126) Total liabilities and equity 213,835 213,255 Treasury shares adjustment 13.1 134 13 Legal reserve 904 733 Voluntary reserve 7,355 12,554 The accompanying notes are an integral part of these consolidated financial statements. Other reserves (483) 367 Retained earnings 15,193 11,806 Other comprehensive income (314) (353) Equity attributable to owners of the company 51,523 56,478 Non-controlling interest 16,160 17,792 Total equity 67,683 74,270
170 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 171 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement Consolidated Statement of Changes in Equity (Continuation)
For the years ended December 31, 2018 and 2017 (In millions of Argentine of Changes in Equity Pesos (“$”) – unless otherwise stated – See Note 3)
ATTRIBUTABLE TO OWNERS NON- CONTROLLING TOTAL EQUITY HOLDERS OF THE COMPANY RETAINED EARNINGS INTEREST EQUITY
OTHER RETAINED SHARE TREASURY TREASURY OTHER COMPREHENSIVE EARNINGS SHARE CAPITAL SHARE TREASURY SHARES SHARES LEGAL VOLUNTARY RESERVES INCOME / (LOSS) (ACCUMULATED CAPITAL ADJUSTMENT PREMIUM SHARES ADJUSTMENT COST RESERVE RESERVE (1) FOR THE YEAR LOSSES) SUBTOTAL
Balance as of December 31, 2016 1,938 10,838 15,870 - - - 567 9,422 333 (142) 4,305 43,131 17,515 60,646
Recomposition of legal reserve ------166 - - - (166) - - - Shareholders’ meeting 04.07.2017 Recomposition of volumtary reserve ------3,132 - - (3,132) - - - Shareholders’ meeting 04.07.2017 Stock compensation plans - - 24 - - - - - 34 - - 58 7 65 Acquisition of own shares (3) (1) - 2 13 (126) - - - - - (115) - (115) Merger with subsidiaries (Note 5.1.3.2) 145 69 2,602 ------2,816 (2,816) - Dividens provided for or paid ------(144) (144) Profit of the year ------10,799 10,799 3,450 14,249 Other comprehensive income for the year ------(211) - (211) (220) (431) Balance as of December 31, 2017 2,080 10,906 18,496 2 13 (126) 733 12,554 367 (353) 11,806 56,478 17,792 74,270
Change in accounting policies (Note 4.1.1.2) ------(55) (55) (25) (80) Balance as of Juanary 1, 2018 2,080 10,906 18,496 2 13 (126) 733 12,554 367 (353) 11,751 56,423 17,767 74,190
Recomposition of legal reserve ------171 - - - (171) - - - Shareholders’ meeting 04.27.2018 Recomposition of volumtary reserve ------4,822 - - (4,822) - - - Shareholders’ meeting 04.27.2018 Subsidiaries’ shares acquisition ------(864) - - (864) (2) (866) Stock compensation plans - - 3 - (1) 9 - - 14 - - 25 - 25 Acquisition of own shares (Note 13.1) (206) (1,080) - 206 1,080 (12,535) - - - - - (12,535) (532) (13,067) Distribution of dividends ------(82) (82) Capita reduction (Note 12.1) - - - (183) (958) 11,162 - (10,021) - - - - - Sale of share in companies ------(3,518) (3,518) Profit of the year ------8,435 8,435 2,373 10,808 Other comprehensive income for the year ------39 - 39 154 193 Balance as of December 31, 2018 1,874 9,826 18,499 25 134 (1,490) 904 7,355 (483) (314) 15,193 51,523 16,160 67,683
NOTE: (1) Includes the result of operations with non-controlling interests that not representing a loss of control and reserves for stock-based compensation plans.
The accompanying notes are an integral part of these consolidated financial statements.
172 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 173 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement Notes to the of Cash Flows Consolidated Financial For the years ended December 31, 2018 and 2017 (In millions of Argentine Pesos (“$”) – unless otherwise stated – See Note 3) Statements NOTE 12.31.2018 12.31.2017 Cash flows from operating activities: For the years ended December 31, 2018 and 2017 Profit of the year from continuing operations 7,789 16,142 Profit (loss) of the year from discontinued operations 3,019 (1,893) (In millions of Argentine Pesos (“$”) – unless otherwise Adjustments to reconcile net profit (loss) to cash flows generated 14.1 23,553 5,784 by operating activities: stated – See Note 3) Changes in operating assets and liabilities 14.2 (11,426) (3,385) Net cash generated by operating activities 22,935 16,648 Cash flows from investing activities: Payment for property, plant and equipment (25,407) (18,290) Payment for acquisitions of intangible assets (6) - NOTE 1: GENERAL INFORMATION Payment for financial assets (110,026) (19,247) Proceeds from financial assets at amortized cost 108,848 15,129 AND GROUP STRUCTURE Collections for sales of shares in companies and property, plant and equipment 17,240 548 Dividends received 735 40 (Proceeds) colletion from loans (167) 38 Recovery of investment funds, net 9,436 (8,259) The Company is a fully integrated power company in Argentina, which directly and through its subsidiaries, Net cash used in investing activities from discontinued operations 5.2 - (1,897) participates in the electric energy and gas value chains. In the generation segment, the Company has a 3,871 Net cash generated by (used in) investing activities 740 (31,938) MW installed capacity, which represents approximately 10% of Argentina’s installed capacity, and is the second largest independent generator in the country. Additionally, the Company is currently undergoing a process to expand its capacity by 504 MW. Cash flows from financing activities: Proceeds from borrowings 12.4 9,250 47,130 In the distribution segment, the Company has a controlling interest in Edenor, the largest electricity distributor Payment of borrowings 12.4 (9,057) (27,650) Payment of borrowings interests 12.4 (5,004) (4,072) in Argentina, which has more than 3 million customers and a concession area covering the Northern part of the Payment for acquisition of own shares (13,938) (128) City of Buenos Aires and Northwestern Greater Buenos Aires. Payments of dividends from subsidiaries to third parties (82) (74) Repayment of own debt (448) (47) In the oil and gas segment, the Company is one of the leading oil and natural gas producers in Argentina, Net cash generated by (used in) financing activities from discontinued 5.2 1,565 (1,168) with operations in 11 production areas and 7 exploratory areas and a production level of 6.8 million m3/ operations day of natural gas and 5,100 barrels/day of oil equivalent for oil in Argentina, during the year 2018 due to Net cash (used in) generated by financing activities (17,714) 13,991 continuing operations. Its main natural gas production blocks are located in the Provinces of Neuquén and Río Negro. Pursuant to the divestment mentioned in Note 5.2.1, the related results of operations and cash flows Increase (decrease) in cash and cash equivalents 5,961 (1,299) are disclosed within discontinued operations. The production level, due to discontinued operations, registered during the first quarter of 2018 and up to the transfer of the related assets, reached 1.1 million m3/day for natural Cash and cash equivalents at the begining of the year 12.3 1,179 2,613 Cash and cash equivalents at the begining of the year reclasified to assets 238 (238) gas and 13.3 thousand barrels of oil equivalent/day for oil and LPG. classified as held for sale Devaluation effect on cash and cash equivalents 2,011 509 As a result of the divestment mentioned in Note 5.2.2, in relation with the main assets of the refining Inflation effect on cash and cash equivalents (292) (406) and distribution segment, the related results and cash flows are disclosed within discontinued operations. Increase (decrease) in cash and cash equivalents 5,961 (1,299) Continuing operations of the segment relates to the Dock Sud Terminal, with a tank park totaling 228 thousand Cash and cash equivalents at the end of the year 12.3 9,097 1,179 m3 of installed capacity, dedicated to providing storage and logistics services to third parties (see Note 23), and the Company interest in Refinor.
The accompanying notes are an integral part of these consolidated financial statements.
174 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 175 CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: (Continuation) NOTE 2: (Continuation) In the petrochemicals segment, the Company has three high-complexity plants producing a wide variety of IN OPERATION: petrochemical products, including styrenics and synthetic rubber, and holding a large market share.
Finally, through the holding and others segment, the Company participates in the transmission and gas transportation businesses. In the transmission business, the Company jointly controls Citelec, which has a GENERATING controlling interest in Transener, a company engaged in the operation and maintenance of a 20,943 km high- (2) voltage electricity transmission network in Argentina with an 85% share in the Argentine electricity transmission GENERATOR UNIT TECNOLOGY POWER APPLICABLE REGIME market. In the gas transportation business, the Company jointly controls CIESA, which has a controlling interest in TGS, a company holding a concession for the transportation of natural gas with 9,184 km of gas pipelines in CTG GUEMTG01 TG 101 MW Energy Plus Res. N° 1281/06 (1) the center, west and south of Argentina, and which is also engaged in the processing and sale of natural gas CTG GUEMTV11 TV ≤100 MW SE Resolutions No. 19/2017 liquids through the Cerri Complex, located in Bahía Blanca, in the Province of Buenos Aires. Additionally, the CTG GUEMTV12 TV ≤100 MW SE Resolutions No. 19/2017 segment includes advisory services provided to related companies. CTG GUEMTV13 TV >100 MW SE Resolutions No. 19/2017 Piquirenda PIQIDI 01-10 MG 30 MW SE Resolution No. 220/2007 (1) CPB BBLATV29 TV >100 MW SE Resolutions No. 19/2017 CPB BBLATV30 TV >100 MW SE Resolutions No. 19/2017 CT Ing. White BBLMD01-06 MG 100 MW SEE Resolution No. 21/2016 (1) CTLL LDLATG01 TG >50 MW SE Resolutions No. 19/2017 NOTE 2: CTLL LDLATG02 TG >50 MW SE Resolutions No. 19/2017 CTLL LDLATG03 TG >50 MW SE Resolutions No. 19/2017 REGULATORY FRAMEWORK CTLL LDLATG04 TG 105 MW SEE Res. 220/2007 (75%), SEE Res. 19/2017 (25%) CTLL LDLATG05 TG 105 MW SEE Resolution No. 21/2016 (1) CTLL LDLATV01 TV 180 MW SE Resolution No. 220/2007 (1) CTGEBA GEBATG01/TG02/TV01 CC >150 MW SE Resolutions No. 19/2017 2.1 CTGEBA GEBATG03 TG 164 MW Energy Plus Res. N° 1281/06 HIDISA AGUA DEL TORO HI HI – Media 120 NOTE: (1) Uncommitted power and energy is remunerated according to Resolution No. 19/2017. (2) Resolution No. 19/2017 became effective as from February 2017. During January 2017, power and energy was remunerated according to Resolution No 22/16. IN CONSTRUCTION: GENERATOR GENERATING UNIT TECNOLOGY APPLICABLE REGIME CTLL MG 15 MW SE Resolutions No. 19/2017 CTGEBA CC 383 MW Resolución N° 287/2017 PEPE II Wind 53 MW MAT Renovable Res. 281/2017 PEPE III Wind 53 MW MAT Renovable Res. 281/2017 176 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 177 CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: (Continuation) NOTE 2: (Continuation) 2.1.2 In case of hydroelectric power plants maintaining control structures on river courses and not having an associated Generation remuneration schemes power plant, a 1.20 factor will be applied to the plant at the headwaters. 2.1.2.1 SEE Resolution No. 19/2017 (remunerative scheme for Old Capacity) The additional remuneration applies to power plants of any scale for their actual availability and based on the On February 2, 2017, the SEE issued Resolution No. 19/2017, which supersedes the remuneration scheme set applicable period, with prices ranging from U$S0 to U$S500/MW-month between May and October 2017, and forth by Resolution No. 22/2016 and establishes guidelines for the remuneration to generation plants as from U$S500 or U$S1,000/MW-month as from November 2017 for pumping or conventional hydroelectric power plants, the commercial transaction corresponding to February 1, 2017. respectively. The Resolution provides for remunerative items based on technology and scale, establishing U$S-denominated As from November 2017, the allocation and collection of 50% of the additional remuneration will be conditional prices payable in pesos by applying BCRA’s exchange rate effective on the last business day of the month of the upon the generator taking out insurance, to CAMMESA’s satisfaction, to cover for major incidents on critical applicable economic transaction, adjusted through credit or debit notes, as appropriate, to consider the BCRA’s equipment, and the progressive updating of the plant’s control systems pursuant to an investment plan to be exchange rate of the day before the expiration date, in accordance with CAMMESA’s procedures. submitted based on criteria to be defined by the SEE. 2.1.2.1.1 Remuneration for Available Power Capacity Other technologies: wind power Thermal Power Generators The remuneration is made up of a base price of U$S7.5/MWh and an additional price of U$S17.5/MWh, which are associated with the availability of the installed equipment with an operating permanence longer than 12 The Resolution provides for a minimum remuneration for power capacity based on technology and scale and months as from the beginning of the summer seasonal programming. allows generating, co-generating and self-generating agents owning conventional thermal power stations to offer Guaranteed Availability Commitments for the energy and power capacity generated by their units not committed 2.1.2.1.2 Remuneration for Generated and Operated Energy under the Energy Plus modality or under the WEM’s supply agreement pursuant to Resolution No. 220/07. The remuneration for Generated Energy is applied on the real generation, with prices ranging between U$S5 Availability Commitments for each unit should be declared for a term of three years, together with information and U$S10/MWh, depending on the technology, scale and type of fuel. for the Summer Seasonal Programming, with the possibility to offer different availability values for the summer and winter six-month periods. The remuneration for Operated Energy applies to the integration of hourly power capacities for the period, and is valued at U$S2.0/MWh for any type of fuel. Finally, generators will enter into a Guaranteed Availability Commitment Agreement with CAMMESA, which in turn may assigned by CAMMESA to the demand as defined by the SE. The committed thermal generators’ In the case of hydroelectric plants, prices for Generated and Operated Energy are remunerated from U$S1.4 remuneration for power capacity will be proportional to their compliance. to U$S3.5/MWh, depending on the technology and scale. The Minimum Remuneration applies to generators with no availability commitments, with prices ranging 2.1.2.1.3 Additional Remuneration for Efficiency from U$S3,050 to U$S5,700/MW-month, depending on the technology and scale. The “Efficiency” incentive consists of the acknowledgment of an additional remuneration equivalent to the remuneration for the generated energy by the percentage difference between the actual consumption and the The Base Remuneration applies to generators with availability commitments, with a price of U$S 6,000/ reference consumption determined for each unit and fuel type. This comparison will be made on a quarterly MW-month during the May-October 2017 period, and U$S 7,000/MW-month as from November 2017. basis. In the case of higher consumptions, the general remuneration will not be affected. The Additional Remuneration is a remuneration for the additional available power capacity aiming to 2.1.2.1.4 Additional Remuneration for Low-Use Thermal Generators encourage availability commitments for the periods with a higher system demand. CAMMESA will define a monthly thermal generation goal for the set of qualified generators on a bi-monthly basis, and will call for The Resolution provides for an additional remuneration for low-use thermal generators having frequent startups additional power capacity availability offers with prices not exceeding the additional price. The additional based on the monthly generated energy for a price of U$S2.6/MWh multiplied by the usage/startup factor. price amounts to U$S 1,000/MW-month between May and October, 2017, and to U$S2,000/MW-month as from November 2017. The usage factor is based on the Rated Power Use Factor recorded during the last rolling year, which will have a 0.5 value for thermal units with a usage factor lower than 30% and a 1.0 value for units with a usage Hydroelectric Generators factor lower than 15%. In all other cases, the factor will equal 0. In the case of hydroelectric power plants, a base remuneration and an additional remuneration for power The startup factor is established based on startups recorded during the last rolling year for issues associated capacity were established. with the economic dispatch made by CAMMESA. It will have a 0.0 value for units with up to 74 startups, a 0.1 value for units recording between 75 and 149 startups, and a 0.2 value for units recording more than 150 Power capacity availability is determined independently of the reservoir level, the contributions made, or the startups. In all other cases, the factor will equal 0. expenses incurred. Furthermore, in the case of pumping hydroelectric power plants, the following is considered to calculate availability: i) the operation as turbine at all hours within the period, and ii) the availability as pump 2.1.2.1.5 Repayment of Overhauls Financing at off-peak hours every day and on non-business days. The Resolution provides that, as regards the repayment of outstanding loans applicable to thermal and The base remuneration is determined by the actual power capacity plus that under programmed and/or hydroelectric generators, credits already accrued and/or committed to the cancellation of such maintenance agreed maintenance, with prices ranging from U$S2,000 to U$S8,000/MW-month, depending on the scale works will be applied first. The balance will be repaid by discounting U$S1/MWh for the energy generated until and type of power plant. the total cancellation of the financing. 178 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 179 CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: (Continuation) NOTE 2: (Continuation) 2.1.3 2.1.5 Energy Plus - Resolution SE No. 1,281/2006 SEE Resolution No. 21/2016 With the purpose of encouraging new generation works, in 2006 the SE approved Resolution No. 1,281/2006 As a result of the state of emergency in the national electricity sector, the SEE issued Resolution No. 21/2016 establishing a specific regime which would allow newly installed generation sold to a certain category of Large calling for parties interested in offering new thermal power generation capacity with the commitment to making Users to be remunerated at higher prices. it available through the WEM for the 2016/2017 summer; 2017 winter, and 2017/2018 summer periods. To such effect, it established certain restrictions on the sale of electricity and implemented the Energy Successful bidders will enter into a wholesale power purchase agreement with CAMMESA for a term of 10 Plus service, which consists of the offer of additional generation availability by the generating agents. These years. The remuneration will be made up of the available power capacity price plus the variable non-fuel cost measures imply that: for the delivered energy and the fuel cost (if offered), less penalties and fuel surpluses. Power capacity surpluses are remunerated pursuant to SEE Resolution No. 19/2017. - Generating, co-generating and self-generating agents which, as of the date of issuance of SE Resolution No. 1,281/06, are neither WEM agents nor have facilities or an interconnection with the WEM, will qualify; For further information on the projects conducted under this resolution, see Note 16. - These plants should have fuel supply and transportation facilities; - The energy used by GU300 in excess of the Base Demand (energy consumption for 2005 year) qualifies 2.1.6 for Energy Plus agreements within the MAT at a price negotiated between the parties; and SEE Resolution No. 287/2017 - For new GU300 entering the system, their Base Demand will equal zero. On May 10, 2017 the SEE issued Resolution No. 287/17 launching a call for tenders for co-generation projects and the closing to CC over existing equipment. The projects should have low specific consumption (lower than Under this regime, the Company —through its power plants Güemes, EcoEnergía and Genelba— sells its 1,680 kcal/kWh with natural gas and 1,820 kcal/kWh with alternative liquid fuels), and the new capacity should energy and power capacity for a maximum amount of 280 MW. not exceed the existing electric power transmission capacity; otherwise, the cost of the necessary extensions will be borne by the bidder. If a generator cannot meet the power demand by an Energy Plus customer, it should purchase that power in the market at the operated marginal cost. Furthermore, SE Note No. 567/07, as amended, provided that GU300 Awarded projects will be remunerated under a wholesale power purchase agreement which will be effective not purchasing their Surplus Demand within the MAT should pay the Surplus Demand Incremental Average for a term of 15 years. The remuneration will be made up of the available power capacity price plus the variable Charge (CMIEE), and that the difference between the actual cost and the CMIEE would be accumulated in an non-fuel cost for the delivered energy and the fuel cost (if offered), less penalties and fuel surpluses. Power individual account on a monthly basis for each GU300 within CAMMESA’s scope. capacity surpluses are remunerated pursuant to SEE Resolution No. 19/2017. Pursuant to SE Note No. 111/16, until May 2018, the CMIEE was $ 650/MWh for GUMA and GUME and $ 0/ For further information on the projects conducted under this resolution, see Note 16. MWh for GUDI. As from June 2018, pursuant to SE Note No. 28663845/18, the CMIEE became the greater of $1,200/MWh or the temporary dispatch surcharge. Additionally, it was provided that, until further instructed, Renovar Programs movements in the individual account of each GU300 would temporarily not be recorded. In order to meet the objectives, set by Law No. 26,190 and Law No. 27.191 promoting the use of renewable Energy Plus contract values are mainly denominated in U.S. dollars; therefore, when expressed in pesos, sources of energy, the MEyM called for open rounds for the hiring of electric power from renewable sources they are exposed to the nominal exchange rate. Due to the decrease in surplus demand as a consequence (RenovAr Programs, Rounds 1, 1.5 and 2) within the WEM. These calls aimed to assign power capacity contracts of the decrease in economic activity, there are GU300 that decide not to make Energy Plus contracts, and from different technologies (wind and solar energy, biomass, biogas and small hydraulic developments with a generators have to sell their energy at the spot market, thus reducing their profitability. The Company has Power capacity of up to 50 MW). Availability agreements in force with other generators, whereby it can purchase power from other generators to support its contracts in case of unavailability. Successful bidders will enter into renewable electric power supply agreements for the sale of a committed annual electric power block for a term of 20 years. In turn, the Company also acts as a selling party supporting other Energy Plus generators in case their equipment is unavailable. These agreements are ranked with a lower priority than Energy Plus contracts and Additionally, several measures have been established to promote the construction of projects for the relate to surplus energy (energy committed to the Energy Plus contracts but not demanded by clients). generation of energy from renewable sources, including tax benefits (advance VAT reimbursement, accelerated depreciation of the income tax, import duty exemptions, etc.) and the creation of a fund for the development 2.1.4 of renewable energies destined, among other objectives, to the granting of loans and capital contributions for SE WEM Supply Agreements – Resolution No. 220/2007 (“Agreement Res.220”) the financing of such projects. Aiming to encourage new investments to increase the generation offer, the SE passed Resolution No. For further information on the projects conducted under this resolution, see Note 16. 220/2007, which empowers CAMMESA to enter into Agreement with WEM Generating Agents for the energy produced with new equipment. These will be long-term agreements and the price payable by CAMMESA should compensate the investments made by the agent at a rate of return to be accepted by the SE. Renewable Energy Term Market (“Renewable MAT” Regimen) Through Resolution No. 281/2017, the MEyM regulated the Renewable MAT system with the purpose of setting Under this regulation, the Company, through its thermal power plants Loma de La Lata and Piquirenda, has the conditions for large users within the WEM and WEM distributing agents’ large users comprised within Section 9 executed Agreement Res.220 to sell energy and power capacity for a total amount of 289 MW. of Law No. 27,191 to meet their demand supply obligation from renewable sources through the individual purchase within the MAT of electric power from renewable sources, or self-generation from renewable sources. 180 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 181 CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: (Continuation) NOTE 2: (Continuation) Furthermore, this resolution regulates the conditions applicable to projects for the generation, self-generation Therefore, beginning on the second half of November 2018, generators were authorized to declare their and co-generation of electric power from renewable sources. Specifically, the Registry of Renewable Electric variable production costs including fuel costs so that they may be recognized by CAMMESA. This declaration, Power Generation Projects (“RENPER”) was created for the registration of such projects. which was originally limited to units remunerated under SEE Resolution No. 19/17, was later extended to equipment remunerated under a specific agreement. Projects destined to the supply of electric power from renewable sources under the Renewable MAT regime may be covered by other remuneration mechanisms, such as the agreements under the Renovar rounds. In the seasonal programming conducted on November 12, 2018, the Company has opted to make use of this Surplus energy will be sold in the Spot Market and remunerated pursuant to SEE Res. No. 19/2017. self-supply capacity and has destined a significant part of its natural gas production as an input to its thermal units’ dispatch. Finally, contracts executed under the Renewable MAT regime will be administered and managed in accordance with the WEM procedures. The contractual terms, life, allocation priorities, prices and other Finally, on February 8, 2019 the SGE instructed CAMMESA, to apply as from February 18, 2019, for the conditions, notwithstanding the maximum price set forth in Section 9 of Law No. 27,191, may be freely agreed definition of maximum CVPs to be recognized in each two-week period, the weighted average price of natural between the parties, although the committed electricity volumes will be limited by the electric power from gas per basin which would have resulted if the total domestic natural gas production necessary for the supply renewable sources produced by the generator or supplied by other generators or suppliers with which it has foreseen by the electricity sector had been acquired under contracts entered into under the last auction purchase agreements in place. conducted by CAMMESA in the MEGSA. For further information on the projects conducted under this resolution, see Note 16. 2.1.7 2.2 Transmission costs payable by Generators Transmission On November 28, 2017, SEE Resolution No. 1,085/17 approved a new cost distribution methodology that represents the transmission service’s remuneration within the WEM. 2.2.1 Tariff situation In this regard, the SEE amended the original regulation of the WEM transmission system, which provided During 2018, as established in the RTI, the ENRE applied the biannual tariff update mechanism, according that transmission service costs would be allocated to the Demand and electric power Generation, and resolved to the corresponding formula, which depends on the Wholesale Price, Consumer Price and Salaries indexes, as that generators should stop paying costs associated with transmission, and start paying a charge representing long as the compliance of the Trigger Clause is verified. operating and maintenance costs for connection and transformation equipment linking with the high-voltage transmission system as from December 1, 2017. This amendment implied a cost reduction for the Company. Regarding Transener, on February 19, 2018, the ENRE issued Resolution No. 37/18, which was rectified on April 5, 2018 by ENRE Resolution No. 99/18. This resolution adjusted Transener´s remuneration by 24.15% for 2.1.8 the December 2016 to December 2017 period, to be applied to the remuneration scheme as from February Fuel Self-Supply for Thermal Power Plants 2018. Subsequently, on November 16, 2018, the ENRE issued Resolution No. 280/18, which adjusted Transener’s On July, 31, 2018, MINEM Resolution No. 46/18 instructed the SGE to take the necessary actions so that compensation by 42.55% for the December 2016 to June 2018 period, to be applied to the remuneration CAMMESA may implement the competitive mechanisms necessary to guarantee the availability of the gas scheme as from August 2018. volumes required for the generation of electricity. Regarding Transba, on February 19, 2018, the ENRE issued Resolution No. 38/18, which was rectified on It also set maximum prices at the Transportation System Entry Point (PIST) for natural gas, based on the April 5, 2018 by ENRE Resolution No. 100/18. This resolution adjusted Transba´s remuneration by 23.39% for source basin, applicable for the valuation of natural gas volumes destined to the generation of electricity to be the December 2016 to December 2017 period, to be applied to the remuneration scheme as form February sold in the WEM and setting a weighted average of U$S 4.20/MBTU (U$S 4.42/MBTU for the neuquina basin). 2018. Subsequently, on November 16, 2018, the ENRE issued Resolution No. 281/18, which adjusted Transba´s remuneration by 43.25% for the December 2016 to June 2018 period, to be applied to the remuneration scheme Furthermore, MEGSA Circular Letter No. 254/18 established an online auction mechanism so that CAMMESA as from August 2018. may acquire natural gas for supply to thermal power plants during the September-December 2018 period. The auction was only made for interruptible volumes. On the other hand, on July 3, 2018, the ENRE informed the beginning of the procedure to determine the remuneration of the Independent Carriers in exploitation stage: TIBA (Transba), Fourth Line (Transener), Later, SGE Resolution No. 70/2018, published in the BO on November 6, 2018, empowered generating, co- YACYLEC and LITSA. In this regard, on October 8, 2018, costs, investments and aimed tariff corresponding to generating and self-generating agents within the WEM to acquire fuels, without distinction, required for own Fourth Line and TIBA were presented to the ENRE. generation. This resolution supersedes Section 8 of Resolution No. 95/2013 of the former ES, which provided that the supply of fuels for electric power generation would be centralized in CAMMESA (with the exception of the generation covered by the Energy Plus regime). 2.3 The cost of generation with own fuels will be valued according to the mechanisms for the recognition of Energy distribution CVPs recognized by CAMMESA. 2.3.1 Furthermore, the self-supply capacity will not affect commitments undertaken by generators under General WEM supply agreements executed with CAMMESA, and CAMMESA will remain in charge of the commercial Edenor Concession was granted in 1992 for a 95-year term, which may be extended for an additional management and the dispatch of fuel for generators which do not or cannot make use of such capacity. maximum period of 10 years. The ENRE is empowered to control the quality levels of the technical product 182 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 183 CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: (Continuation) NOTE 2: (Continuation) and service, the commercial service and the compliance with public safety regulations, as provided for in the Additionally, and as a consequence of the transfer of jurisdiction over the public service of electricity Concession Agreement. If the Distribution Company fails to comply with the obligations assumed, the ENRE may distribution from the Federal Government to the Province of Buenos Aires and to the City of Buenos Aires apply the penalties stipulated in the aforementioned Agreement. provided for by Law 27,467, Edenor will be required, when the transfer takes place, to undertake a review, with the new Grantors of the Concession, of the treatment to be given to low-income areas and shantytowns’ 2.3.2 consumption of electricity as from January 1, 2019. In this framework, the Government of the Province Electricity rate situation of Buenos Aires enacted Law No. 15,078 on General Budget, which establishes that the aforementioned consumption shall be borne by the referred to province’s Municipalities and approved by the regulatory On January 31, 2017, the ENRE issued Resolution No. 63/17, pursuant to which it determined the definitive entities or local authorities having jurisdiction in each area. Electricity Rate Schedules, the review of costs, the required quality levels, and all the other rights and obligations that are to be applied and complied with by Edenor as from February 1, 2017. Furthermore, it limited the increase 2.3.4 in the VAD resulting from the RTI process and applicable as from February 1, 2017, to a maximum of 42% vis-á-vis Penalties the VAD in effect at the date of issuance of the aforementioned resolution, with the remaining value of the new VAD being applied in two stages, the first of them in November 2017 and the second and last one in February 2018. As of December 31, 2018 and 2017, Edenor has recognized in its financial statements the penalties accrued, whether imposed or not yet issued by the ENRE, relating to the control periods elapsed as of those dates. Furthermore, on November 30, 2017, by means of Resolution No. 603/17, the ENRE approved the CPD values, applicable as from December 1, 2017, and retroactively to consumption recorded in the months of August through Furthermore, ENRE Resolution No. 63/17, Note 2.c) has set out the control procedures, the service quality November 2017. That amount totaled $ 753.9 million and was billed in two installments, December 2017 and January assessment methodologies, and the penalty system, applicable as from February 1, 2017, for the 2017 – 2021 period. 2018. Additionally, the Electricity Rate Schedule’s values, applicable as from December 1, 2017, were approved. Additionally, by means of Note No. 125,248 dated March 29, 2017, the ENRE sets the new penalty On January 31, 2018, the ENRE issued Resolution No. 33/18, whereby it approves the CPD values relating to the determination and adjustment mechanisms in relation to the control procedures, the service quality assessment July 2017-December 2017 period, which were in the order of 11.99%, the values of the 48 monthly installment to methodologies, and the penalty system applicable as from February 1, 2017 for the 2017 – 2021 period set by be applied in accordance with the provisions of ENRE Resolution No. 329/17 which were deferred in the year 2017, ENRE Resolution No. 63/17, providing for the following: and the electricity rate schedule to be applied to consumption recorded as from February 1, 2018. Additionally, it is informed that the average electricity rate value amounts to $2.4627/kwh. i, Penalty values shall be determined on the basis of the kWh value, the average electricity rate, the cost of energy not supplied or other economic parameter at the value in effect at the first day of the control Furthermore, on July 31, 2018, the ENRE issued Resolution No. 208/18, whereby it approves, as from August 1, period or the value in effect at the date of the penalizable event for penalties arising from specific events. 2018, the CPD relating to the January-June 2018 period, to be applied 7.93% as of August 1, 2018, and 6.51% in six ii. For all the events that occurred during the transition period (the period between the signing of the (6) consecutive monthly installments as of February 1, 2019. The CPD amounted to 15.85%. Moreover, the above- Adjustment Agreement and the effective date of the RTI) for which a penalty has not been imposed, mentioned resolution sets the system of caps for the social tariff as well as the values that the Company shall apply penalties shall be adjusted by the IPC used by the BCRA to produce the ITCRM for the month prior to the to determine and credit discount amounts onto the power bills of the consumers affected by deficiencies in the end of the control period or that for the month prior to the date of occurrence of the penalizable event quality of the technical product and/or the quality of the technical and commercial service as from the first control for penalties arising from specific events, until the date on which the penalty is imposed. This mechanism day of the September 2018-February 2019 six-month period. Additionally, it is informed that the average electricity is also applicable to the concepts penalized after April 15, 2016 (ENRE Note No. 120,151) and until the rate value amounts to $2.9871/kWh. effective date of the RTI. This adjustment will be part of the penalty principal amount. iii. Unpaid penalties will accrue interest at the BNA lending rate for thirty-day discount transactions from the Finally, according to section 4 of SE Resolution No. 366/18, passed on December 27, 2018, SE Resolution 1,091/17 date of the resolution to the date of actual payment, as interest on late payment. In the case of penalties was repealed, thus eliminating the energy-savings discount for the residential tariff charged to customers framed or relating to Customer service, the calculated amount shall be increased by 50%. not under the social tariff as from January 1, 2019. With regard to the social tariff discounts, they will be assumed by the Governments of the Province of Buenos Aires and the City of Buenos Aires in accordance with the provisions iv. Penalties subsequent to February 1, 2017 will be valued at the Kwh value or the cost of energy not of the 2019 Federal Budget Law. supplied of the first day of the control period or of the day on which the penalty is imposed for penalties arising from specific events. Those concepts will not be adjusted by the IPC, applying the interest on late 2.3.3 payment established in iii) above. Moreover, an additional fine equivalent to twice the amount of the Framework Agreement penalty will be determined if payment is not made in due time and proper form. On January 10, 1994, Edenor, together with Edesur S.A., the Federal Government and the Government In the ENRE’s opinion many of the penalties imposed in kWh must be valued at the date of occurrence of of the Province of Buenos Aires entered into the so-called Framework Agreement, whose purpose was the penalizable event; these modifications have been quantified and recognized as of December 31, 2018. to establish the guidelines under which the Company was to supply electricity to low-income areas and shantytowns. In October 2003, the so-called New Framework Agreement was signed with the aim of setting In accordance with the provisions of Sub-Appendix XVI to ENRE Resolution No. 63/17, Edenor is required to the bases and general guidelines based on which the Federal and the Provincial Governments’ economic submit in a term of 60 calendar days the calculation of global indicators, interruptions for which force majeure contribution for the electricity supplied by the two Distribution Companies to the different shantytowns would had been alleged, the calculation of individual indicators, and will determine the related discounts, crediting take place and be coordinated. After successive extensions of the agreement’s term, the latest extension was the amounts thereof within 10 business days. In turn, the ENRE will examine the information submitted by in effect until September 30, 2017. Edenor, and in the event that the crediting of such discounts were not verified will impose a fine, payable to the Federal Government, equivalent to twice the value that should have been recorded. At the date of these At the date of these financial statements, Edenor is negotiating with the Federal Government the signing of financial statements, Edenor has complied with the provisions of the aforementioned Resolution in relation to a new extension for the period elapsed from October 1, 2017 through December 31, 2018, and the payment of the six-month period ended August 31, 2018. the electricity supplied during such period; therefore, no revenue for this concept has been recognized. 184 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 185 CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: (Continuation) NOTE 2: (Continuation) Furthermore, in different resolutions concerning penalties relating to the Quality of the Commercial and In this regard, on February 28, 2019, the Federal Government, the Province of Buenos Aires and the City Technical Service, the Regulatory Entity has provided for the application of increases and adjustments, applying of Buenos Aires entered into an agreement for the transfer of the public service of electricity distribution, duly for such purpose a criterion different from the one applied by the Company. In this regard, the ENRE implemented awarded to Edenor under a concession by the Federal Government, to the jurisdiction of the Province of Buenos an automatic penalty mechanism in order that the discounts on account of deviations from the established Aires and the City of Buenos Aires. It is worth pointing out that Edenor has not been a party to such agreement, limits may be credited to customers within a term of 60 days as from the end of the six-month control period. and, at the date of issuance of these financial statements is analyzing the scope and effects therefrom. In fiscal year 2018, the ENRE regulated and/or issued new penalty procedures: - ENRE Resolution No. 118/18: It regulated the Compensation for extraordinary service provision interruptions. 2.4 - ENRE Resolution No. 170/18: It regulated the Penalty System for Deviations from the Investment Plan, a Oil and gas procedure whereby real investments are assessed by comparison with the annual investment plan submitted by Edenor, and the investment plan carried out for the 5-year rate period is assessed as against the Five-year 2.4.1 period plan proposed in the RTI. Argentine Hydrocarbons Law - ENRE Resolution No. 198/18: New Supplementary Penalty System of Technical Service Quality, which penalizes deviations ºfrom quality parameters at feeder level. On October 29, 2014, the National Congress enacted Law No. 27,007 amending Hydrocarbons Law No. 17,319 (enacted in 1967), which empowers the Government to grant exploration permits and concessions to the - ENRE Resolution N° 91/18: Through the filing of charges, the ENRE informs Edenor about the penalty system private sector, and: to be applied for failure to comply with meter-reading and billing time periods. a. Sets the terms for exploration permits, exploitation concessions and transportation concessions, making a The effects of these resolutions were quantified by Edenor and recognized as of December 31, 2018. distinction between conventional and unconventional reservoirs in the continental shelf and the territorial sea. b. Establishes a 12% percentage payable as royalties by the exploitation concessionaire to the grantor on 2.3.5 the proceeds derived from liquid hydrocarbons extracted at wellhead and the production of natural gas. Law on electricity dependent patients In the case of extension, additional royalties for up to 3% over the applicable royalties at the time of the On May 17, 2017, Law No. 27,351 was passed, which guarantees the permanent and free of charge supply first extension, up to a total of 18%, will be paid for the following extensions. of electricity to those individuals who qualify as dependent on power for reasons of health and require medical c. Provides for two types of non-binding commitments between the National Government and the equipment necessary to avoid risks in their lives or health. The law states that the account holder of the service Provinces aiming to establish a uniform environmental legislation and to adopt a uniform tax treatment or someone who lives with him/her (a cohabitant) that is registered as “Electricity dependent for reasons of to encourage hydrocarbon activities. health” will be exempt from the payment of any and all connection fees and will benefit from a special free d. Restricts the National Government and the Provinces from reserving new areas in the future in favor of of charge tariff treatment in the electric power supply service under national jurisdiction, which consists in the public or mixed companies or entities, irrespective of their legal form. recognition of the entire amount of the power bill. Furthermore, Abbreviated Hydrocarbons Law No. 26,197, enacted in 2007, granted the Argentine provinces According to Executive Order No. 740 of the PEN, dated September 20, 2017, the MINEM will be the title to the crude oil and gas reserves located in their territories, and provinces were empowered to grant Authority of Application of Law No. 27,351, whereas the Ministry of Health will be responsible for determining concessions and permits to private companies. the conditions necessary to be met for registration with the “Registry of Electricity Dependent for Reasons of Health” and will issue the clarifying and supplementary regulations for the application thereof. Additionally, pursuant to Decree No. 1,277/12 (as amended by Decree No. 272/15), duties are vested in the MEyM, with which hydrocarbon companies should be registered, and the Hydrocarbons Investment Plan’s On September 25, 2017, the National Ministry of Health issued Resolution No. 1,538-E/17, which creates Strategic Planning and Coordination Commission, whose primary role is to implement the National Plan for the Registry of Electricity Dependent for Reasons of Health (RECS), within the orbit of the National Ministry of Hydrocarbon Investments, under which the companies should timely file with the Commission any required Health, operating under the authority of the Undersecretariat for the Management of Health Care Services. technical, quantitative and/or economic information necessary to evaluate the performance of the sector. The Companies should also submit an Annual Investment Plan consistent with the National Plan for Hydrocarbon At the date of issuance of these financial statements no further regulations have been issued concerning the Investments. This Executive Order also authorizes the MEyM to publish reference prices for each cost and Resolution mentioned in the preceding paragraph. expense component, as well as fuel reference prices, which are intended to cover production costs attributable to the activity and, in turn, achieve a reasonable profit margin. The MEyM may apply different types of penalties 2.3.6 in case of breach. Change of Jurisdiction By Law No. 27467, 2019 Federal budget of expenditures and resources, the Executive Power is instructed to 2.4.2 promote such actions that may be necessary in order for electricity distribution companies Edenor and Edesur Gas Market S.A. to become subject to the jurisdiction of the Province of Buenos Aires and the City of Buenos Aires as from 2.4.2.1 Programs Encouraging an Increase in Domestic Natural Gas Production January 1, 2019. 2.4.2.1.1 Gas Plan I Upon completion of the aforementioned process, the ENRE will continue to exercise its functions and On February 14, 2013, Res. No. 1/13 was published in the BO. This resolution creates the Gas Plan I Program, powers over all those issues that are unrelated to the public service of electricity distribution. which aims to evaluate and approve projects furthering the national self-supply of hydrocarbons through a gas production into the domestic market, as well as to generate higher levels of activity, investment and employment in this sector. Gas Plan I was regulated by Resolution No. 3/13 issued by the National Plan for Hydrocarbon Investments’ Strategic Planning and Coordination Committee, (the “Committee”) and published in the BO on April 26, 2013. 186 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 187 CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: (Continuation) NOTE 2: (Continuation) Gas Plan I provides that the National Government undertakes to pay a monthly compensation resulting from: pesos at the exchange rate for sales operations of Banco de la Nación Argentina effective on the last business day (i) the difference between the Surplus Injection price (U$S7.5/MMBTU) and the price actually collected from the of the month corresponding to the production subject to compensation. sale of the Surplus Injection, plus; (ii) the difference between the Base Price and the price actually collected from the sale of the Adjusted Base Injection. These projects will be in force for a maximum term of 5 years, On November 2, 2017, MEyM Resolution No. 419/2017 was published in the BO. This resolution amends Resolution with the possibility for renewal. No. 46/2017 and classifies concessions into pgilot and developing, with an Initial Production equal to or higher than 500,000 m3/day (monthly average between July 2016 and June 2017). Undeveloped concessions may obtain a On August 7, 2013, pursuant to Res. No. 27/13, the Committee approved a project for an increase in the total guaranteed minimum price for their whole production provided they reach an annual average production equal natural gas injection submitted by former subsidiary PEPASA, with retroactive effects to March 1, 2013. to or higher than 500,000 m3/day during a twelve-month period by December 31, 2019. Developing concessions may only apply for the benefit for the incremental portion of their Initial Production. The reference price for the 2.4.2.1.2 Gas Plan II incentive will be calculated using the domestic market’s weighted average reported by the MEyM’s Secretariat of Hydrocarbon Resources. In November 2013, the Committee issued Res. No. 60/13 creating Gas Plan II. Such program was directed 3 to companies without previous production or with a maximum injection limit of 3.5 MMm /d and included price On November 17, 2017, MEyM Resolution No. 447/2017 was published in the BO. This resolution extends the incentives in the case of production increases, as well as penalties involving LNG imports in case of non-compliance application of the Unconventional Gas Plan created by Resolution No. 46/2017 and amended by Resolution 419/2017 with committed volumes. Res. No. 60/13 (as amended by ES Resolution N° 22/14 y N° 139/14), established a price to natural gas production from unconventional reservoirs in the austral basin. ranging from U$S4/MMBTU to U$S7.5/MMBTU, based on the highest production curve attained. Finally, on January 23, 2018, MEyM Resolution No. 12E/2018 was published, which introduces certain modifications On March 6, 2014 and January 30, 2015, former subsidiaries PELSA and Petrobras were registered with to the Unconventional Gas Plan created by MEyM Resolution No. 46/17, as amended, including an extension of the this program pursuant to Res. No. 20/14 and 13/15, respectively, of the Secretariat of Economic Policies and definition of “Covered Concessions” to include more than one concession in a single Plan provided: Development Planning of the Ministry of Economy and Public Finances. i. they are adjacent; It should be pointed out that the collection of the compensation for both programs depends on the payment ii. they have a jointly-applicable investment plan; capacity of the Argentine Government, which has incurred a delay in the cancellation of credit claims. iii. they are operated on a joint basis through the use of substantially the same surface facilities; On April 3, 2018, MINEM Resolution No. 97/18 was published, which approves the procedure for the iv. the companies making up the consortium holding such concessions have the same interest percentages cancellation of compensations pending settlement and/or the payment for the year 2017 under the above- in all concessions involved; and mentioned gas injection encouragement programs. Beneficiary companies opting for the application of the v. during the life of the program, any assignment of an interest in the consortium holding any of the procedure should state their decision to adhere to adhere within a term of twenty (20) business days, waiving concessions making up the Covered Concession should be made jointly and simultaneously with the all present or future administrative and/or judicial actions, remedies, rights or claims regarding the payment of assignment of a like interest in all the concessions making up such Covered Concession. obligations arising from the programs. The cancellation procedure established in the Resolution provides that the amounts will be payable in thirty equal and consecutive installments as from January 1, 2019. The Company has requested the SGE to include the following exploitation projects timely approved by the provincial enforcement authority in the Unconventional Gas Plan: (i) “Río Neuquén”, filed on February 5, 2018, The Company has decided to adhere to the payment procedure established in MINEM Resolution No. 97/18, as owner of 33.07% of production, (ii) “El Mangrullo”, filed on July 26, 2018, as operator and owner of 100% and the estimated compensation amount for the Group provided for by said resolution amounts to U$S148 of production; and (iii) “Sierra Chata”, filed on July 30, 2018, as operator and owner of 45.55% of production. million (see Note 12.2). However, on January 30, 2019, in a meeting called by the SGE, affected gas producers (including the Company) On February 21, 2019, SGE Resolution No. 54/19 was published, which modifies the procedure for the cancellation were informed that no new projects would be approved under the Unconventional Gas Plan, and that the SGE of compensations pending settlement and/or the payment for the year 2017 (MINEM Resolution No. 97/18), the would evaluate a new incentive scheme for the production of unconventional gas during the winter period. main modification being that cancellations would be instrumented through the delivery of public debt bonds. As of the issuance of these financial statements, the SGE has still not issued any resolution or administrative 2.4.2.1.3 Unconventional Gas Plan decision in this respect, and the Company has not been formally notified of the rejection of the above- On March 6, 2017, MEyM Resolution No. 46-E/2017 was published, which created the Program for the mentioned exploitation projects; notwithstanding that, the Company is currently analyzing the course of action Encouragement of Investments in the Development of Natural Gas Production from Unconventional Reservoirs to take and awaiting a new incentive proposal for the winter period. (the “Unconventional Gas Plan”) seeking to encourage investments for the production of natural gas through unconventional methods in the Neuquén Basin and effective until December 31, 2021. 2.4.2.2 Natural Gas for the Residential Segment and CNG 2.4.2.2.1 Administration of the Priority Demand To join this program, an investment plan should be submitted for concessions located in the Neuquén Basin producing unconventional natural gas; the program consists of the payment of a compensation to be determined In June, 2016, MEyM Res. No. 89/16 was published in the BO, which established the criteria for the on a monthly basis by multiplying the gas volume sold from the covered concessions by the difference between standardization of natural gas purchases within the PIST by distribution service providers in order to meet its minimum price and its actual price (the average volume billed by each company in the domestic market). The the Priority Demand. Additionally, criteria were established to guarantee the meeting of the Priority Demand minimum price is U$S7.50 per million BTU for the year 2018, and it will later decrease by U$S0.50 per million through the Emergency Executive Committee (CEE) in case of operational emergencies which may affect its BTU per year until reaching U$S6.00 per million BTU for the year 2021. Compensations under this program may normal supply. be collected as from the month following the submission of the application to join the program or the month of January, 2018, whichever is later, and until December 2021. Compensations assessed as indicated above will be In June, 2017 ENARGAS Resolution No. 4502/17 was published, which approved the procedure for dispatch payable as follows: 88% to the companies joining the program, and the remaining 12% to the province where the administration in the CEE. In case the CEE does reach an agreement, ENARGAS will define the supply taking concession covered by the program is located. Compensations will be assessed in U.S. dollars but will be payable in into consideration each producer’s available quantities minus the amounts previously purchased to meet the 188 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 189 CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: (Continuation) NOTE 2: (Continuation) Priority Demand, with a progressive allocation until matching the proportional quota of each producer/importer 2.4.2.4 Acquisition of Natural Gas for Generation in the Priority Demand. As explained in detail in Note 2.1.9, MINEM Resolution No. 46/18 and MEGSA Circular Letter No. 254/18 2.4.2.2.2 New Natural Gas Prices within the PIST established new maximum prices within the PIST for natural gas and a mechanism for online auctions for the acquisition of natural gas by CAMMESA to supply thermal power plants during the September-December 2018 In early January, 2018, the extension period set forth by Law No. 27,200 to the public emergency declared period. On September 6, 2018, CAMMESA’s auction for the stated period took place, and offers for a total 143 in 2002 terminated and, therefore, Law No. 24,076 was reinstated, which provides that the price of natural gas million m3 of interruptible gas-day were received with a weighted average PIST price of U$S3.8/MBTU. Pampa supply agreements will be determined by the free interaction of supply and demand. As a result, on November took part in this auction. 29, 2017, with the backing of the MEyM, natural gas distributors executed an agreement with the country’s main natural gas producers, including the Company, effective from January 1, 2018 to December 31, 2018. Prices were Later, SGE Resolution No. 70/18 empowered generating, self-generating and co-generating agents to differentiated based on the source basin, the user category, and whether the tariff was full or differential, with acquire the fuels required for their generation, without making a distinction between liquid fuels, natural gas periodic increases, and ranged from U$S 1/MBTU to U$S 6.5/MBTU. or other types of fuel. However, on account of the significant devaluation of the Argentine peso and the impossibility to transfer this However, as this is an option granted to the generator, it could be argued that, even if the agreement new exchange rate on to final users’ tariff schemes, in early October, 2018 this agreement was ineffective and, provides that the supply is an obligation by the generator, in case it opts not to acquire the fuel on its own, consequently, prices with gas distributors began to be agreed in the spot market on a daily basis. CAMMESA should keep supplying the necessary fuel. Furthermore, ENARGAS Resolutions No. 280-289 and 292/2018 were issued, which established, effective It should be pointed out that since the seasonal programming conducted on November 12, 2018, the for a six-month period beginning October 1, 2018, the new natural gas final tariffs for SGP, CNG and residential Company has opted to make use of its self-supply capacity, and has destined a significant part of its natural gas users considering a price for natural gas as input ranging between U$S 1.74/MBTU y U$S 3.98/MBTU, including production to its thermal units’ dispatch. the differential tariff. Furthermore, on December 27, 2018, under another CAMMESA auction conducted for the year 2019, offers Furthermore, on November 15, 2018 Decree No. 1,053/2018 was issued, which established, on a one-off basis, for a total 222 million m3 interruptible gas-day were received, at seasonal PIST prices with a maximum price of that the National Government assume the difference between the price of gas purchased by gas distributors U$S5.2/MBTU and a minimum price of U$S3.2/MBTU for the June-August 2019 period, and with a maximum price and the price of gas recognized in distributors’ final tariffs for the April 2018 – March 2019 period. ENARGAS of U$S3.7/MBTU and a minimum price of U$S2.2/MBTU for the rest of the year. Pampa took part in this auction. will determine the net amount, which will be transferred to each Distributor in 30 monthly and consecutive installments as from October 1, 2019 updated using the BNA’s 30-day interest rate; once an installment has been 2.4.2.5 Natural Gas Exports received, Distributors must immediately make the corresponding payments to gas suppliers, and must inform and credit them monthly before the ENARGAS. MEyM Resolution No. 104/2018 and SGE Resolution No. 9/2018, issued on August 21 and September 15, 2018, respectively, established a Procedure for the Authorization of Natural Gas Exports. Authorizations may As of the issuance of these financial statements, the Company has not still decided whether or not to adhere consist of short-term (up to 1 year) or long-term (1 to 10 years) exports, whether on an interruptible basis or to the payment procedure established by Decree No. 1,053/18. on a firm basis for summer periods (October - April for a term of up to 5 years), or operational exchanges in emergency situations, the security of supply to the Argentine domestic market being a condition in all cases. Finally, on February 12, 2019, with the publication in the BO of ENARGAS Res. No. 72/19, the methodology Furthermore, in the case of projects covered by the Unconventional Gas Plan, exported natural gas may not be for passing the gas price on to tariffs and the general procedure for calculating accumulated daily exchange computed as part of and/or within the production applicable to such program. differences entered into effect. Among other aspects, this methodology contemplates the recognition of prices stipulated in the agreements entered into between distributors and producers and the definition of the On December 12, 2018, the Company was authorized pursuant to SGE Resolution No. 252/2018 to export exchange rate to be used. Specifically, it provides that the exchange rate to be considered between producers natural gas to Chile, on an interruptible basis, from the Río Neuquén and Rincón del Mangrullo areas, to Colbún 3 and distributors should be BNA’s average exchange rate for the first 15 days of the month immediately preceding S.A., at a PIST price of U$S4.2/MBTU, for a maximum volume of 2 million m -day until November 15, 2019, or the beginning of each seasonal period or, if lower, the exchange rates stipulated in the agreements. until meeting the total maximum quantity equivalent to the authorized daily export volume by the number of days this authorization is effective, whichever occurs first. 2.4.2.3 Tender for Firm Gas Supply Furthermore, on January 22, 2019, the Company was authorized pursuant to SGE Resolution No. 12/2019 to SGE Resolution No. 32/19, published in the BO on February 11, 2019, approved the mechanisms for the single export natural gas to Uruguay, also on an interruptible basis, from the Río Neuquén and Rincón del Mangrullo price tender for firm gas supply to distributors by producers and IEASA. It also defined commitments for up to areas, to the National Administration of Power Stations and Electric Transmissions, at a PIST price of U$S4.01/ 70% of the maximum daily volume for a term of 12 months, with seasonal variations, effective as from April 2019. MBTU, for a maximum volume of 600 million m3-day until May 1, 2019, or until meeting the total maximum quantity equivalent to the authorized daily export volume by the number of days this authorization is effective, From the Southern and Neuquina basin, 14.4 million m3-day were assigned for the summer and 36.1 million whichever occurs first. m3-day for the winter, at a weighted average price between auctioned offers of U$S 4.62/MBTU. Out of these volumes, 83% corresponded to the Neuquina Basin at a weighted average price of U$S 4.61/MBTU. Pampa took It should be pointed out that from September 4, 2018 to December 31, 2020, the application of a natural gas part in this auction. export tax of $ 4 over each exported U$S, with a maximum 12% tax rate, was regulated. Furthermore, from the Northwest basin, 3.8 million m3-day were assigned for the summer and 9.4 million m3-day for the winter, at a weighted average price of U$S4.35/MBTU. 190 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 191 CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: (Continuation) NOTE 2: (Continuation) - Effective as of April 1, 2018, an increase of 50% over the tariff for the natural gas transport service and 2.5 the CAU within the framework of the provisions of Resolution No. 310/2018 issued by the ENARGAS. Gas Transportation In addition, completing the RTI process, prior to the ratification of the 2017 Integral Agreement and within 2.5.1 the framework of the Transitional Agreements, the Company received the following tariff increases: General aspect - Through Resolution ENARGAS I-2852/2014 on April 7, 2014, a staggered increase of 8% was established as of April 1, 2014, from 14% accumulated since 1 June 2014 and 20% accumulated since August 1, 2014. TGS’ license has been granted for an original term of 35 years starting December 28, 1992. However, upon termination TGS may request to the ENARGAS a License extension for an additional ten-year period. Upon - On June 5, 2015, ENARGAS issued Resolution No. I-3347/2015, which complements Resolution I-2852, termination of the License’s life, whether it be 35 or 45 years, the Natural Gas Law requires the call for a new which approved an increase in the tariffs applicable to the natural gas transportation service from May bid for the granting of a new license, where TGS —provided it has substantially met its obligations resulting 1, 2015. This increase represented for TGS a transitional increase of 44.3% in the price of the natural gas from the License— will have the option to match the best offer received by the National Government during transport service and 73.2% in the CAU. the bidding process. - Effective since April 1, 2016, an increase of 200.1% on the rates applicable to the public service of Natural Gas Transportation and to the CAU in accordance with the provisions of Resolution No. I-3724/2016 of 2.5.2 ENARGAS, which could only be invoiced in full from October 7, 2016 after the ruling issued by the CSJN TGS’s Tariff situation that determined the nullity of Resolutions N° 28/2016 and 31/2016 (jointly “Resolutions 28 and 31”) of the 2.5.2.1 Integral Agreement MINEM. On March 30, 2017, within the framework of the tariff renegotiation process mentioned above, TGS entered 2.5.2.2 Semi-annual tariff increase into the Integral Renegotiation Agreement (the “2017 Integral Agreement”). The 2017 Integral Agreement had as background the transitional agreements celebrated in 2008, 2016 and 2017 (the “Transitional Agreements”) This increase is granted within the framework of the semi-annual tariff adjustment of the natural gas by which TGS was granted with transitional tariff schedule applicable in order to continue providing the transportation service in accordance with the provisions of the RTI process. service of natural gas transportation service. In the public hearing held on September 4, 2018, in which the Company requested, based on the variation After being approved by the different intervening government agencies and the National Congress, the of the WPI recorded for the period February - August 2018, a tariff increase of approximately 30%. Considering 2017 Integral Agreement was ratified on March 27, 2018, through PEN Decree No. 250/2018. This decree the hearing, on September 27, 2018, ENARGAS issued Resolution No. 265/2018 which determined a 19.7% tariff represents the conclusion of the RTI process and the completion of the 2017 Transitional Agreement, and increase effective as of October 1, 2018. thus, the final renegotiation of the license after seventeen years of negotiations. This increase was determined by ENARGAS based on the simple average of the WPI, the Construction Cost Index The 2017 Integral Agreement sets the guidelines for the provision of the natural gas transportation service for the period February and August 2018 and the Salary Variation Index between December 2017 and June 2018. until the end of the License. Among these guidelines: It is noteworthy that ENARGAS supported the determination of the aforementioned tariff increase in the - The RTI Process, which will culminate in the signing of the integral agreement, was approved. As a result provisions of Resolution 4362, which, among other issues, provided that under certain circumstances and of this RTI, a new tariff schedule was also approved. This new tariff schedule applicable to the Company macroeconomic conditions, such as the significant devaluation occurred after April 2018, ENARGAS may use determined a total tariff increase of 214.2% and 37%, in the event that it had been granted in a single other indexes than the WPI to determine the tariff increase. TGS notified ENARGAS its disagreement with installment as of April 1, 2017, on the tariff of the natural gas transportation service and the charge of access respect to the methodology for calculating the semi-annual adjustment. and use (CAU), respectively. - A Five-Year Investment Plan is approved. Resolution 4362 obliged TGS for the execution of the Five-Year On February 26, 2019, within the framework of the RTI, a new public hearing took place with the aim of Plan, which requires a high level of essential investments for the operation and maintenance of the pipeline the determination of the biannual tariff increase that will come into effect as of April 1, 2019. As of the date system, to provide quality, safe and reliable service. The Five-Year Plan shall be for the period from April 1, of issuance of these consolidated financial statements, ENARGAS has not issued the corresponding resolution. 2017 to March 31, 2022 and will amount to Ps. 6,786,543 (valued at December 31, 2016). 2.5.2.3 Non-regulated segments - A non-automatic six-month adjustment mechanism for the natural gas transportation tariff and the investment commitments were approved. This adjustment must be approved by ENARGAS and for its 2.5.2.3.1 Domestic market calculation, the evolution of the WPI published by INDEC will be considered. The Production and Commercialization of Liquids segment is not subject to regulation by ENARGAS. However, - TGS and its shareholders must withdraw any claim against the Government related to the natural gas over recent years, the Argentine Government enacted regulations which significantly impacted on it. transportation business, including the arbitration proceedings before the ICSID. The Company desisted from it on June 26, 2018. GLP domestic sales prices are impacted by the provisions of Law No. 26.020 “Regime of the industry and commercialization of liquefied petroleum gas” and the SRH (former Secretary of Hydrocarbon Resources), that As it is mentioned above the tariff increase was granted in 3 installments according to the following sets forth LPG minimum volumes to be sold in the local market in order to guarantee domestic supply. resolutions: - Effective as of April 1, 2017, 64.2% of the tariff for the natural gas transport service, the CAU not being In this context, TGS sells the production of propane and butane to fractionators at prices determined adjusted, in accordance with the provisions of Resolution No. 4362/2017. semiannually by the SRH. On March 30, 2015, the PEN issued Decree No. 470/2015, regulated by SE Resolution No. 49/2015, which sets a maximum reference price for the members of the marketing chain in order to - Effective as of December 1, 2017, after the issuance of Resolution 120, 81.1% on the tariff for the natural guarantee the supply to low-income residential user, by committing the GLP producers to supply at a fixed price gas transport service and 29.7% on the CAU, which includes the first adjustment by WPI. with a quota assigned to each producer. Additionally, payment of compensation to the participating producers of the Households with Bottles Program was established. 192 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 193 CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: (Continuation) NOTE 2: (Continuation) During 2017, the MINEM issued Resolutions No. 56/2017 and No. 287/2017, setting the prices at Ps. 2,568 This Decree instructed the MEyM: per ton of butane and $ 2,410/tn of propane as of April 2017 and at $ 4,302/tn of butane and $ 4,290/tn of propane as of December 1, 2017. For 2016 and the first quarter of 2017, the price was set by Resolution No. i. to take the necessary steps so that EBISA should be merged through absorption into ENARSA, which 70/2015 in $ 650 /tn. corporate name will be changed to Integración Energética Argentina S.A. (“IEASA”). As from the pre- merger agreement, IEASA will sell the energy corresponding to Argentina in all binational projects where On March 27, 2018, the SRH issued Resolution No. 5/2018, which increases as from April 1, 2018, the price EBISA takes part; of the products contributed to the Households with Bottles Program to $ 5,416/tn and $ 5,502/tn of butane ii. to adopt the necessary measures to sell, or, if applicable, so that IEASA may sell, assign or otherwise and propane, respectively. On the other hand, the compensation received from the National Government transfer to the private sector, certain assets, works and participations, including the Ensenada de Barragán remained at $550/tn. and Brigadier López power plants, pursuant to public bidding processes, preserving the rights stipulated in the applicable corporate and contractual instruments (i.e., preemptive rights). Finally, on January 28, 2019, the Energy Government Secretariat issued Resolution No. 15/2019 modifying the price for which the products contributed to the Households with Bottles Program are sold. As of February Furthermore, the MEyM and IEA were authorized to receive in payment the LVFVDs issued pursuant to 1, 2019, the price increased to $ 9.154/tn and $9,042/tn of butane and propane, respectively, eliminating the Resolution No. 406/2003 and other provisions passed by the SE for up to the maximum amounts and under compensation received by the Argentine government. the conditions to be established by the MEyM. The applicable public bodies will take part in the valuations necessary to execute these processes, although the MEyM is authorized to hire private entities to such effect. In this context, the Company has filed various administrative and judicial claims challenging the general regulations of the program, as well as the administrative acts that determine the volumes of butane that must In observance of the previous instructions, IEASA launched the national and international public tenders for be sold in the domestic market, in order to safeguard its economic-financial situation and thus, preventing that the sale of Ensenada de Barragán and Brigadier López thermal power plants. The deadline for the presentation this situation does not extend over time. of offers is January 31, 2019. The public tender contemplates the transfer of the goodwill and the assignment of certain rights, contracts and staff, as well as the repurchase of part of the liabilities issued by the trusts. As of December 31, 2018, the Argentine Government owes TGS $ 293 million for these concepts. Appraisals were made by the National Appraisal Court. Bids should contemplate the payment in cash of 75% of the applicable appraisal. Bids above the minimum price may consist of cash or LVFVDs. In addition, the Company is a party of the Propane Gas Supply Agreement for Induced Propane Gas Distribution Networks (“Propane for Networks Agreement”) entered into with the Argentine Government by The Company has not submitted any bid under these public tenders. which it undertakes to supply propane to the domestic market at a lower price to the market. In compensation, the Company receives an economic compensation calculated as the difference between the sales price and the export parity determined by the MINEM. 2.7 In 2017, the MINEM issued Resolutions No. 74 and 474 /2017 that stipulate increases in the price of undiluted Tax reform propane gas destined to the Propane for Networks Agreement as of April 1 and December 1, 2017, respectively. From those dates onwards, the price of undiluted propane gas has been set at $ 1,267/tn and $ 2,832/tn and $ On December 29, 2017 the PEN issued Law No. 27,430 that has introduced several modifications in tax 1,941.20/tn and $ 3,694/tn, respectively, depending on the client to whom the undiluted propane gas is delivered. treatment, the key components of which are described below: Finally, on May 30, 2018, the Company initiated the sixteenth extension by which the methodology for 2.7.1 determining the price and volumes for the period April 1, 2018 - December 31, 2019 is established. Additionally, Income tax this last extension established the propane sale price to customers under this program. 2.7.1.1 Income tax rate During 2018 and 2017, the Company received the amount of $ 407 million and $ 383 million, for subsidies The income tax rate for Argentine companies will be gradually reduced from 35% to 30% for fiscal years for the programs mentioned above, respectively. beginning as from January 1, 2018 until December 31, 2019, and to 25% for fiscal years beginning as from January 1, 2020. 2.5.2.3.2 Foreign market The effect of the application of the income tax rate changes on deferred tax assets and liabilities pursuant to On September 3, 2018, the Executive Branch issued Decree No. 793/2018, which, between September 4, the above-mentioned tax reform was recognized, based on their expected realization year, in “Income tax rate 2018 and December 31, 2020, sets an export duty of 12% on the exported amount of propane, butane and change” under Income tax and Minimum notional income tax of the Consolidated Statement of Comprehensive natural gasoline. This withholding is capped at $4 for each dollar of the tax base or the official FOB price. Income (Note 10.6). 2.7.1.2 Tax on dividends 2.6 The tax on dividends or earnings distributed by, among others, Argentine companies or permanent Restructuring of the National Government’s interests establishments to individuals, undivided estates or beneficiaries residing abroad is introduced based on the following considerations: (i) dividends resulting from earnings accrued during fiscal years beginning as from in assets and energy sector companies January 1, 2018 until December 31, 2019, will be subject to a 7% withholding; and (ii) dividends resulting from earnings accrued during fiscal years beginning as from January 1, 2020 will be subject to a 13% withholding. On November 1, 2017, Decree No. 882/2017 was published, which provides for the restructuring of the National Government’s interests in several energy sector companies and ventures to limit its participation to Dividends resulting from benefits gained until the fiscal year prior to that beginning on January 1, 2018 will those works and services which may not be properly undertaken by the private sector. remain subject to the 35% withholding on the amount exceeding the untaxed distributable retained earnings (equalization tax’ transition period) for all beneficiaries. 194 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 195 CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: (Continuation) NOTE 2: (Continuation) 2.7.1.3 Transfer prices plant and equipment which, after 6 months as from their assessment, have not been absorbed by tax debits generated by the activity. Controls are established for the import and export of goods through international intermediaries different from the exporter at the point of origin or the importer at destination. 2.7.3 Fuel tax Furthermore, the Act sets out the obligation to provide documentation allowing for the verification of the characteristics of the transaction for the import and export of goods and the export of commodities, Certain modifications are introduced to the fuel tax, incorporating a tax on the emission of carbon dioxide. in both cases when they are conducted through an international intermediary different from the exporter Tax on Fuels comprises the Tax on Liquid Fuels (“ICL”) and the Carbon Dioxide Tax (“IDC”). The reform simplifies at the point of origin or the importer at destination. the fuel taxation structure, keeping the same tax burden effective prior to the reform. 2.7.1.4 Optional Tax revaluation By means of Law No. 27,430, subsection c) of Section 7 of Chapter I of Title III of Law No. 23,966 was modified, establishing the fuel tax exemption for the transfers of certain taxable products used as raw material The Act provides that Companies may opt to make a tax revaluation of assets located in the country and in petrochemical processes. Later, Decree No. 501/2018, regulated Law No. 23,966 and established that transfers subject to the generation of taxable earnings existing as of December 31, 2017. The special tax on the revaluation of virgin naphtha and pyrolysis gasoline are exempted from the fuel tax when are destined to a petrochemical amount depends on the asset, and will amount to 8% for real estate not accounted for as inventories, 15% for catalytic reform process. real estate accounted for as inventories, and 10 % for personal property and the remaining assets. Once the option is exercised for a certain asset, all assets within the same category should be revalued. This regulatory modification allowed a significant financial saving for the Company as a consequence of the tax exemption on the purchase of virgin naphtha as raw material. The tax result from the revaluation will not be subject to income tax, and the special tax on the amount of the revaluation will not be deductible from such tax. Several regulations (Decrees No. 353/2018 and 613/2018 and General Resolution (AFP) No. 4287), have repeatedly postponed the date for exercising this option based on the international context and the greater volatility in financial variables affecting decision-making regarding the exercise of the option. Even though in NOTE 3: principle the deadline for exercising this option is February 28, 2019 for companies with fiscal years closing as BASIS OF PRESENTATION of December 31, Decree No. 143/19 issued on February 22, 2019 that extended this period by one month, until March 29, 2019. On March 27, 2019, Pampa and CPB have decided to exercise the above-mentioned option (see Note 23). These consolidated financial statements have been prepared in accordance with IFRS issued by IASB. 2.7.1.5 Adjustment These consolidated financial statements have been approved for issue by the Board of Directors dated Law No. 27,430 sets out the following rules for the application of the income tax inflation adjustment March 11, 2019. mechanism: Significant accounting policies adopted in the preparation of these financial statements are described in Note i. a cost adjustment for goods acquired or investments made during fiscal years beginning after January 1, 4, which have been consistently applied in these financial statements, unless otherwise stated. 2018 taking into consideration the variations in the Consumer Price Index: General Level (IPC) published by the National Institute of Statistics and Censuses (INDEC); and These accounting policies have been applied consistently by all Group companies. ii. the application of the comprehensive adjustment provided for by Title VI of the Income Tax Law when variations in the above-mentioned index exceed one hundred percent (100%) over the thirty-six (36) Restatement of financial statements months preceding the closing of the fiscal period to be settled; alternatively, for the first, second and third The financial statements have been stated in terms of the measuring unit current as of December 31, 2018 fiscal year as from its effective date, this proceeding will apply in case the accumulated variation in such in accordance with IAS 29 “Financial reporting in hyperinflationary economies”. price index, calculated from the beginning of the first fiscal year to the closing of each fiscal year, are higher than fifty-five percent (55%), thirty percent (30%) and fifteen percent (15%) for the first, second Comparative information and third year of application, respectively. The comparative information has been stated in terms of the measuring unit current as of December 31, As of the end of fiscal year 2018, an accumulated variation in the price index exceeding the foreseen 55% 2018 in accordance with IAS 29 “Financial reporting in hyperinflationary economies”. condition for the application of the comprehensive adjustment in such first fiscal year has not been evidenced. However, the costs of goods acquired during fiscal year 2018 have been adjusted in accordance with the Certain reclassifications have been made to those financial statements to keep the consistency in the procedure stated in subsection (i). presentation with the amounts of the current year. 2.7.2 Additionally, with the purpose of improving the quality of the revised internal information for decision- Value-added tax making and resource allocation processes, the Company has assigned to each business segment the expenses of the centralized structure and the financial results associated with the management of the net financial debt Reimbursement of favorable balances from investments. and the income tax considered in the Holding and Others segment. A procedure is established for the reimbursement of tax credits originated in investments in property, 196 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 197 CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: (Continuation) NOTE 4: On the other hand, regarding the new hedge accounting model, the Company has not opted for the designation of any hedge relationship at IFRS 9 amended initial adoption date and, consequently, the initial ACCOUNTING POLICIES adoption did not have any impact on the results of operations or the financial position of the Company. Finally, in relation to the change in the impairment methodology for financial assets based on expected credit losses, the Company applied the simplified approach of IFRS 9 for trade receivables and for other The main accounting policies used in the preparation of these financial statements are explained below. receivables with similar risk characteristics. To measure the expected credit losses, rates are calculated for different ranges of days past due on receivables that are grouped by business segment, and based on shared credit risk characteristics. 4.1 The expected credit loss as of January 1, 2018 was determined based on credit loss rates calculated for days New accounting standards, amendments and interpretations past due detailed below: issued by the IASB effective as of December 31, 2018 and adopted by the Company 30 60 90 120 150 180 +180 RATES UNDUE DAYS DAYS DAYS DAYS DAYS DAYS DAYS The Group has applied the following standards and/or amendments for the first time for their annual reporting period commencing January 1, 2018 Distribution of energy 8% 8% 12% 19% 26% 59% 69% 69% - IFRS 15 “Revenue from contracts with customers” (issued in May 2014 and amended in September 2015) Rest of business segments 0.32% 0.93% 8.11% 19.61% 35.69% 45.63% 59.00% 63.01% - IFRS 9 “Financial instruments” (amended in July 2014) - IFRS 2 “Share based payments” (amended June 2016) - IFRIC 22 “Foreign currency transactions and advance consideration” (issued in December 2016) The loss allowance for trade receivables adjustment as of January 1, 2018 for the application of the expected - Annual improvements to IFRS Standards - Cycle 2014-2016 (issued in December 2016) credit losses methodology to the loss allowance as of December 31, 2017, stated in terms of the measuring unit current as of December 31, 2018, amounted to $ 153 million and is detailed as follows: The impact of the main issues related to the initial application of IFRS 9 and IFRS 15 is disclosed below, the application of the rest of the standards, amendments or interpretations did not have any impact on the results of the operations or the financial position of the Company, neither on the accounting policies applicable as from January 1, 2018. Loss allowance for trade receivables calculated under IAS 39 as of 12/31/2017 822 Adjustment to the opening balance of retained earnings 153 4.1.1 Loss allowance for trade receivables calculated under IFRS 9 as of 01/01/2018 975 Impacts of adoption 4.1.1.1 IFRS 15 The Company opted to apply IFRS 15 retrospectively as from of January 1, 2018, only in relation to contracts The loss allowance for other receivables adjustment as of January 1, 2018 for the application of the expected that were not completed at the date of initial application, recognizing, when applicable, the cumulative effect credit losses methodology to the loss allowance as of December 31, 2017, stated in terms of the measuring unit of the application as an adjustment to the opening balance of retained earnings. current as of December 31, 2018, amounted to a decrease of $ 39 million and is detailed as follows: The management has assessed the effects of the application of IFRS 15, in relation to the contracts not completed as of January 1, 2018 and has not identified differences related to the identification of performance obligations, nor the methodology for allocating prices to those obligations, that could affect the amount or Loss allowance for other receivables calculated under IAS 39 as of 12/31/2017 256 timing of revenue recognition and, as a consequence, the Company did not recognize any adjustment to the Adjustment to the opening balance of retained earnings (39) opening balance of retained earnings. Finally, no significant contract assets or contract liabilities to be separately Loss allowance for other receivables calculated under IFRS 9 as of 01/01/2018 217 presented in accordance with IFRS 15, have been identified. 4.1.1.2 IFRS 9 The Company applied IFRS 9 amended as from January 1, 2018, with the practical expedient permitted The detailed adjustments to the opening balance in equity as a result of the application of IFRS 9, stated in under the standard, without restating comparative periods. terms of the measuring unit current as of December 31, 2018, are disclosed net of tax effect for a total amount of $ 80 million, with counterpart in retained earnings of $ 55 million and in non-controlling interest of $ 25 million. The Company has reviewed its financial assets measured and classified at fair value through profit and loss or at amortized cost and has concluded that satisfy conditions to maintain the classification. As a result, the In the prior year, the calculation of the loss allowance for trade receivables and other receivables was initial adoption did not affect the classification and measurement of financial assets of the Company. assessed based on the incurred loss model, and considered the existence of objective evidence of default for the recognition of losses in the statement of comprehensive income. 198 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 199 CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: (Continuation) NOTE 4: (Continuation) Finally, although cash, cash equivalents and financial assets are also subject to the impairment requirements - IFRS 9 “Financial instruments”: application guidance modified in October 2017, in relation to the of IFRS 9, the identified impairment loss is immaterial. classification of financial assets in the case of contractual terms that change the timing or amount of contractual cash flows to determine whether the cash flows that could arise due to that contractual term are solely payments of principal and interest on the principal amount. It is effective for annual 4.2 periods beginning on or after January 1, 2019, early adoption is permitted. The Company estimates that its application will not have any impact on the Company´s results of operations or financial position. New accounting standards, amendments and interpretations - IAS 28 “Investments in associates and joint ventures”: amended in October 2017. Clarifies IFRS 9 issued by the IASB which are not yet effective and have not applies to other financial instruments in an associate or joint venture to which the equity method is not applied. It is applicable to annual periods beginning on or after January 1, 2019, early adoption is been early adopted by the Company permitted. The Company estimates that its application will not have any impact on the Company’s results of operations or financial position. - IFRS 16 “Leases”: issued in January 2016 and replaces the current guidance in IAS 17. It defines a lease as a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) - Improvements to IFRSs – 2015-2017 Cycle: amendments issued in December 2017 that are for a period of time in exchange for consideration. Under this standard, lessees have to recognize effective for periods beginning on or after January 1, 2019. The Company estimates that these a lease liability reflecting future lease payments and a ‘right-of-use asset’ for lease contracts. This amendments will not have any impact on the Company’s operating results or financial position. is a significant change compared to IAS 17 under which lessees were required to make a distinction between a finance lease (on balance sheet) and an operating lease (off balance sheet). IFRS 16 - IAS 19 “Employee benefits”: amended in February 2018, establishes changes for measurement of contains an optional exemption for lessees in case of short-term leases and leases for which the past services costs and net interest in case of post-employment defined benefit plans amendments, underlying asset is of low value assets. The IFRS 16 is effective for annual periods beginning on or curtailments or settlements. It is applicable to plan amendments, curtailments or settlements after 1 January 2019. occurring on or after 1 January 2019. The Company will apply the practical expedients permitted under IFRS 16, in relation to the lease contracts previously identified as such under IAS 17, retrospectively with the cumulative effect - Conceptual Framework: the IASB issued a revised conceptual framework for financial reporting that recognised as an adjustment to the opening balance of retained earnings as of January 1, 2019, will replace the current framework. However, the framework is not a standard, nor does it replace any without restating the comparative information. existing standard. The set of concepts of the revised conceptual framework is effective immediately The company will recognise right-of-use assets for an amount equal to the lease liability at the for the IASB and Interpretations Committee. It is effective for annual periods beginning on or adoption date (which is equivalent to the present value of the remaining lease payments), adjusted after January 1, 2020 for companies with financial statements under IFRS that use the conceptual by the amount of any prepaid or accrued lease payments as of December 31, 2018. The Company framework to develop accounting policies when no IFRS Standard applies to a particular transaction. is ending the analysis of its application and estimates that the initial application will not have a significant impact in retained earnings. - IFRS 3 “Business Combinations”: amended in October 2018. Clarifies the business definition and establishes guidelines to determine whether a transaction should be accounted as a business The Company, will maintain the recorded book value for the right-of-use assets and lease liabilities combination or as an asset acquisition. It is applicable to acquisition transactions on or after January previously classified as finance leases under IAS 17, at the adoption date. 1, 2020 and early adoption is permitted. Finally, no transition adjustments will be made for leases in which Pampa is a lessor. - IAS 1 “Presentation of financial statements” and IAS 8 “Accounting policies, changes in - IFRS 17 “Insurance contracts”: issued in May 2017. Replaces IFRS 4, which was brought in as accounting estimates and errors”: amended in October 2018. Clarify the definition of material an interim standard in 2004 establishing the dispensation to carry on accounting for insurance and incorporate the concept of “obscured information” when there is a similar effect to omitting or contracts using national accounting standards, resulting in a multitude of different approaches. IFRS misstating that information. It is applicable prospectively to annual periods beginning on January 1, 17 establishes the principles for recognition, measurement, presentation and disclosure related to 2020 and early adoption is permitted. insurance contracts and shall by applied for annual reporting periods beginning on or after January 1, 2021, early application for entities that apply IFRS 9 and IFRS 15 is permitted. The Company is analyzing the impact of the application of IFRS 17, however, it estimates that it will not have any 4.3 impact on the Company’s results of operations or financial position. Effects of changes in inflation and foreign exchange rate - IFRIC 23 “Uncertainty over Income Tax Treatments”: issued in June 2017. Clarifies how to apply IAS 12 when there is uncertainty over income tax treatments to determine income tax. According to 4.3.1 the interpretation, an entity shall reflect the effect of the uncertain tax treatment by using the method Functional and presentation currency that better predicts the resolution of the uncertainty, either through the most likely amount method or the expected value method. Additionally, an entity shall assume that the taxation authority will Information included in the financial statements is measured in the functional and presentation currency of examine the amounts and has full knowledge of all related information in assessing an uncertain the Company, which is the currency of the primary economic environment in which the entity operates. The tax treatment in the determination of income tax. The interpretation shall apply for annual reporting functional currency is Argentine peso, which is the Group’s presentation currency. periods beginning on or after January 1, 2019, early application is permitted. The Company estimates that application of IFRIC 23 will not have any impact on the Company’s results of operations or IAS 29 “Financial reporting in hyperinflationary economies” requires for financial statements of an entity financial position. whose functional currency is the currency of a hyperinflationary economy, whether they are based on a historical cost approach or a current cost approach, to be stated in terms of the measuring unit current at the end of the reporting year. In general terms, by applying to non-monetary items the change in a general price index from the date of acquisition or the date of revaluation, as appropriate, to the end of the reporting period. 200 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 201 CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: (Continuation) NOTE 4: (Continuation) In order to determine whether an economy is categorized as a high inflation economy under IAS 29, the The adjustment for inflation was calculated considering the price index established by the FACPCE based on standard details several factors to be assessed, including the existence of a cumulative inflation rate over three the price index published by the INDEC. As of December 31, 2018, the price index amounted to 184,255, with years approaching, or exceeding, 100%. Cumulative inflation over the last three years exceeds 100%. Therefore, an inflation rate of 47.6% and 148.0% for the periods of 12 and 36 months, ended on that date, respectively. the Argentine economy should be considered a high inflation economy under IAS 29 as from July 1, 2018. The standard establishes that the adjustment methodology should be applied from its last application date, which 4.3.2 was February 2003. Transaction and balances in foreign currency In an inflationary period, an entity holding an excess of monetary assets over monetary liabilities loses Foreign currency transactions are translated into the functional and presentation currency using the exchange purchasing power, and an entity with an excess of monetary liabilities over monetary assets gains purchasing rates as of at the date of the transaction or measurement, if there are remeasured items. Foreign exchange power, provided such items are not subject to an adjustment mechanism. gain and loss resulting from the settlement of any transaction and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of In turn, Law No. 27,468, published in the BO on December 4, 2018, amended Article 10 of Law No. 23,928 comprehensive income, net of inflation effect, unless they have been capitalized. as amended, establishing that the repeal of all legal or regulatory standards that establish or authorize the indexation by prices, monetary update, variation of costs or any other form of repowering of debts, taxes, The exchange rates used are as follows: buying rate for monetary assets, selling rate for monetary liabilities, prices or rates of goods, works or services, does not include financial statements, for which the provisions of average rate at the end of the year for balances with related parties, and transactional exchange rate for foreign article 62 of Law No. 19,550 as amended will continue to be applicable. Additionally, the aforementioned law currency transactions. repealed of Decree No. 1,269 / 2002 dated on July 16, 2002 as amended and delegated to the PEN, through its controlling agencies, to establish the date from which the mentioned provisions will take effect in relation 4.3.3 to the presentation of financial statements. Therefore, through General Resolution 777/2018, published in the Group companies BO on December 28, 2018, the CNV provided that entities subject to its control should apply the restatement Results and financial position of subsidiaries and associates that have a different functional currency from method in a constant currency as established by IAS 29 for financial statements, interim financial statements the presentation currency are translated into the presentation currency as follows: and special purposes financial statements for periods ending as from December 31, 2018. - assets and liabilities are translated using the closing exchange rate; The main procedures for adjusting for inflation are the following: - gains and losses are translated using the exchange rates prevailing at the date of the transactions, stated in terms of the measuring unit current at the end of the reporting year. - Monetary assets and liabilities are not restated since they are already stated in terms of the measuring unit current at the end of the reporting year. The results from the remeasurement process into the functional currency are recorded in line “Financial - Assets and liabilities subject to adjustments based on specific agreements are restated in accordance results” of the Consolidated Statement of Income. with such agreements. - Non-monetary assets and liabilities are restated by applying the variation of the general price index from The results from the translation process into the functional currency to presentation currency transactions the acquisition or revaluation to the end of the reporting year. are recognized in “Other Comprehensive Income”, net of inflation effect. When an investment is sold or disposed of, in whole or in part, the related differences are recognized in the Consolidated Statement of Income as part - Equity components are restated by applying the variation of the general price index from the date of of the gain/loss on the sale or disposal. contribution, or from the moment they arose by any other means. - Non-monetary assets and liabilities measured at fair value are not restated since they are already stated in terms of the measuring unit current at the end of the reporting year. 4.4 - Components of the statement of comprehensive income are restated by applying the variation of the general price index form the date on which the income and expenses were originally recognized. Principles of consolidation and equity accounting - The loss or gain derived from the net monetary position of the Company is included in the statement of 4.4.1 comprehensive income, in “Financial results”, under the heading “Gain on monetary position”. Subsidiaries - All the comparative figures are restated by applying the variation of the general price index until the end of the current year. Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect For initial application of the restatement method, equity accounts were restated as follows: those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. - Share capital and treasury shares were restated from the date of subscription, repurchase or from last adjustment for inflation application date, whichever happened later. The resulting amount was included The acquisition method of accounting is used to account for business combinations by the group (see Note in “Adjustment of capital” and “Adjustment of own shares in portfolio” lines, respectively. 4.4.5 below). - Share premiums were restated from the date of the respective merger. Intercompany transactions, balances and unrealized gains on transactions between Group companies are - Exchange differences on translation were stated in real terms. eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment - Other comprehensive income or loss were restated from the date of each accounting registration. of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure - Reserves were not restated in the initial application. consistency with the policies adopted by the Group. 202 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 203 CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: (Continuation) NOTE 4: (Continuation) Since the functional currency of some subsidiaries is different from the functional currency of the Company, 4.4.5 exchange gains or losses arise from intercompany operations. Those exchange results are included in “Financial Business combinations results” in the Consolidated Statement of Comprehensive Income under the heading Foreing Currency Exchage Difference, net. The acquisition method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisitions comprises: Non-controlling interests in the results and equity of subsidiaries are shown separately in the Consolidated i. the fair value of the transferred assets, Statement of Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated Statement of Financial Position respectively. ii. the liabilities incurred to the former owners of the acquired business, iii. the equity interests issued by the group, 4.4.2 Associates iv. the fair value of any asset or liability resulting from a contingent consideration arrangement, and v. the fair value of any pre-existing equity interest in the subsidiary. Associates are all entities over which the group has significant influence but not control or joint control. This is generally the case where the Group holds between 20% and 50% of the voting rights. Investments in Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are associates are accounted for using the equity method of accounting (see Note 4.4.4 below), after initially being measured initially at their fair values at the acquisition date. The group recognises any non-controlling interest in recognized at cost. the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets. 4.4.3 Joint arrangements Acquisition-related costs are expensed as incurred. The value of the goodwill represents the excess of: i) the consideration transferred, ii) the amount of any non-controlling interest in the acquired entity, and iii) the Under IFRS 11 “Joint Arrangements” investments in joint arrangements are classified as either joint operations acquisition-date fair value of any previous equity interest in the acquired entity, over the fair value of the net or joint ventures. The classification depends on the contractual rights and obligations of each investor, rather identifiable assets acquired is recorded as goodwill. If the fair value of the net identifiable assets of the business than the legal structure of the joint arrangement. The Company has both joint operations and joint ventures. acquired exceeds those amounts, the gain on bargain purchase is recognised directly in profit or loss. Joint operations Where settlement of any part of cash consideration is deferred, the amounts payable in the future are The Company recognizes its direct right to the assets, liabilities, revenues and expenses of joint operations and discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental its share of any jointly held or incurred assets, liabilities, revenues and expenses. These have been incorporated borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier in the financial statements under the appropriate headings. under comparable terms and conditions. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial Joint ventures liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss. Interests in joint ventures are accounted for using the equity method (see Note 4.4.4 below), after initially If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously being recognized at cost. held equity interest in the acquiree is remeasured to fair value at the acquisition date. Any gains or losses arising 4.4.4 from such remeasurement are recognised in profit or loss. The Group has up to 12 months to finalize the Equity Method accounting for a business combination. Where the accounting for a business combination is not complete by the end of the year in which the business combination occurred, the Group reports provisional amounts. Under the equity method of accounting, the investments are initially recognized at cost and adjusted thereafter to recognize the Group’s share of the post-acquisition profits or losses of the investee in profit or loss, 4.4.6 and the Group’s share of movements in other comprehensive income of the investee in other comprehensive Changes in ownership interests income. Dividends received or receivable from associates and joint ventures are recognized as a reduction in The group treats transactions with non-controlling interests that do not result in a loss of control as transactions the carrying amount of the investment. with equity owners of the group. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any When the Group’s share of losses in an equity-accounted investment equals or exceeds its interest in the difference between the amount of the adjustment to non-controlling interests and any consideration paid or entity, together with any long-term interests that, in substance, form part of the net investment, the Group does received is recognized in “Other reserves” within equity attributable to owners of the Company. not recognize further losses, unless it has incurred obligations or made payments on behalf of the other entity. When the Group ceases to consolidate or equity account for an investment because of a loss of control, Unrealized gains on transactions between the Group and its associates and joint ventures are eliminated to joint control or significant influence, any retained interest in the entity is remeasured to its fair value with the the extent of the group’s interest in these entities. Unrealized losses are also eliminated unless the transaction change in carrying amount recognized in profit or loss. This fair value becomes the initial carrying amount for provides evidence of an impairment of the asset transferred. Accounting policies of equity accounted investees the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial have been changed where necessary to ensure consistency with the policies adopted by the Group. asset. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that The carrying amount of equity accounted investments is tested for impairment in accordance with the policy amounts previously recognised in other comprehensive income are reclassified to profit or loss. described below in Note 4.9. If the ownership interest in a joint venture or an associate is reduced but joint control or significant influence is retained, only a proportionate share of the amounts previously recognized in other comprehensive income are reclassified to profit or loss where appropriate. 204 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 205 CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: (Continuation) NOTE 4: (Continuation) Machinery and generation equipment (including any significant identifiable component) are depreciated 4.5 under the unit of production method. Segment reporting The group´s remaining items of property, plant and equipment (including any significant identifiable Operating segments are reported in a manner consistent with the internal reporting provided to the Executive component) are depreciated by the straight-line method based on estimated useful lives, as detailed below: committee. The Executive committee, is the highest decision-making authority, is the person responsible for allocating Buildings: 50 years resources and setting the performance of the entity’s operating segments, and has been identified as the Substations: 35 years person/ body executing the Company’s strategic decisions. High voltage lines: 40 - 45 years Medium voltage lines: 35 - 45 years In segmentation the Company considers transactions with third parties and intercompany operations, which Low voltage lines: 30 - 40 years Transformer centrals: 25 - 35 years are done on internal transfer pricing based on market prices for each product. Meters: 25 years Vehicles: 5 years Furniture, fittings and communication equipment: 5 - 20 years 4.6 Computer equipment and software: 3 years Tools: 10 years Property, plant and equipment Gas Plant and Pipeline: 20 years Property, Plant and Equipment is measured following the cost model. It is recognized at acquisition cost stated in terms of the measuring unit current at the end of the reporting year, less depreciation a less any The depreciation method is reviewed, and adjusted if appropriate, at the end of each year. accumulated impairment. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the 4.7 group and the cost of the item can be measured reliably. The carrying amount of any component accounted Intangible assets for as a separate asset is derecognised when replaced. All other repairs and maintenance are charged to profit or loss during the reporting period in which they are incurred. 4.7.1 Goodwill The cost of work in progress whose construction will extend over time includes, if applicable, the computation Goodwill is the result of the acquisition of subsidiaries. Goodwill represents the excess of the acquisition of financial costs, net of the inflation effect, accrued on loans granted by third parties and other pre-production cost over the fair value of the equity interest in the acquired entity held by the company on the net identifiable costs, net of any income obtained from the sale of commercially valuable production during the launching period. assets acquired at the date of acquisition, stated in terms of the measuring unit current at the end of the reporting year. Works in progress are valued according to their degree of progress. Works in progress are recorded at cost stated in terms of the measuring unit current at the end of the reporting year, less any loss due to impairment, if applicable. For the purpose of impairment testing, goodwill acquired in a business combination is allocated from the acquisition date to each of the acquirer’s cash-generating units or group of CGUs that are expected to benefit The depreciation methods and periods used by the group are described below. from the synergies of the combination. Each unit or group of units that goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. Assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each year. An asset’s carrying amount is written down immediately to its recoverable amount if the asset´s carrying amount 4.7.2 is greater than its estimated recoverable amount. Concession arrangements Gains and losses on disposals are determined by comparing the sale price with the carrying amount, stated Concession arrangements corresponding to Edenor and hydroelectric generation plants Diamanteand in terms of the measuring unit current at the disposal date. The resulting amount is subsequently stated in Nihuiles are not under the scope of the guidelines of IFRIC 12 “Service Concession Arrangements”. terms of the measuring unit current at the end of the reporting year. These concession agreements meet the criteria set forth by the IFRSs for capitalization and are stated in 4.6.1 terms of the measuring unit current at the end of the reporting year less depreciation a less any accumulated Depreciation methods and usefull lives impairment. They are amortized following the straight-line method based on each asset’s useful life, which corresponds to the life of each concession agreement. The group depreciates productive wells, machinery and camps in the oil and gas production areas according to the units of production method, by applying the ratio of oil and gas produced to estimated proved developed oil and gas reserves. The acquisition cost of property with proved reserves is depreciated by applying the ratio of oil 4.7.3 and gas produced to estimated proved oil and gas reserves. Acquisition costs related to properties with unproved Identified intangible assets in acquired investments reserves is valued at cost with recoverability periodically assessed on the basis of geological and engineering estimates of possible and probable reserves that are expected to be proved over the life of each concession. Corresponds to intangible assets identified at the moment of the acquisition of companies. Identified assets meet the criteria established in IFRS for capitalization and are stated in terms of the measuring unit current 206 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 207 CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: (Continuation) NOTE 4: (Continuation) at the end of the reporting year less depreciation a less any accumulated impairment. They are amortized by 4.10.1 the straight-line method according to the useful life of each asset, considering the estimated way in which the Classification benefits produced by the asset will be consumed. The Group classifies its financial assets in the following categories: i. those that are subsequently measured at fair value (either through other comprehensive income or 4.8 through profit or loss), and Assets for oil and gas exploration ii. those that are subsequently measured at amortised cost. The Company uses the successful efforts method of accounting for its oil and gas exploration and production The classification depends on the entity´s business model for managing the financial assets and the activities. This method involves the capitalization of: (i) the cost of acquiring properties in oil and gas exploration contractual cash flow characteristics. and production areas; (ii) the cost of drilling and equipping exploratory wells that result in the discovery of commercially recoverable reserves; (iii) the cost of drilling and equipping development wells, and (iv) the Gains and losses from financial assets measured at fair value, will be recorded in the Statement of estimated asset retirement obligations. Comprehensive Income or in Statement of Other Comprehensive Income. According to the successful efforts method of accounting, exploration costs (including geological and Investments in equity instruments are measured at fair value. For those investments that are not held for trading, geophysical costs), excluding exploratory well costs, are expensed during the period in which they are incurred. the Company may make an irrevocable election at initial recognition to present subsequent changes in other Drilling costs of exploratory wells are capitalized until it is determined that proved reserves exists and they comprehensive income. The Company’s election was to recognize changes in fair value through profit and loss. justify the commercial development. If reserves are not found, such drilling costs are expensed. Occasionally, an exploratory well may determine the existence of oil and gas reserves but they cannot be classified as The company reclassifies financial assets when and only when it changes its business model for managing proved when drilling is complete. In those cases, such costs continue to be capitalized insofar as the well has those financial assets. allowed determining the existence of sufficient reserves to warrant its completion as a production well and the Company is making sufficient progress in evaluating the economic and operating feasibility of the project. 4.10.2 Recognition and derecognition The initial estimated asset retirement obligations in hydrocarbons areas, discounted at a risk adjusted rate, Regular way purchases and sales of financial assets are recognised and derecognised, as applicable, using are capitalized in the cost of the assets and depreciated using the units of production method. Additionally, a trade date accounting or settlement date accounting on the date of contracting or settlement, that is, the date liability at the estimated value of the discounted amounts payable is recognized. Changes in the measurement on which the Company commits itself to purchase or sell an asset. Financial assets are derecognized only when of asset retirement obligations that result from changes in the estimated timing, amount of the outflow of the contractual rights to receive the cash flows from the financial assets have expired or have been transferred resources required to settle the obligation, or the discount rate, are added to, or deducted from, the cost of the and the Company has transferred substantially all the risks and rewards of ownership of the asset. related asset. If a decrease in the liability exceeds the carrying amount of the asset, the excess is recognized immediately in profit or loss. 4.10.3 Measurement At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial 4.9 asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of Impairment of non-financial assets the financial asset. Intangible assets that have an indefinite useful life and goodwill are not subject to amortization and are A gain or loss on a debt investment that is subsequently measured at fair value and is not part of a tested annually for impairment, or more frequently if events or changes in circumstances indicate that they hedging relationship is recognised in profit or loss and disclosed in “Changes in the fair value of financial might be impaired. instruments” within “Other financial Results. A gain or loss on a debt investment that is subsequently measured at amortised cost and is not part of a hedging relationship is recognized in profit or loss when the financial asset Other assets are tested for impairment whenever events or changes in circumstances indicate that the is derecognised or impaired and through the amortization process using the effective interest rate method. carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset´s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset´s fair value The Group subsequently measures equity investments at fair value. Dividends from such investments less costs of disposal and value in use. For the purpose of assessing impairment, assets are grouped at the continue to be recognized in profit or loss as long as they represent a return on investment. lowest levels for which there are separately identifiable cash flows which are largely independent of the cash inflows from other assets or groups of assets (cash generating units or CGUs). 4.10.4 Impairment of financial assets Non-financial assets, other than goodwill, that have been impaired are reviewed for possible reversal of the impairment at the end of each reporting period. As from January 1, 2018, the Company assesses the expected credit losses related to its financial instruments at amortized cost and financial instruments at fair value through other comprehensive income, if applicable. The Company applies the simplified approach allowed by IFRS 9 to measure expected credit losses for trade 4.10 receivables and other receivables with similar risk characteristics. For this purpose, receivables are grouped by business segment and based on shared credit risk characteristics and expected credit losses are determined Financial assets based on rates calculated for different ranges of default days from the due date. 208 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 209 CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: (Continuation) NOTE 4: (Continuation) The expected loss rates are based on the sales collection profiles over a period of 24 months before the end value of derivative financial instruments traded in active markets is disclosed based on their quoted market of each year, considering historical credit losses experienced within this period that are adjusted, if applicable, prices and fair value of instruments that are not traded in active markets is determined using different valuation to reflect forward-looking information that could affect the ability of customers to settle the receivables. techniques. Subsequent accounting of changes in fair value depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. The Company may designate derivative Edenor’s allowance for impairment of receivables is assessed based on the delinquent balance, which financial instruments in the following categories: comprises all such debt arising from the bills for electricity consumption of small-demand (T1), medium- demand (T2), and large-demand (T3) customers that remain unpaid 7 working days after their first due dates. i. fair value hedge of recognized assets or liabilities or over firm commitment (fair value hedge); The Company’s Management records an allowance applying to the delinquent balances of each customer ii. cash flow hedges of a particular risk associated with recognized assets and liabilities and highly probable category an uncollectibility rate that is determined according to each customer category based on the historical future transactions (cash flow hedges), or comparison of collections made. iii. net investment hedge in foreign operation (net investment hedges). Additionally, and faced with temporary and/or exceptional situations, Edenor’s Management may redefine At the beginning of the hedge relationship, the Group documents the economic relationship between the the amount of the allowance, specifying and supporting the criteria used in all the cases. hedging instruments and the hedged items, even if it is expected that changes in the cash flows of the hedging instruments offset changes in the cash flows of the hedged items. The Group documents its objective and risk 4.10.5 management strategy to carry out its hedging operations. Offsetting of financial instruments Changes in the measurement of derivative financial instruments designated as cash flow hedge, which have Financial assets and liabilities are offset, and the net amount reported in the consolidated statements of been determined as effective, are recognized in equity. The gain or loss related to the ineffective portion is financial position, when there is a legally enforceable right to offset the recognized amounts, and there is an recognized immediately in profit or loss. Changes in the measurement of derivative instruments that do not intention to settle on a net basis, or realize the asset and settle the liability simultaneously. qualify for hedge accounting are recognized in profit or loss. Changes in the measurement of derivative financial instruments designated as effective cash flow hedges 4.11 are recognized in other comprehensive income. The gain or loss related to the ineffective portion is recognized immediately in the statement of income. Changes in the measurement of derivative financial instruments that Trade and other receivables do not qualify for hedge accounting or are not designated as hedges are recognized in the statement of income. Trade receivables and other receivables are recognized at fair value and subsequently measured at amortized cost, using the effective interest method, less provision for impairment, if applicable. The Company partially hedges its exchange rate risk mainly through the execution of forward contracts denominated in U.S. dollars. However, the Company has not formally designated privately negotiated derivatives The Company recongnises provisions for impairment on trade and other receivables based on expected as hedging instruments. Therefore, changes in their value are disclosed in “Foreign currency exchange difference”, credit loss model described in Note 4.10.4. Trade receivables are written off when there is no reasonable under “Other financial results”. expectation of recovery. The Company considers the following default indicators: i) voluntary reorganization proceedings, bankruptcy or initiation of judicial demands; ii) insolvency implying a high impossibility of collection and iii) past due balances greater than 90 days. 4.13 Receivables from CAMMESA, documented as LVFVDs, have been valued at their amortized cost, the Inventories maximum value of which is their recoverable amount at the period’s closing date. The amortized cost has been This line item includes crude oil stock, raw materials, work in progress and finished products relating to determined based on the estimated future cash flows, discounted based on a rate reflecting the time value of Petrochemicals and Oil and Gas business segments as well as materials and spare parts relating to the Generation money and the risks inherent to the transaction. and Distribution of Energy business segments. Receivables arising from services billed to customers but not collected by Edenor, as well as those arising Inventories are stated at the lower of cost stated in terms of the measuring unit current at the end of the from services rendered but unbilled at the closing date of each financial year are recognized at fair value and reporting year or net realizable value. Cost is determined using the weighted average price method. The cost of subsequently measured at amortized cost using the effective interest rate method. inventories includes expenditure incurred in purchases and production and other necessary costs to bring them to their existing location and condition. In case of manufactured products and production in process, the cost Receivables from electricity supplied to low-income areas and shantytowns are recognized, also in line with includes a portion of indirect production costs, excluding any idle capacity (slack). revenue, when the Framework Agreement has been renewed for the period in which the service was provided. The net realizable value is the estimated selling price in the ordinary course of business less the estimated Where applicable, allowances for doubtful tax credits have been recognized based on estimates on their cost of completion and the estimated costs to make the sale. uncollectibility within their statutory limitation period, taking into consideration the Company’s current business plans. The assessment of the recoverable value of these assets is made at each reporting date, and the resulting loss is recognized in the statement of income when the inventories are overstated. 4.12 The Company has classified materials and spare parts into current and non-current, depending on the timing Derivative financial instruments and hedging account in which they are expected to be used for replacement or improvement on existing assets. The portion of Derivative financial instruments are measured at fair value, determined as the amount of cash to be collected materials and spare parts for maintenance or improvements on existing assets, is exposed under the heading or paid to settle the instrument as of the measurement date, net of any prepayment collected or paid. Fair “Property, plant and equipment”. 210 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 211 CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: (Continuation) NOTE 4: (Continuation) All equity items are stated in terms of the measuring unit current at the end of the reporting year, except for 4.14 “Share Capital” and “Treasury Shares”, which represent the subscribed and integrated capital in circulation and portfolio, respectively. Adjustments derived from restating those items into the measuring unit current at the Non-current assets (or disposal group) held for sale end of the reporting year are disclosed in items “Share capital Adjustment” and “Treasury shares Adjustment”, and discontinued operations respectively. Non-current assets are classified as held for sale if their carrying amount will be recovered principally a. Share capital through a sale transaction rather than through continuing use and a sale is considered highly probable. They are Share capital represents the capital issued, composed of the contributions that were committed and/ measured at the lower of their carrying amount stated in terms of the measuring unit current at the end of the or made by the shareholders and represented by shares that comprise outstanding shares at nominal reporting year and fair value less costs to sell, except deferred tax assets, assets arising from employee benefits, value. Ordinary shares are classified as equity. The restatement into the measuring unit current at financial assets and investment property that are carried at fair value and contractual rights from insurance the end of the reporting year has been applied from the date of subscription. The restatement of contracts, which are specifically exempt from this requirement. Treasury shares and Treasury shares cost have been applied from the date of each share repurchase transaction. An impairment loss is recognised for any initial or subsequent write-down of the asset (or disposal group) b. Share premium until fair value less costs to sell. A gain is recognised for any subsequent increases in fair value less costs to It includes: sell of an asset (or disposal group), but not in excess of any cumulative impairment loss previously recognised. The gain or loss not previously recognised by the date of the sale of the non-current asset (or disposal group) i. The portion of the collected price exceeding the face value of the shares issued by the Company, is recognised at the date of derecognition. net of absorbed accumulated losses. The restatement into the measuring unit current at the end of the reporting year has been applied from the date of subscription. Non-current assets (including those that are part of a disposal group) are not depreciated or amortized while ii. The difference between the fair value of the consideration paid/collected and the accounting they be classified as held for sale. Interest and other expenses attributable to the liabilities of a disposal group value of the equity interest in the subsidiary acquired/sold/diluted which does not represent a classified as held for sale continue to be recognized. loss of control or significant influence. The restatement into the measuring unit current at the end of the reporting year has been applied from the date of each purchase transaction after Non-current assets classified group of assets classified as held for sale are presented separately from the restating the result into the measuring unit current at the date of each purchase. other assets in the balance sheet. The liabilities of a disposal group classified as held for sale are presented iii. The difference between the proportional equity value registered before the merger of subsidiary separately from other liabilities in the balance sheet. These assets and liabilities are not offset. and the value resulting from applying to the subsidiary’s merged equity interest, the new ownership share resulting from the exchange relationship. The restatement into the measuring If it is a discontinued operation, that is, an item which has been disposed of or classified as held for sale; and unit current at the end of the reporting year has been applied from the merger effective date (i) it represents a significant business line or geographic area which may be considered separate from the rest; as determined by the Merger Commitment. (ii) it is part of a single coordinated plan to dispose of a significant business line or operating geographic area which may be deemed separate from the rest; or (iii) it is a subsidiary entity acquired solely for the purpose c. Legal reserve of reselling it; a single amount is disclosed in the statement of comprehensive income, which shows results of In accordance with the Argentine Commercial Companies Law No. 19,550, 5% of the profit arising from discontinued operations, net of tax, including the result for the valuation at fair value less cost of sales or asset the statement of comprehensive income for the year, prior years’ adjustments, the amounts transferred disposal costs, if applicable. from other comprehensive income and prior years’ accumulated losses, must be appropriated to a legal reserve until such reserve equals 20% of the Company’s share capital and the related adjustment of share capital. When for any reason, the amount of this reserve will be shorter, dividends may not be 4.15 distributed, until such amount is reached. The amount is stated at book value at the beginning of the first period of application of IAS 29 and subsequently is stated in terms of the measuring unit current at Cash and cash equivalents the end of the reporting year. Any amounts of legal reserve appropriated after IAS 29 first application, is restated from the end of the prior year. For the purpose of presentation in the Consolidated Statement of Cash Flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments d. Voluntary reserve with original maturities of three months or less that are readily convertible to known amounts of cash and which This reserve results from an allocation made by the Shareholders’ Meeting, whereby a specific amount are subject to an insignificant risk of changes in value. If any, bank overdrafts are shown within borrowings in is set aside to cover for the funding needs of projects and situations associated with Company current liabilities in the Consolidated Statement of Financial Position and there are not disclosed under Cash policies. The amount is stated at book value at the beginning of the first period of application of IAS and cash equivalents in the Consolidated Statement of Cash Flows since they are not part of the Company’s 29 and subsequently is stated in terms of the measuring unit current at the end of the reporting year. cash management. Any amounts of legal reserve appropriated after IAS 29 first application, is restated from the end of the prior year. 4.16 e. Other reserves It includes the result of operations with non-controlling interest that do not result in a loss of control Shareholder´s equity and reserves for stock compensation plans. The amount is stated at book value at the beginning of Equity’s movements have been accounted for in accordance with the pertinent decisions of shareholders’ the first period of application of IAS 29 and subsequently is stated in terms of the measuring unit meetings and legal or regulatory standards. current at the end of the reporting year. Any amounts of legal reserve appropriated after IAS 29 first application, is restated from the end of the prior year. 212 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 213 CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: (Continuation) NOTE 4: (Continuation) f. Retained earnings (Acumulated losses) - Compensations payable in shares Retained earnings comprise accumulated profits or losses without a specific appropriation; positive earnings can be distributable by the decision of the Shareholders’ meeting, as long as they are not i. Stock-based Compensation Plan – Officers and other key staff: the fair value of the received subject to legal restrictions. These earnings comprise prior years’ earnings that were not distributed, services is measured at the fair value of shares at the time of granting, and is disclosed during the amounts transferred from other comprehensive income and prior years’ adjustments, according the vesting period, together with the corresponding increase in equity. to IFRS. The restated amount is derived from the difference between the equity at the beginning ii. Stock-based Compensation Plan -Edenor: The fair value of the services received is disclosed as of the first period of application of IAS 29 and the restatement of assets, liabilities and the rest of an expense and determined by reference to the fair value of the granted shares and charged to the equity items. Subsequently, the amounts are restated into the measuring unit current at the profit or loss in the vesting period, or immediately if vested at the grant date. end of the reporting year. General Resolution No. 593/2011 issued by the CNV provided that Shareholders in the Meetings at which they should decide upon the approval of financial statements in which the Retained earnings 4.18 account has a positive balance, should adopt an express resolution as to the allocation of such balance, whether to dividend distribution, capitalization, setting up of reserves or a combination of Trade payables and other payables these. The Company’s Shareholders have complied with these requirements. Trade payables and other payables are recognized initially at fair value and subsequently measured at g. Other comprehensive income amortized cost using the effective interest method, except for particular matters described below. It includes gains and losses from the remeasurement process of foreign operations and actuarial gains and losses for defined benefit plans and the related tax effect, net of the inflation effect. 4.18.1 Customer guarantees h. Dividends distribution Dividend distribution to Company shareholders is recognized as a liability in the consolidated financial Customer guarantees are initially recognized at fair value and subsequently measured at amortized cost statements in the year in which the dividends are approved by the Shareholders’ Meeting. The using the effective interest method. distribution of dividends is made based on the Company’s Stand-Alone Financial Statements. The restatement into the measuring unit current at the end of the reporting year has been applied from In accordance with the Concession Agreement, Edenor is allowed to receive customer guarantees in the the date of the Shareholders’ Meeting in which distsribution decision has been taken. following cases: i. When the power supply is requested and the user is unable to provide evidence of his legal ownership of the premises; 4.17 ii. When service has been suspended more than once in one-year period; Compensation plans iii. When the power supply is reconnected and Edenor is able to verify the illegal use of the service (fraud). iv. When the customer is undergoing liquidated bankruptcy or reorganization proceedings. Note 45 details the conditions applicable to the different compensation agreements, the payment conditions, and the main variables considered in the corresponding valuation model. Edenor has decided not to request customer guarantees from residential tariff customers. The following guidelines under IFRS 2 have been taken into consideration for the registration of stock-based Customer guarantees may be either paid in cash or through the customer’s bill and accrue monthly interest compensations: at a specific rate of Banco de la Nación Argentina for each customer category. - Compensations payable in cash: When the conditions for which Edenor is allowed to receive customer guarantees no longer exist, the customer’s account is credited for the principal amount plus any interest accrued thereon, after deducting, if i. Compensation agreements – Senior Management: the reasonable value of the received services appropriate, any amounts receivable which Edenor has with the customer. is measured through a share appreciation estimate using the Black-Scholes-Merton valuation model. The fair value of the amount payable under the compensation agreements is accrued 4.18.2 and acknowledged as an expense, with the corresponding increase in liabilities. Liabilities are Edenor’s customer refundable contributions revalued on each balance sheet date. Any change in the fair value of liabilities is disclosed under profit or loss. Edenor receives assets or facilities (or the cash necessary to acquire or built them) from certain customers for services to be provided, based on individual agreements and the provisions of ENRE Resolution No. 215/12. ii. Company Value Sharing (“Company-Value Compensation”) – Pampa (as PEPASA´s successor These contributions are initially recognized as trade payables at fair value against Property, plant and equipment, company): the Black-Scholes-Merton financial valuation model was used to make this estimate, and are subsequently measured at amortized cost using the effective interest rate method. taking into consideration the enforceability of the remuneration. The fair value of the amount payable for the compensation plan is accrued and acknowledged as an expense, with the 4.18.3 recognition of an increase in liabilities. Liabilities are revalued on each balance sheet date and at Edenor’s particular matters their settlement date. Any change in the fair value of liabilities is disclosed under profit or loss. iii. Annual Variable Compensation granted to certain officers for the performance of technical The recorded liabilities for the debts with the FOTAE, the penalties accrued, whether imposed or not yet and administrative duties amounting to 7% of the EBDA accrued (EBITDA less paid income issued by the ENRE (Note 2.3), and other provisions are the best estimate of the settlement value of the present tax, less total net financial costs, less interest on its own capital, considering an annual 10% obligation in the framework of IAS 37 provisions at the date of these financial statements. dollar-denominated rate) of PEPASA´s continuing business in Pampa. The Company recognizes The balances of ENRE Penalties and Discounts are adjusted in accordance with the regulatory framework a provision (liability) and an expense for this EBDA Compensation based on the previously applicable thereto and are based on Edenor’s estimate of the outcome of the RTI process described in Note 2.3, mentioned formula. 214 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 215 CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: (Continuation) NOTE 4: (Continuation) whereas the balances of the loans for consumption (mutuums) are adjusted by a rate equivalent to the monthly related service are recognised in respect of employees’ services up to the end of the reporting period and are average yield obtained by CAMMESA from its short-term investments. measured at the amounts expected to be paid when the liabilities are settled. The liabilities are presented as current salaries and social security payable in the consolidated statement of financial position. 4.21.2 4.19 Defined benefit plans Borrowings Labor costs liabilities are accrued in the periods in which the employees provide the services that trigger the Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently consideration. measured at amortized cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognized in profit or loss over the period of the borrowings, using the effective interest method. The cost of defined contribution plans is periodically recognized in accordance with the contributions made by the Company. Borrowings are removed from the statement of financial position when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability Additionally, the Company operates several defined benefit plans. Defined benefit plans define an amount that has been extinguished or transferred to another party and the consideration paid, including any non-cash of pension benefit that an employee will receive on retirement, depending on one or more factors, such as assets transferred or liabilities assumed, is recognised in profit or loss as other income or finance costs. age, years of service and compensation. In accordance with conditions established in each plan, the benefit may consist in a single payment, or in making complementary payments to those made by the pension system. Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period The defined benefit liability recognized in the financial statement balance sheet, at the end of the reporting period, is the present value of the defined benefit obligation net of the fair value of the plan assets, when Borrowing costs applicable. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the General and specific borrowing costs that are directly attributable to the acquisition, construction or estimated future cash outflows using future actuarial assumptions about demographic and financial variables production of a qualifying asset are capitalized during the period of time that is required to complete and that affect the determination of the amount of such benefits. prepare the asset for its intended use or sale, net of the inflation effect. Qualifying assets are assets that necessarily take a substantial period of time to get ready for their intended use or sale. Actuarial gains and losses from experience adjustments and changes in actuarial assumptions, are recognized in other comprehensive income (loss) in the period in which they arise and past service costs are recognized Investment income earned on the temporary investment of specific borrowings pending their expenditure immediately in the statement of income (loss). on qualifying assets is deducted from the borrowing costs eligible for capitalization. Other borrowing costs are expensed in the period in which they are incurred. 4.22 Provisions, contingent liabilities and contingent assets 4.20 Provisions are recognized when the group has a present legal or constructive obligation as a result of a past Deferred revenues event, it is probable that an outflow of resources will be required to settle that obligation, and the amount can Non-refundable customer contributions be reliably estimated. Provisions are not recognised for future operating losses. Edenor receives assets or facilities (or the cash necessary to acquire or built them) from certain customers Provisions are measured at the present value of the expenditures expected to be required to settle the present for services to be provided, based on individual agreements. The assets received are recognized by Edenor as obligation, taking into account the best available information as of the date of the financial statements based Property, plant and equipment with a contra-account in deferred revenue, the accrual of which depends on the on assumptions and methods considered appropriate and taking into account the opinion of each Company’s nature of the identifiable services, in accordance with the following: legal advisors. As additional information becomes available to the Company, estimates are revised and adjusted periodically. The discount rate used to determine the present value reflects current market assessments of the i. Customer connection to the network: revenue is accrued until such connection is completed; time value of money and the risks specific to the liability. The increase in the provision due to the passage of ii. Continuous provision of the electric power supply service: throughout the shorter of the useful life of time is recognised as other financial results. the asset and the term for the provision of the service Contingent liabilities are possible obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future events not wholly within the control of the entity; or present obligations that arise from past events but it is not probable that an outflow of resources 4.21 will be required to its settlement; or whose amount cannot be measured with sufficient reliability. Employee benefits Contingent liabilities are not recognised. The Company discloses in notes to the financial statements a brief 4.21.1 description of the nature of material contingent liabilities. Short-term obligations Contingent liabilities, whose possibility of any outflow in settlement is remote, are not disclosed unless they Liabilities for wages and salaries, including non-monetary benefits and accumulating sick leave that are involve guarantees, in which case the nature of the guarantee is disclosed. expected to be settled wholly within 12 months after the end of the period in which the employees render the 216 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 217 CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: (Continuation) NOTE 4: (Continuation) Contingent assets are possible assets that arise from past events and whose existence will be confirmed ii. Edenor’s other revenues from contracts with customers only by the occurrence or non-occurrence of uncertain future events not wholly within the control of the entity. Edenor recognizes other revenues from contracts with customers in relation to connection and reconnection services, rights of use on poles and transport of energy to other distribution companies Contingent assets are no recognised. The Company discloses in notes to the financial statements a brief on a monthly basis as services are rendered based on the price established in each contract. Revenues description of the nature of material contingent assets, where the related inflows of economic benefits are are not adjusted for the effect of financing components as sales’ payments are not deferred over time, estimated to be probable. which is consistent with market practice. 4.23.3 4.23 Oil and gas segment Revenue from contracts with customers The Company recognizes revenues from the sale of gas when control of the product is transferred, that is, at the output of each area, when the gas is delivered to the carrier and to the extent there is no unfulfilled 4.23.1 obligation that could affect the acceptance of the product by the client. In all cases the transport of the gas is in Generation segment charge of the client. Revenues from these sales are recognized based on the price by product specified in each contract or agreement to the extent that it is highly probable that a significant reversal will not occur. i. Revenues from SPOT market sales (SEE Resolution No. 19 /2017) The Company recognizes revenues from i) power availability on a monthly basis as the different Revenues are not adjusted for the effect of financing components as sales are made with a credit term not power stations are available to generate and ii) energy generated when the delivery of energy is exceeding 45 days, which is consistent with market practice. effective, based on the price specified in the applicable Resolution depending on the technology of each plant, including the additional remuneration, if applicable. Revenues are not adjusted for the 4.23.4 effect of financing components as sales are made with an average credit term of 45 days. Petrochemical segment The Company recognizes revenues from the sale of petrochemical products, whether in local or foreign ii. Revenues from contracts with CAMMESA (SE Resolution No. 220/07, SEE Resolution No. 21/16, market, when the control of the product is transferred, that is, when the products are delivered to the client SEE Resolution No. 287/17 and Renovar Programs) and there is no unfulfilled obligation that could affect the acceptance of the product by the client. The delivery, The Company recognizes revenues from supply contracts with CAMMESA for i) power availability, when as established in each contract, is occurs: applicable, on a monthly basis, as the different power plants are available to generate and ii) energy generated when the delivery of energy is effective, based on the price established in each contract. a. when the products are dispatched and transported by and in charge of the client, or, Revenues are not adjusted for the effect of financing components as sales are made with an average b. when the products have been dispatched by the Company to a specific location, the obsolescence risks credit term of 45 days. and loss have been transferred to the client, and the client has accepted the products according to the sale contract, the acceptance provisions have expired, or when the Company has objective evidence iii. Revenues from contracts within the MAT (energy plus Resolution SE No. 1,281/06) that all acceptance criteria have been met. The Company recognizes revenues from energy plus sales and renewable energy when the delivery of energy is effective based on the price established in each contract. Revenues are not adjusted for Revenues from these sales are recognized based on the price specified in each contract, to the extent the effect of financing components as sales are made with an average credit term of 30 days, which is that it is highly probable that a significant reversal will not occur. Revenues are not adjusted for the effect of consistent with market practice. financing components as sales are made with a credit term not exceeding 90 days, which is consistent with market practice. 4.23.2 Distribution segment 4.23.5 Holding and others segment i. Revenues from contracts with customers (ENRE Resolutions No. 63/17, 603/17, 33/18, 208/18 and SE Resolution No. 366/18) The Company recognizes revenues from contracts with customers in relation to advisory services to related companies as services are rendered based on the price established in each agreement. Revenues are not Edenor recognizes, on a monthly basis, revenues from electricity distribution and commercialization adjusted for the effect of financing components, as sales are made with a credit term of 30 days, which is as energy is distributed to each client based on the applicable tariff and procedures established by the consistent with market practice. ENRE. Such revenue includes energy delivered, whether billed or unbilled, at the end of each period. Revenues are not adjusted for the effect of financing components as sales’ payments are not deferred over time, which is consistent with market practice. The current remuneration scheme establishes certain limits to the increase in the VAD resulting from 4.24 the tariff structure review process, as well as a mechanism for monitoring the variation of CPD, which Other Income implies an increase in the compensation scheme for certain cases; the Company recognizes related revenues only to the extent that it is highly probable that a significant reversal will not occur and it is 4.24.1 probable that the consideration will be collected regardless the period in which the energy is distributed. Government grants Edenor recognizes revenues related to energy supply to low-income areas and shantytowns, only to the Grants from the government are recognised at their fair value where there is a reasonable assurance that the extent that the Framework Agreement with Argentine Nation and Province of Buenos Aires has been grant will be received and the Group will comply with all attached conditions. There are no unfulfilled conditions renewed for the period in which the service was rendered. or other contingencies attaching to the following grants. The group did not benefit directly from any other forms of government assistance. 218 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 219 CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: (Continuation) NOTE 4: (Continuation) 4.24.1.1 Recognition of Compensation from Programs Encouraging an Increase in Domestic Natural Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will Gas Production be available and can be used against temporary differences. The Company recognizes revenues from Programs Encouraging an Increase in Domestic Natural Gas Production Deferred income tax is provided on temporary differences from investments in subsidiaries and associates, when the delivery of the gas is effective based on the price established in the applicable regulation, only to the except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled extent that it is highly probable that a significant reversal will not occur and it is probable that the consideration by the group and it is probable that the temporary difference will not reverse in the foreseeable future. will be collected, that is, as the procedure established by Government is formally complied with. Although, the consideration Programs´ collection depends on the Argentine Government’s payment capacity that has incurred in Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset the important delays in the cancellation of the credits in the past, revenues are not adjusted for the effect of financing recognized amounts and when the deferred income tax assets and liabilities relate to income taxes levied by components, which is consistent with market practice. the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. The recognition of income from Programs Encouraging an Increase in Domestic Natural Gas Production is covered by IAS 20 since it involves a compensation as a result of the production increase committed. Current and deferred tax assets and liabilities have not been discounted, and are stated at their nominal value. This item has been disclosed under Programs Encouraging an Increase in Domestic Natural Gas Production, Income tax rates prevailing at year-end in Argentina (see Note 2.7), Venezuela, Ecuador, Bolivia, Spain and under Other operating income, in the Consolidated Statement of Comprehensive Income. Furthermore, ítem Uruguay are 30%, 50%, 22%, 25%, 25% and 25%, respectively. Additionally, payment of Bolivian-source income Extroardinary Canon disclosed within Other operating expenses includes fiscal costs related to this Programs. to beneficiaries outside Bolivia is levied with a 12.5% withholding income tax. 4.24. 2 4.25.2 Interest income Minimum notional income tax Interest income from financial assets at fair value through profit or loss is included into the result of changes The Company assesses the minimum notional income tax by applying the current 1% rate over the assets in the fair value of those assets. Interest income from financial assets at amortized cost and financial assets at computable at the closing of the year. As this tax supplements the income tax, the Company does not assess fair value through other comprehensive income are recognised in the statement of income. it for the periods where no income is evidenced on the income tax, based on the case law established by the “Hermitage” decision (CSJN, 15/06/2010), which ruled on the unconstitutionality of this tax when tax losses are Interest income is calculated by using the effective interest rate to the gross carrying amount of a financial disclosed for the period. asset (without considering impairment provision), except for impaired financial assets, that is calculated by applying the effective interest rate to carrying amount net of impairment provision. The Company’s tax obligation for each year will be the higher of the two taxes. If in a fiscal year, however, minimum notional income tax obligation exceeds income tax liability, the surplus will be computable as a 4.24.3 payment in advance of income tax through the next ten years. Dividends Dividends are received from financial assets measured at fair value through profit or loss or through other As of the closing date hereof, the Company’s Management analyzed the receivable’s recoverability, and comprehensive income. Dividends are recognized as revenue when the right to receive payment has been allowances are created in as long as it is estimated that the amounts paid for this tax will not be recoverable established. This applies even if they are paid out of pre-acquisition profits. within the statutory limitation period taking into consideration the Company’s current business plans. The Company’s Management will evaluate the evolution of this recoverability in future fiscal years. 4.25 4.26 Income tax and minimun notional income tax Leases 4.25.1 Leases of property, plant and equipment where the Group, as lessor, has transferred all the risks and rewards Current and deferred income tax of ownership are classified as finance leases (Note 18.2). Finance leases are recognized at the lease’s inception The tax expenses for the year include current and deferred tax. Tax is recognized in the income statement, at the fair value of the leased property or, if lower, the present value of the minimum lease payments. The except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In corresponding rental rights, net of finance charges, are included in other current and non-current receivables. Each this case, the tax is also recognized in other comprehensive income or directly in equity, respectively. lease payment received is allocated between the receivable and finance income. The finance income is charged to the profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at balance of the receivable for each period. The property, plant and equipment leased under finance leases is the balance sheet. Management periodically evaluates positions taken in tax returns with respect to situations derecognized if there is reasonable certainty that the Group will assign ownership at the end of the lease term. in which applicable tax regulation is subject to interpretation. It establishes provisions, where appropriate, on the basis of amounts expected to be paid to the tax authorities. Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classified as operating leases (Note 18.1). Payments made under operating leases (net of any incentives Deferred income tax is recognized, using the liability method on temporary differences between the tax received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease. bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognized if they come from the initial recognition of goodwill; or if it arises from Lease income from operating leases where the Group is a lessor is recognised in income on a straight-line initial recognition of an asset or liability in a transaction other than a business combination that at time of the basis over the lease term (Note 18.1). The respective leased assets are included in the Consolidated Statement transaction affects neither accounting nor taxable profit or loss. of Financial Position based on their nature. 220 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 221 CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: (Continuation) NOTE 5: On January 17, 2017, the exchange whereby the Purchasers transferred to PHA their capacity as beneficiaries and trustees of the trust holding 40% of CIESA’s capital stock and voting rights, and the Company and PHA GROUP STRUCTURE transferred to the Purchasers shares representing 40% of CIESA’s capital stock and voting rights, was perfected; the Group thus keeping a 10% direct interest in CIESA’s capital stock and voting rights. The Exchange was approved by ENARGAS on December 29, 2016. The Purchasers and the Company’s direct and indirect interests in TGS remain unaltered as a result of the Exchange. 5.1 5.1.2.2 Sale of interest in Greenwind Business combinations With the purpose of incorporating into the project a strategic partner contributing part of the investments necessary for the development of the Mario Cebreiro Wind Farm, on March 10, 2017, CTLL and PP entered into an 5.1.1 agreement with Valdatana Servicios y Gestiones S.L.U., an entity which later changed its name to Viento Solutions Acquisition of PPSL’s Capital stock S.L. for the sale of 50% of Greenwind’s capital stock and rights for a total amount of U$S 11.2 million. On May 13, 2016, Petrobras Internacional Braspetro B.V. (“Petrobras Holland”), a subsidiary of Petróleo Brasileiro S.A. (“Petrobras Brazil”) and the Company executed a share purchase agreement for the acquisition by the As a result of the transaction, the Company has deconsolidated Greenwind’s assets and liabilities and presents Company of the whole capital stock of PPSL, which holds 67.1933% of the capital stock and voting rights in its interest in the joint venture based on the equity method of accounting. Petrobras (respectively, the “Share Purchase Agreement” and the “Transaction”) for an amount of U$S 80 million. 5.1.2.3 Sale of interest in Oldelval On July 27, 2016, the Transaction was closed upon the meeting of all applicable conditions precedent, the On November 2, 2018, the Company entered into an agreement with ExxonMobil Exploration Argentina S.R.L. Transaction’s final price, was set at U$S 900 million. for the sale of 21% of Oldelval’s capital stock and rights, maintaining the remaining 2.1% interest. The following operations were completed after the closing of the Transaction: Subsequently, on November 27, 2018, the transaction was closed upon the meeting of the applicable precendent i. On October 14, 2016, YPF acquired from Petrobras 33.33% of all rights and obligations in the conditions, the purchase price paid by the purchaser amounted to U$S 36.4 million. concession over the Río Neuquén area for an amount of U$S 72 million and the 80% interest in the concession over the Aguada de la Arena area for an amount of U$S 68 million. A result of the transaction, the Comany has recongnised a $ 1.052 million gain, before taxes, stated in terms of the measuring unit current as of December 31, 2018. ii. On October 27, 2016, an affiliate of Petrobras Brasil acquired from Petrobras 33.6% of the rights and obligations in the concession over the Río Neuquén area for an amount of U$S 72 million and 5.1.3 100% of the rights and obligations pursuant to the Operating Agreement entered into by Petrobras, Corporate reorganization Bolivia Branch and YPF Bolivia, regarding the Colpa and Caranda areas in Bolivia for a negative value of U$S 20 million. The corporate reorganizations mentioned below are carried out in order to obtain important benefits for the Company and all its corporate group, as it will allow for enhanced operating efficiency; an optimized use of iii. The Company increased its direct and indirect interest in Petrobras to 90.4% as a result of the available resources; the leveraging of technical, administrative and financial structures; and the implementation consummation of mandatory tender offer and voluntary public offer for the exchange of Petrobras’ of converging policies, strategies and goals. Furthermore, the high complementarity between the participating shares (the offers), on November 22 and 23, 2016. companies will be leveraged, thus reducing costs resulting from the duplication and overlapping of operating iv. In March 2017 and as a result of the Company’s adherence to the regularization regime (moratorium), and administrative structures. in relation to certain liabilities identified (see detail in Note 10.4), which established benefits of releasing tax fines and reducing compensatory interests, a payment obligation to Petrobras Brasil This reorganization was perfected by means of a merger through absorption process, under the terms of tax of $ 171 million, was generated as a contingent consideration in accordance with the Purchase neutrality pursuant to articles 77 and following of the Income Tax Law, whereby the absorbed companies will Agreement and was paid on April 18, 2017. be dissolved without liquidation subject to the stipulations of the PMC, the provisions of sections 82 to 87 of Companies Act No. 19,550 and its amending provisions, the CNV provisions, the BCBA Listing Rules and other 5.1.2 provisions, the IGJ provisions and all other applicable legal and regulatory provisions. Sale of participations 5.1.2.1 Sale and swap of indirect interest in TGS 5.1.3.1 2016 Reorganization On July 27, 2016, the Company sold its 25.5% indirect interest in TGS (through PEPCA, owner of a 10% On August 10, 2016, the Company and Petrobras’ Board of Directors resolved to instruct both managements equity interest in CIESA and through other subsidiaries rightholders as the only beneficiary of the trust that owns to initiate all necessary tasks and procedures to merge Pampa Energía, as absorbing company, with Petrobras, 40% equity interest in CIESA, the “interest in TGS”) to Grupo Inversor Petroquímica S.L. (members of the GIP as absorbed company. Group, headed by the Sielecki family), WST S.A. and PCT L.L.C. (members of the Werthein group) (jointly, the “Purchasers”). The economic impact of the transaction reached to a gain of $ 1,015 million. Furthermore, it was considered appropriate to incorporate as absorbed companies under such merger, two Petrobras’ subsidiaries: PEISA (95% through a direct interest and 5% through an indirect interest) and Albares On January 11, 2017, the CNDC approved the acquisition by the Company of 40% of CIESA’s capital stock, (100% direct interest). an interest that had been acquired by the Company through CIESA’s financial debt swap executed on July, 2012 and 100% of PEPCA shares acquired on March, 2011. The merger was effective as of November 1, 2016, date on which the transfer to the absorbing company of all the rights and obligations, assets and liabilities of Petrobras, PEISA and Albares became effective, all of which subject to the corresponding corporate approvals under the applicable law and the registration with the Registry of Commerce of the merger and the dissolution without liquidation of the absorbed companies. 222 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 223 CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: (Continuation) NOTE 5: (Continuation) On December 23, 2016, the Board of Directors of Pampa Energía, as absorbing company and Petrobras On January 18, 2018, the shareholders’ meetings of the intervening companies approved the merger and Argentina, PEISA and Albares, as absorbed companies, approved the CPF, which was authorized by the CNV on February 19, 2018, the merger final agreement was entered into. On July 16, 2018, the Public Registry on January 13, 2017. On February 16, 2017, the Extraordinary General Meetings of Shareholders approved the registered the merger. merger in agreement with the terms of the CPF. On April 19, 2017, the final merger agreement was entered into. 5.1.3.3.2 PACOSA and WEBSA Pursuant to the provisions of Chapter X of the CNV provisions, the Company has filed a merger authorization proceeding before this entity and obtained from the CNV its authorization to publish the merger prospectus. On December 7, 2016, the Boards of Directors of PACOSA and WEBSA resolved to begin all necessary tasks and procedures for the merger through absorption between PACOSA, as absorbing company, and On May 2, 2018, the Public Registry registered the merger. On May 21, 2018, the exchange of Petrobras shares WEBSA as absorbed company. for those of the Company was effected (for the remaining 10.6% minority interest). As a result, 193,745,611 shares of Petrobras were exchanged for 101,771,793 shares of the Company, with 2,775 shares remaining as On March 7, 2017, the shareholders’ meetings of the intervening companies approved the merger, and on May treasury shares since they were fractional or decimal shares which were paid in cash. As of December 31, 2018, 30, 2017 the merger final agreement was entered into. On March 5, 2018, the Public Registry registered the merger. in accordance with current regulations, the Company proceeded to sell those shares. There was no exchange ratio for PEISA and Albares’s shares, as Petrobras holds 100% of the capital stock of these companies. 5.2 5.1.3.2 2017 Reorganization Discontinued operations On September 22, 2017, the Company’s Board of Directors informed that the companies which would take part in the merger would be the Company, as absorbing company, and BLL, CTG, CTLL, EG3 Red, INDISA, As of December 31, 2017 assets and liabilities subject to the transactions detailed below have been classified INNISA, IPB, PP II and PEPASA, as absorbed companies. as held for sale, and the results for affected operations have been disclosed under “Discontinued Operations” in the consolidated Statement of comprehensive income. The merger became effective on October 1, 2017, date as from which the transfer of the absorbed companies’ equity to the absorbing company became effective and, therefore, all their rights and obligations, 5.2.1 assets and liabilities will become incorporated into the absorbing company’s equity, all of which subject to the Sale of PELSA shares and certain oil areas corresponding corporate approvals under the applicable law and the registration with the Public Registry of On January 16, 2018, the Company agreed to sell to Vista Oil & Gas S.A.B. de C.V. (“Vista”) its direct 58.88% Commerce of the merger and the dissolution without liquidation of the absorbed companies. interest in PELSA and its direct interests in the Entre Lomas, Bajada del Palo, Agua Amarga and Medanito-Jagüel de los Machos blocks, in line with the Company’s strategy to focus its investments and human resources both on the On December 21, 2017, the Board of Directors of Pampa Energía, as absorbing company and BLL, CTG, CTLL, expansion of its power generation installed capacity and on the exploration and production of natural gas, placing a EG3 Red, INDISA, INNISA, IPB, PP II and PEPASA, as absorbed companies, approved the CPF, and on April 27, special focus on the development and exploitation of unconventional gas reserves, as well as to continue investing 2018, the Extraordinary General Meetings of Shareholders approved the merger in agreement with the terms on the development of its utility concessions. of the CPF. On April 4, 2018, upon the meeting of all applicable conditions precedent, the transaction was closed. The price On June 1, 2018, the final merger agreement was entered into between Pampa and the absorbed companies paid by Vista, considering the agreed adjustments regarding interests in PELSA, amounted to U$S 389 million. This and was filed for registration before the applicable controlling authorities. On July 20, 2018 the CNV’s transaction generated a profit comprehensive income net of taxes in the amount of $ 1,115 million, as follows: authorization on merger publication was obtained and on August 2, 2018, the Public Registry registered the merger. On August 15, 2018, the exchange of PEPASA, CTG INNISA and INDISA shares for 144.322.083 of the Company was effected, with 1,880 shares remaining as treasury shares since they were fractional or decimal shares which were paid in cash. As of December 31, 2018, in accordance with current regulations, the Company proceeded to sell those shares. There was no exchange ratio for the remaining companies, as Pampa direct and 12.31.2018 indirect held 100% of the capital stock of these companies. Sale price 10,197 5.1.3.3 Merger of Subsidiaries Book value of assets sold and costs associated with the transaction (8,553) Result for sale 1,644 The merger’s effective date detailed below was fixed on January 1, 2017 and correspond to business Interests (1) 133 combinations between companies under common control, and therefore there is no effect in these consolidated Income tax (818) financial statements. Included in results 959 Other comprehensive income (loss) 5.1.3.3.1 CTLL, EASA and IEA.SA Reclasification form exchange differences on translation 223 Income tax (67) On December 7 and 22, 2016, the Board of Directors of CTLL, EASA and IEA.SA resolved to initiate all Imputed in Other comprehensive income 156 necessary tasks and procedures for the merger through absorption among CTLL, as absorbing company, and Total comprehensive income 1,115 EASA and IEA.SA, as absorbed companies. In analyzing this reorganization, EASA’s management concluded that, in order for the process to be viable, NOTE: (1) Are exposed in “Financial income” of the consolidated statement of comprehensive income related to discontinued it was necessary to capitalize the debt EASA held with holders of Series A and B Discount Corporate Bonds operations. issued on July 19, 2006 and maturing in 2021. On March 27, 2017 EASA’s Extraordinary General Meeting of Shareholders resolved to capitalize such CBs, which was accepted by PISA in its capacity as sole holder. 224 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 225 CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: (Continuation) NOTE 5: (Continuation) 5.2.2 It should be highlighted that, as of December 31, 2018, the Company considers that under IFRS it has Sale of assets in the Refining and Distribution segment transferred control over the whole assets since, pursuant to the participation agreements entered into with Trafigura, it has not retained the power to redirect their use or substantially derive other benefits. However, On December 7, 2017, the Company executed with Trafigura Ventures B.V and Trafigura Argentina S.A. as of the issuance of these financial statements the transfer of ownership and the assignment of agreements an agreement for the sale of certain assets in the Company’s refining and distribution segment based on the associated with the assets mentioned in subsections (i) and (iii) have been perfected, whereas the process for conviction that the oil refining and distribution business calls for a larger scale to attain sustainability. The the legal transfer and actual assignment of the agreements associated with the assets described in subsections closing of the transaction, which is subject to the meeting of certain conditions precedent. (ii) and (iv) has started with the rebranding of gas stations to the “Puma Energy” brand, owned by Trafigura, a process which is expected to end in 2019. The assets subject-matter of the transaction are as follows: (i) the Ricardo Eliçabe refinery; (ii) the Avellaneda lubricants plant; (iii) the Caleta Paula reception and dispatch plant; and (iv) the network of gas stations currently Upon completing the above-mentioned asset transaction, Trafigura and the Company executed several operated under Petrobras branding. contractual agreements whereby, for the May 9, 2018 to November 9, 2018 period, the Dock Sud Terminal provided reception, storage and dispatch services for light fuels and base lubricants owned by Trafigura. The Dock Sud storage facility is excluded from the sale, as well as the Company’s investment in Refinería del Norte S.A. The Company continued executing agreements with other high level companies, to align the Dock Sud plant’s activity as a terminal providing logistics services to third parties. Results associated with the Dock Sud Pursuant to the foregoing, as of December 31, 2017, assets and liabilities subject to this transaction have Terminal are disclosed under Continuing operations in the Refining and Distribution segment (see Note 23). been measured at the lower of fair value less cost to sell and carrying value, stated in terms of the measuring unit current immediately before held for sale criteria was met and it involved the recognition of an impairment The consolidated statement of comprehensive income related to discontinued operations is of Intangible assets and Property, plant and equipment in the amount of $ 1.040 million. presented below: On May 9, 2018, upon the meeting of all applicable precedent conditions the transaction was subject to, the closing of the sale to Trafigura was carried out, including the transfer of all the Company’s contracts, permits and licenses key for the ordinary conduction of the business, together with the transfer of 1,034 employees related to the assets subject-matter of the sale, of which 67 employees work on the Company’s corporate segment. After applying the adjustments stipulated in the assets purchase and sale agreement, the transaction price amounted to U$S 124.5 million, and was paid by Trafigura on May 9, 2018, with the exception of U$S 9 million which were previously paid as down payment upon the execution of the agreement, and U$S13.5 million which have been deposited in an escrow account and which will be released in line with the transfer of the network’s gas stations to the “Puma Energy” brand. Furthermore, after the closing of the transaction, Trafigura paid to Pampa U$S 56 million for the purchase of crude oil. As of December 31, 2018, the closing of the transaction did not generated additional profits or losses, according to the following detail: 12.31.2018 Sale price 1,044 Book value of assets sold and costs associated with the transaction (1,044) Result for sale - Items that may be reclassified to profit or loss - Total result - 226 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 227 CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: (Continuation) NOTE 5: (Continuation) OIL REFINING Y OIL REFINING Y AS OF DECEMBER 31, 2018 AND GAS DISTRIBUTION ELIMINATIONS TOTAL AS OF DECEMBER 31, 2017 AND GAS DISTRIBUTION ELIMINATIONS TOTAL Revenue 2,481 15,900 (3,388) 14,993 Revenue 9,755 27,439 (11,177) 26,017 Cost of sales (1,233) (13,606) 3,419 (11,420) Cost of sales (9,468) (23,313) 11,211 (21,570) Gross profit 1,248 2,294 31 3,573 Gross profit 287 4,126 34 4,447 Selling expenses (72) (1,243) - (1,315) Selling expenses (298) (3,192) - (3,490) Administrative expenses (46) (152) - (198) Administrative expenses (208) (703) - (911) Exploration expenses (4) - - (4) Exploration expenses (31) - - (31) Other operating income 54 211 - 265 Other operating income 604 365 - 969 Other operating expenses (231) (378) - (609) Other operating expenses (294) (484) - (778) Result from the sale of shareholdings in companies 1,644 - - 1,644 Reversal of impairment of property, plant - (1,040) - (1,040) and property, plant and equipment and equipment Operating income 2,593 732 31 3,356 Operating income (loss) 60 (928) 34 (834) RECPAM 255 80 (47) 288 Financial income 36 25 - 61 Financial income 148 27 - 175 Financial expenses - (27) - (27) Financial expenses (20) (10) - (30) Other financial results (375) (20) - (395) Other financial results (135) 824 - 689 Financial results, net (339) (22) - (361) Financial results, net 248 921 (47) 1,122 Income before income tax (279) (950) 34 (1,195) Income (loss) before income tax 2,841 1,653 (16) 4,478 Income tax (1,049) 351 - (698) Income tax (973) (486) - (1,459) Profit (loss) of the year from discontinued (1,328) (599) 34 (1,893) Profit (loss) of the year from discontinued 1,868 1,167 (16) 3,019 operations operations Other comprehensive income Other comprehensive income (loss) Items that will not be reclassified to profit or loss Income tax (67) - - (67) Remeasurements related to defined benefit plans (11) 26 - 15 Reclasification form exchange differences on translation 223 - - 223 Income tax 67 (9) - 58 Exchange differences on translation 156 - - 156 Items that may be reclassified to profit or loss Other comprehensive loss of the year from 312 - - 312 Exchange differences on translation (606) - - (606) discontinued operations Other comprehensive loss of the year from (550) 17 - (533) Total comprehensive income (loss) of the year 2,180 1,167 (16) 3,331 discontinued operations from discontinued operations Total comprehensive income (loss) of the year (1,878) (582) 34 (2,426) from discontinued operations Total income (loss) of the year from discontinued operations attributable to: Total income of the year from discontinued Owners of the company 1,778 1,167 (16) 2,929 operations attributable to: Non - controlling interest 90 - - 90 Owners of the company (1,503) (599) 34 (2,068) 1,868 1,167 (16) 3,019 Non - controlling interest 175 - - 175 Total comprehensive income (loss) of the year (1,328) (599) 34 (1,893) from discontinued operations attributable to: Total comprehensive income of the year from Owners of the company 2,026 1,167 (16) 3,177 discontinued operations attributable to: Non - controlling interest 154 - - 154 Owners of the company (1,804) (582) 34 (2,352) 2,180 1,167 (16) 3,331 Non - controlling interest (74) - - (74) (1,878) (582) 34 (2,426) 228 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 229 CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: (Continuation) NOTE 5: (Continuation) The consolidated statement of cash flows related to discontinued operations is presented below: OIL REFINING Y AND GAS DISTRIBUTION TOTAL 12.31.2018 12.31.2017 LIABILITIES Net cash (used in) generated by operating activities (1,726) 3,291 NON-CURRENT LIABILITIES Net cash used in investing activities - (1,897) Defined benefit plans 143 86 229 Net cash generated by (used in) financing activities 1,565 (1,168) Deferred tax liabilities 837 - 837 (Decrease) increase in cash and cash equivalents from discontinued operations (161) 226 Provisions 1,361 77 1,438 Total non-current liabilities 2,341 163 2,504 Cash and cash equivalents at the begining of the year 238 142 CURRENT LIABILITIES 576 - 576 Loss on net monetary position generated by cash and cash equivalents (77) (130) Trade and other payables 69 - 69 (Decrease) increase in cash and cash equivalents (161) 226 Salaries and social security payable 3 9 12 Cash and cash equivalents at the end of the year - 238 Defined benefit plans Income tax and minimum notional income tax provision 38 - 38 Taxes payables 173 - 173 Provisions 75 52 127 Total current liabilities 934 61 995 Liabilities associated to assets classified 3,275 224 3,499 As of December 31, 2017, the assets and liabilities that comprise the assets held for sale and associated as held for sale liabilities are: OIL REFINING Y 5.3 AND GAS DISTRIBUTION TOTAL Interest in subsidiaries, associates and joint ventures ASSETS 5.3.1 NON-CURRENT ASSETS Subsidiaries information Property, plant and equipment 11,139 1,652 12,791 Intangible assets 459 154 613 Unless otherwise indicated, the capital stock of the subsidiaries consists of common shares, each granting Financial assets at amortized cost 52 - 52 the right to one vote. The country of the registered office is also the principal place where the subsidiary Trade and other receivables 9 - 9 develops its activities. Total non-current assets 11,659 1,806 13,465 CURRENT ASSETS Inventories 226 2,894 3,120 Financial assets at fair value through profit and loss 1,005 - 1,005 Trade and other receivables 629 - 629 Cash and cash equivalents 238 - 238 Total current assets 2,098 2,894 4,992 Total assets classified as held for sale 13,757 4,700 18,457 230 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 231 CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: (Continuation) NOTE 5: (Continuation) i. Summary statement of financial position 12.31.2018 12.31.2017 DIRECT AND DIRECT AND INDIRECT INDIRECT 12.31.2018 12.31.2017 PARTICIPATION PARTICIPATION COMPANY COUNTRY MAIN ACTIVITY % % NON CURRENT Corod Argentina Oil 100.00% 100.00% Total non current assets 63,284 57,134 CPB Argentina Generation 100.00% 100.00% Borrowings 7,192 6,189 CPB Energía S.A. Argentina Generation 100.00% 100.00% Other non current liabilities 17,853 18,381 Ecuador TLC S.A. Ecuador Oil 100.00% 100.00% Total non current liabities 25,045 24,570 (2) Edenor Argentina Distribution of energy 52.18% 51.54% CURRENT Enecor S.A. Argentina Transportation of electricity 69.99% 69.99% Cash and cash equivalents 28 122 HIDISA Argentina Generation 61.00% 61.00% Other current assets 13,680 13,626 HINISA Argentina Generation 52.04% 52.04% Total current assets 13,708 13,748 PACOSA Argentina Distributor 100.00% 100.00% Borrowings 1,077 105 PBI Bolivia Investment 100.00% 100.00% Other current liabilities 19,901 18,413 PELSA (1) Argentina Oil - 58.88% Total current liabilities 20,978 18,518 Petrobras Energía Colombia Gran Colombia Oil 100.00% 100.00% Total equity 30,969 27,794 Cayman Non-controlling interest 14,938 13,470 Petrobras Energía Ecuador Gran Cayman Investment 100.00% 100.00% Petrobras Energía Operaciones Ecuador Ecuador Oil 100.00% 100.00% Petrolera San Carlos S.A. Venezuela Oil 100.00% 100.00% PHA Spain Investment 100.00% 100.00% ii. Summary statement of comprehensive income (loss) PISA Uruguay Investment 100.00% 100.00% PP Argentina Investment 100.00% 100.00% PPSL Spain Investment 100.00% 100.00% TGU Uruguay Gas transportation 100.00% 100.00% 12.31.2018 12.31.2017 Transelec Argentina Investment 100.00% 100.00% Trenerec Energía Bolivia Bolivia Investment 100.00% - Revenue 55,954 39,603 Trenerec Ecuador Investment 100.00% - Depreciation (2,561) (2,148) Interest income 672 454 Interest expense (4,968) (2,567) NOTES: (1) See Note 5.2.1. Profit for the year before tax 6,175 5,591 (2) Corresponds to effective interest considering the treasury shares in Edenor´s effect (51,76% nominal interest). Income tax (1,877) (510) Profit for the year 4,298 5,081 5.3.1.1 Summarised financial information for each subsidiary that has significant non-controlling interest Other comprehensive loss (47) (14) Non-controlling interests in subsidiaries are not significant for the Company, except for Edenor with 51.76% Total comprehensive profit of the year 4,251 5,067 equity interest and PELSA with 58.88% equity interest, whose sale was perfected on April 4, 2018 (Note 5.2.1). Income of the year attributable to non-controlling interest 2,073 2,462 Edenor Other comprehensive income of the year attributable (22) (7) The subsidiary is registered in Argentina, which is also the place where it develops its activities. to non-controlling interest Comprehensive income (loss) of the year attributable 2,051 2,455 to non-controlling interest 232 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 233 CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: (Continuation) NOTE 5: (Continuation) iii. Summary statement of cash flow The details of the balances of investments in associates and joint ventures is as follows: 12.31.2018 12.31.2017 12.31.2018 12.31.2017 Disclosed in non-current assets Net cash generated by operating activities 9,621 7,361 Associates Net cash used in investing activities (8,328) (8,509) Refinor 960 1,094 Net cash used in (geneted by) financing activities (2,097) 867 Oldelval - 379 Decrease in cash and cash equivalents (804) (281) OCP 1.305 - Other 10 1 Cash and cash equivalents at the begining of the year 122 382 2,275 1,474 Exchange differences in cash and cash equivalents 156 - Joint ventures Result from exposure to inflation 554 21 CIESA 9,755 7,606 Citelec 3,303 2,534 Cash and cash equivalents at the end of the year 28 122 Greenwind - 261 13,058 10,401 15,333 11,875 Disclosed in non-current liabilities 5.3.2 Greenwind (1) 153 - Investments in associates and joint ventures 153 - The following table presents the main activity and information from the financial statements used for valuation and percentages of participation in associates and joint ventures: NOTE: (1) The Company provides financial assistance to this company. INFORMATION ABOUT THE ISSUER The following tables show the breakdown of the result from investments in associates and DIRECT AND joint ventures: PROFIT (LOSS) INDIRECT MAIN SHARE OF THE YEAR/ PARTICIPATION ACTIVITY DATE CAPITAL PERIOD EQUITY % Associates Refinor Refinery 09.30.2018 92 (113) 968 28.50% 12.31.2018 12.31.2017 Associates Joint ventures Oldelval 116 41 CIESA (1) Investment 12.31.2018 639 5,871 16,748 50% Refinor (138) (113) Citelec (2) Investment 12.31.2018 556 1,531 7,481 50% OCP 1,305 - Greenwind Generation 12.31.2018 5 (824) (408) 50% Other 1 (3) 1,284 (75) Joint ventures NOTES: (1) The Company holds a direct and indirect interest of 50% in CIESA, a company that holds a 51% interest in the share CIESA 2,793 949 capital of TGS. therefore, the Company has an indirect participation of 25.50% in TGS. (2) Through a 50% interest, the company joint controls Citelec, company that controlled Transener with 52.65% of the shares Citelec 801 1,012 and votes. As a result, the Company has an indirect participation of 26.33% in Transener. Greenwind (414) (73) 3,180 1,888 4,464 1,813 234 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 235 CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: (Continuation) NOTE 5: (Continuation) The evolution of investments in associates and joint ventures is as follows: Later, on September 6, 2018, TGS’ Board of Directors approved a program for the repurchase of own shares for a maximum amount of up to $ 1,800 million (in terms of the constitution date) and for a term of 180 calendar days, which terminated on March 5, 2019. The acquisition was made with net realized income, as shown in TGS’ Financial Statements for year ended December 31, 2018. NOTE 12.31.2018 12.31.2017 As of December 31, 2018, TGS holds 13,600,780 own shares in its portfolio, which represent 1.71% of its total capital stock. Their market acquisition cost amounted to $ 1,421 million which, in accordance with the At the beginning of the year 11,875 9,608 provisions of Title IV, Chapter III, article 3.11.c of the Rules, restricts the amount of the retained earnings that Reclassifications (1) - 457 TGS may distribute. Dividends 17 (706) - Other decreases 13.1 (434) (3) Vaca Muerta Project Share of profit 4,464 1,813 The project consists in the construction of a gas collector pipeline that will allow to transport natural gas Other comprehensive loss (19) - extracted by natural gas producers to the regulated transport systems operated by TGS and TGN and a gas At the end of the year 15,180 11,875 conditioning plant in Tratayén city. The Vaca Muerta system will have two collector pipelines; the first of them with an extension of 115 NOTE: (1) Corresponds to the deconsolidation for sale of the interest in Greenwind. kilometers, a 36” diameter and 35 MMm3/d transport capacity (the “Northern Trench”) and the second one with an extension of 33 kilometers, 30” diameter and 25 MMm3/d transport capacity (the “South Trench”). The gas transported by these pipelines system will be treated in the new conditioning plant that is being constructed by 5.3.3 TGS in Tratayén city, Province of Neuquén with 5.0 MMm3/d of initial capacity, and the expansion of the capacity Investment in CIESA-TGS is planned to be extended as volumes of gas transported by the Vaca Muerta system increase. TGS’s Arbitral claim TGS will invest approximately U$S 250 million in the implementation of transport and conditioning capacity. On May 8, 2015, the Secretariat of the International Court of Arbitration of the International Chamber of As of the date of issuance of these financial statements, the related works are in the process of being executed Commerce notified TGS regarding the request for arbitration initiated by PAE and Pan American Sur SA (the and TGS expects the habilitation of the work in stages beginning in the second quarter of 2019 and ending in “claimants”) related to the execution of three natural gas processing contracts (for the February 2006 and the fourth quarter of the same year. February 2016 period) between the claimants and TGS that according to the demand, the claimants allege breach of contracts, that would have resulted in a lower allocation of the products obtained. 5.3.4 Other interest in Associates Between April 4 and September 29, 2017, the parties presented their arguments and the Arbitration Interests in mixed companies in Venezuela: Testing Hearing took place. The claimed amount reach U$S 306 million as of March 15, 2017 plus interest accrued until the date of actual payment. Finally, on December 15, 2017, the Claimants and TGS submitted Interests in Petroritupano S.A. (22%), Petrowayú S.A. (36%), Petroven-Bras S.A. (34.49%) and Petrokariña S.A. their Final Conclusions Memorials. (34.49%), companies organized as a result of the migration of operating agreements regulating the exploitation in Venezuela of the Oritupano Leona, La Concepción, Acema and Mata areas, respectively, were incorporated On May 28, 2018, the International Court of Arbitration of the International Chamber of Commerce with the purchase of PPSL’s capital stock. issued the final award by which it partially acknowledged the claim and ruled that the Company must pay damages to the claimants in the amount of U$S 19 million, plus interest accrued as from May 8, 2015 until Given that as of the date of the acquisition of PPSL, the authorizations regarding the change of indirect the date of actual payment. This payment was made on June 14, 2018 for an amount of $ 553 million control by the Government of Venezuela were not obtained, and considering the fact that the contracts of (equivalent to U$S 21.3 million). mixed companies provide the mandatory transfer of the shares for these cases, the Company has determined market value for its investment as of the date of acquisition was zero, considering: i) the monetary and fiscal Issuance of Corporate Bonds policies implemented by the Venezuelan government together with the significant drop in international oil prices since 2014 that have eroded the ability of the mixed companies to efficiently operate the producing On May 2, 2018, under the Short- and Medium-Term Corporate Bonds Program for a maximum amount of fields that resulted in increasing losses and reduction of equity in those investments, and ii) that there is very U$S 700 million approved by the CNV, TGS issued Class 2 corporate bonds for U$S 500 million at an annual unlikely to acquire these assets in a stand-alone transaction, as conversion contracts establish that the transfer 6.75% rate. Collected funds will be destined by TGS to: (i) the repurchase of Class 1 corporate bonds, (ii) the of direct control of the shares without obtaining prior approval of Venezuelan Government, implies that such redemption of Class 1 corporate bonds; and (iii) capital expenditures. participation is considered finished and all of the shares shall be transferred without any consideration in exchange for those shares. Acquisition of own shares in TGS In view of the fact that the TGS’ share price does not reflect either the value or the economic reality its Pampa has not recognized any share in the additional losses from these investments as it has not incurred assets currently or potentially have, this being detrimental to the interests of its shareholders, and taking into any legal or implicit obligations or made any payments in the name of these mixed companies as from the consideration TGS’ strong cash position and fund availability, on May 9, 2018, TGS’ Board of Directors approved acquisition date. the repurchase of own shares in the market, in Argentine pesos, for a maximum amount of $ 1,700 million (in terms of the constitution date). Additionally, under the agreements migration process, in 2006 the Venezuelan Government recognized in favor of the participating Company an interest-free severable and transferable credit in the amount of U$S 88.5 million which may be used to pay acquisition bonds under any new mixed company projects for the 236 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 237 CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: (Continuation) NOTE 5: (Continuation) development of oil exploration and production activities, or licenses for the development of gas exploration and production operations in Venezuela. Since no projects have been undertaken for its use, negotiations for its transfer to third parties have been unsuccessful, and there are no other foreseen application alternatives, the 5.4 Company keeps this credit valued at zero. Operations in Hydrocarbon Consortiums Mixed companies should sell to PDVSA all liquid hydrocarbons produced in the delimited area and the 5.4.1 associated natural gas (if stipulated in the agreement), pursuant to a price formula based on international General considerations benchmarks such as BRENT. The Company is jointly and severally liable with the other participants for meeting the contractual obligations As of the issuance of these financial statements, the Company has not obtained the timely requested under these arrangements. authorizations regarding the change in indirect control. Notwithstanding that, the Company has submitted the requested technical, legal and financial information, as well as development plans and financing proposals, to The production areas in Argentina are operated pursuant to concession production agreements with free the consideration of CVPSA (Corporación Venezolana de Petróleo S.A.)’s majority shareholder, without obtaining hydrocarbons availability. a favorable answer. Furthermore, CVPSA has expressed that, in view of the time elapsed, the Company should begin a new process for the presentation of plans under the guidelines to be provided by the Ministry of People’s According to Law No.17,319, royalties equivalent to 12% of the wellhead price of crude oil and natural gas are Power for Oil of the Bolivarian Republic of Venezuela, which have not been informed to the Company yet. Given paid in Argentina. The wellhead price is calculated by deducting freight and other sales related expenses from these circumstances, the Company has expressed to the Venezuelan Government’s authorities that it is no the sale prices obtained from transactions with third parties. This rate may increase from 3% to 4% depending longer interested in submitting investments and/or financing proposals in mixed companies and that it is willing to the producing jurisdiction and market value of the product. to negotiate the transfer of its shares to CVPSA. 5.4.2 Investment in Oleoductos de Crudos Pesados (OCP) Oil and gas areas and participation in joint-operations The Company has an 11.42% equity interest in OCP, an oil pipeline in Ecuador that has a transportation As of December 31, 2018, the Company and associates are part of the joint operations and consortia for the capacity of 450,000 barrels/day. exploration and production of oil and gas as indicated below: As of December 31, 2017, OCP has negative 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. However, and since the Company has not made any capital contributions or financial assistance commitments to OCP, this shareholding as of December 31, 2017, has been valued at zero. However, on December 6, 2018, OCP entered into a settlement agreement with the Republic of Ecuador to terminate all claims and legal actions brought by the parties regarding discrepancies with the Ecuadorian Treasury. This agreement stipulates a total settlement amount of U$S 182 million, of which U$S 64 million will be offset with receivables from income tax withholdings made by OCP in the 2004-2005 and 2007-2014 periods and U$S 7 million with a payment previously made by OCP corresponding to the determination of the 2003 fiscal year, and the remaining U$S 111 million will be paid in cash in two installments. After satisfactorily meeting the stipulated obligations, on December 21, 2018, the parties executed a settlement agreement letter. As a result of the agreement, OCP has recorded profits for U$S 387 million. The Company has resumed recognising its participation in OCP’s profits, through PEB, after recording previously unrecognized losses; therefore, as of December 31, 2018, it has recognised profits for the participation in OCP’s results in the amount U$S 35 million ($ 1,305 million). Furthermore, on December 5, 2018, the Company, through its subsidiary PEB, entered into an agreement with Agip Oleoducto de Crudos Pesados BV for the purchase of shares representing 4.49% of OCP’s capital stock and the subordinated debt issued by OCP. Additionally, among other precedent conditions, the closing of the operation is subject to the Ecuadorian Government’s authorization. On March 8, 2019 the Ecuadorian government granted the authorization and on March 19, 2019 OCP was notified. Finally, as of the date of issuance of these financial statements, the parties are working to comply the steps required to the closing of the transaction. 238 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 239 CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: (Continuation) NOTE 5: (Continuation) 5.4.3 New concession and changes in working interest oil and gas areas 5.4.3.1 Parva Negra Area The exploration license for Parva Negra Este, an area located in the Province of Neuquén granted under PARTICIPATION concession to GyP and operated by Pampa since April 2014 for a term of 4 years, expired in the month of April DURATION 2018. As the original agreement had stipulated the possibility to extend it for a year, GyP requested such extension NAME NOTE LOCATION DIRECT INDIRECT OPERATOR UP TO in due time and manner. Argentine production Río Neuquén Río Negro and Neuquén 33.07% - YPF 2027/2051 On June 7, 2018, the Province of Neuquén issued Executive Order No. 759/18 ratifying such extension until Sierra Chata Neuquén 45.55% - PAMPA 2053 April 3, 2019. Pampa has a 42.5% interest in the Parva Negra Este area. El Mangrullo Neuquén 100.00% - PAMPA 2053 5.4.3.2 Senillosa Area La Tapera - Puesto Quiroga Chubut 35.67% - Tecpetrol 2027 El Tordillo Chubut 35.67% - Tecpetrol 2027 As a result of the low pressure and production in the wells, the long-term production trial was terminated and Aguaragüe Salta 15.00% - Tecpetrol 2023/2027 the built facilities in UTE Senillosa were dismantled. Therefore, the Company recorded an impairment of property, Gobernador Ayala Mendoza 22.51% - Pluspetrol 2036 plant and equipment in the amount of $ 74 million under “Exploration Expenses” as of December 31, 2016. Anticlinal Neuquén 15.00% - YPF 2026 Estación Fernández Oro Río Negro 15.00% - YPF 2026 In the first semester of 2018, the well abandonment tasks in the 12 wells required by the Department of Environment of the Province of Neuquén were completed and, as of the date of issuance of these financial Rincón del Mangrullo Neuquén 50.00% - YPF 2052 statements, proceedings for the final reversal of the block are in course. Senillosa (a) Neuquén 85% - PAMPA 2040 5.4.3.3 Las Tacanas Norte area Foreign Oritupano - Leona Venezuela - 22.00% PDVSA 2025 Under the Public Tender No 1/2017 - V Round, for the selection of companies interested in the exploration, Acema Venezuela - 34.49% PDVSA 2025 development and eventual exploitation of the blocks located in the Province of Neuquén and concessional in La Concepción Venezuela - 36.00% PDVSA 2025 favor of the Gas y Petróleo del Neuquén S.A. (‘GyP’), on November 1, 2017, the Board of Directors of GyP has proceed to award in favor of the Company for the offer summited for Las Tacanas Norte block. Mata Venezuela - 34.49% PDVSA 2025 Las Tacanas Norte block has a 120 km2 surface and is adjacent to El Mangrullo block, which is currently Argentine exploration operated by the Company. The accepted offer consists of a perforation of up to 8 wells with the objective Parva Negra Este Neuquén 42.50% - PAMPA 2019 toward Vaca Muerta formation, and other exploratory studies. Enarsa 1 (E1) (b) Argentine Continental 25.00% - YPF - Shelf On January 4, 2019, with the publication in the BO of Executive Order No. 2315/18 passed by the Enarsa 3 (E3) (b) Argentine Continental 35.00% - PAMPA - Executive Branch of the Province of Neuquén, this exploratory agreement, effective for a term of 4 years, Shelf entered into force. Pampa is the operator of Las Tacanas Norte area with a 90% interest, and GyP is the Chirete Salta 50.00% - High Luck 2019 permit holder with a 10% interest. Group Limited (c) 5.4.3.4 Rincón del Mangrullo area Río Atuel Mendoza 33.33% - Tecpetrol 2019 Borde del Limay (c) Neuquén 85.00% - PAMPA 2014 On August 1, 2017, YPF entered into an Agreement with the Province of Neuquén for the awarding of an Los Vértices Neuquén 85.00% - PAMPA 2014 unconventional exploitation concession in the Rincón del Mangrullo area, which was approved by a provincial Veta Escondida y Rincón de Aranda Neuquén 55.00% - PAMPA 2027 executive order. Las Tacanas Norte Neuquén 90.00% - PAMPA 2023 The main commitments of the Agreement are as follows: - A 35-year extension of the exploitation concession, NOTES: (a) It is in process for the total reversal of the area. (b) The Company, in compliance with section 5.2 of the respective partnership agreements, informed to the partners of Enarsa 1 and Enarsa 3, - A commitment to pay a bond, a corporate social responsibility contribution and the stamp tax for a total its decision not to participate in retraining them in exploration permits according to section 30 of Law 27.007. amount of U$S 20 million, and (c) It is in process of returning to Gas y Petróleo del Neuquén SA (“GyP”, permit holder). - An investment commitment of U$S 150 million aiming to further the development of the Mulichinco formation (tight gas) and to explore the potential of the Lajas and Vaca Muerta formations. Although the Company will participate in this new unconventional concession in Rincón del Mangrullo jointly with YPF, its investment commitment will amount to 30% of the total amount agreed upon between YPF and the Province of Neuquén as PEPASA’s Agreement with YPF does not include the Vaca Muerta formation. 240 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 241 CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: (Continuation) NOTE 5: (Continuation) 5.4.3.5 Extension of Concessions in El Mangrullo and Sierra Chata blocks: El Mangrullo 12.31.2018 12.31.2017 On June 5, 2018, the Company was granted a 35-year extension at El Mangrullo block for the development of unconventional gas (shale and tight gas) under the new exploitation concession granted by the Cutral Có and At the beginning of the year 452 486 Plaza Huincul Intermunicipal Autarchic Entity (“ENIM”), which was ratified by the respective provincial executive Increase for subsidiries acquisition - - order on June 18, 2018. Increases 309 226 Transferred to development (5) (216) El Mangrullo block is fully developed by Pampa, and the undertaken commitment consists of an investment Loss of the year (28) (44) pilot plan in the amount of U$S 205 million during the next 5 years aiming to continue developing the Mulichinco At the end of the year 728 452 formation and exploring the potential of the Vaca Muerta formation (shale gas). Moreover, Pampa disbursed an exploitation bond and a contribution to corporate social responsibility for U$S 15.4 million. Number of wells at the end of the year 7 7 Sierra Chata On July 10, 2018, the Company entered into a Memorandum of Understanding with the Province of Neuquén for the granting of a new 35-year concession for the exploitation of unconventional hydrocarbons at the Sierra 5.6 Chata block aiming at the development of shale and tight gas in the Vaca Muerta and the Mulichinco formations, respectively. The Memorandum of Understanding entered into force on July 27, 2018 with the passing of Provincial Operations in Ecuador Executive Order No. 1,086/18. As from 2006 the Ecuadorian government implemented far-reaching tax and regulatory reforms in connection with hydrocarbon activities, which involved material changes in the conditions set forth at the time of execution Pampa has a 45.6% stake in the consortium and is the block’s operator. The Consortium committed to make of participation agreements. investments in the block for an amount of U$S 520 million during the next 5 years (of which Pampa will contribute the amount corresponding to its stake) seeking to continue developing the Mulichinco formation and explore Amendatory Agreements and Law amending the Hydrocarbon Law the potential of the Vaca Muerta formation. Moreover, the Consortium disbursed an exploitation bond and a contribution to corporate social responsibility for U$S 30 million. On October 31, 2008, EcuadorTLC S.A., Teikoku Oil Ecuador and Petroecuador, among others, executed the Amendatory Agreements regulating the operation of Block 18 and Palo Azul while the parties negotiated the Both projects are in line with the Company’s strategy to focus its investments on the exploration and production migration to a new contract modality. of natural gas, with special emphasis on the development and exploitation of unconventional gas reserves at our blocks in the Neuquina basin. As a result of the negotiation process mentioned above, the Company decided not to accept the final proposal received from the Ecuadorian government, as this is insufficient to migrate to Service Agreements 5.4.3.6 Exploration Permit in Oil Areas in Block 18 and Palo Azul Unified Field. Consequently, through Resolution dated November 25, 2010 the Hydrocarbon Secretary notified EcuadorTLC S.A. the termination of the Participation Agreements and instructed In September 2018, the exploration permit for Río Atuel, an area located in the Province of Mendoza Petroamazonas EP to undertake the operational transition process; the Ecuadorian government must compensate operated by Petrolera El Trébol, expired, and the permit term was extended until March 13, 2019 pursuant the terminated parties in an amount equivalent to unamortized investments adjusted by a variable rate and to Administrative Decision No. 19/18 issued by the Department of Hydrocarbons of Mendoza. As a result provides for a period of time for the Ecuadorian government and the terminated parties to work out the details of the delay in the approval of the drilling project filed with the Department of Environmental Protection of the termination payment. on December 19, 2018, on February 19, 2019, Petrolera El Trébol requested the suspension of the term in progress for a six-month period as from obtaining such approval to complete the works committed for the After bringing several administrative and judicial proceedings, not having reached an agreement with the second exploratory period. Pampa has a 33.33% interest in the Río Atuel area. Ecuadorian government, EcuadorTLC SA, Cayman International Exploration Company and Teikoku Oil Ecuador, members of the joint operation, presented, on February 26, 2014 the request for arbitration against Ecuador Furthermore, the exploration permit for Chirete, an area located in the Province of Salta operated by High and EP Petroecuador under the arbitration Rules of the United Nations Commission on International Trade Law. Luck Group Limited, expired in November 2018. However, as the drilling of a well is in progress, an extension has been requested to the Province, which is expected to be granted until the completion of the well’s drilling On January 16, 2018 the Arbitration Court issued the Award, which determined a Settlement Value of U$S and testing. Pampa has a 50% interest in the Chirete area. 176 million for Ecuador TLC based on its interest in the Block. As regards the Arbitration, on March 19, 2018, the Republic of Ecuador and the Plaintiff Partners entered into 5.5 an agreement (the “Agreement”) whereunder the Plaintiff Partners will not seek the collection of the Award in consideration of the award of consequential damages, which for Ecuador TLC consist of (i) the release from Exploratory well costs tax and labor claims in dispute in the amount of U$S 132 million, and (ii) the additional collection of U$S54 The following table provides the year end balances and activity for exploratory well costs, during the years million in three installments payable in the months of March, April and May. Additionally, the parties agreed that ended December 31, 2018 and 2017: Ecuador TLC would be the sole beneficiary of the collection of the amount of U$S9 million corresponding to an obligation undertaken by Petromanabí (a member of the Block 18 Consortium but not a plaintiff). This receivable has not been recognized in view of its contingent nature. 242 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 243 CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: (Continuation) Furthermore, the Republic of Ecuador has declared and recognized in the Agreement: (i) that the Agreement is fully valid and binding on the Republic of Ecuador, (ii) that any payment default by the Republic of Ecuador under the Agreement will enable the Plaintiff Partners to fully enforce the Final Award, and (iii) there are no other NOTE 6: obligations pending performance regarding the operation and exploitation of Block 18 by the Plaintiff Partners. RISKS As a result of the Agreement, the Company has disclosed net profits for U$S40 million ($ 1,116 million) as of December 31, 2018, made up of: i) profits of U$S 133 million as consequential damages after writing off the receivable of U$S 53 million to be recovered from the Ecuadorian Government pursuant to the Amending Agreements, and ii) a U$S 93 million loss associated with the agreement to the terms of the tax claims assigned to Ecuador TLC in accordance with the Agreement. 6.1 Critical accounting estimates and judgments As of May 3, 2018, Ecuador TLC has collected the three installments and has waived (without this implying an admission of facts or rights) the proceedings brought in the Ecuadorian Internal Revenue System Claims, and The preparation of financial statements requires the Company’s Management to make future estimates and the Ecuadorian Government has made the withholding to cancel all tax debts. assessments, to apply critical judgment and to establish assumptions affecting the application of accounting policies and the amounts of disclosed assets and liabilities, income and expenses. Crude Oil Transportation Agreement with OCP The applied estimates and accounting judgments are evaluated on a continuous basis and are based on past The Company holds a contract with OCP, whereby it assumed a commitment to an oil transport capacity of experiences and other reasonable factors under the existing circumstances. Actual future results might differ 80,000 barrels/day for a term of 15 years counted as from November 10, 2003. from the estimates and evaluations made at the date of preparation of these consolidated financial statements. The estimates which have a significant risk of producing adjustments on the amounts of the assets and liabilities The transport contract is a “Ship or Pay” contract, so the Company must meet its contractual obligations for during the following year are detailed below: the total volume agreed upon, regardless of the real volume transported, and has to pay, the same as the other producers, a rate that covers the operating costs and financial services of OCP, among others. 6.1.1 Impairment of non-financial assets EcuadorTLC has the right to sell the transport capacity in the heavy crude oil pipeline (OCP) to mitigate the negative impact of its non-use. Periodically, the Company negotiates the sale of the hired transport capacity. Non-financial assets, including identifiable intangible assets, are reviewed for impairment at the lowest On December 31, 2008, the Company entered into a contract with Petroecuador whereby the Ecuadorian State level for which there are separately identifiable cash flows (CGU). For this purpose, each asset group with assumed a commitment to charge, effective January 1, 2009, the available crude owned by it and transported independent cash flows, each subsidiary, associate and each jointly controlled company has been considered a through the heavy crude oil pipeline to the oil transport capacity hired by the Company, up to a maximum single CGU, as all of their assets jointly contribute to the generation of cash inflows, which are derived from a volume of 70,000 barrels/day. In addition, the Company sold transport capacity of approximately 8,000 barrels/ single service or product; thus cash inflows cannot be attributed to individual assets. day of oil for the period from July 2004 to January 2012. As a result of the contract non-compliance by the buyers, the Company is making the pertinent claims to Petroecuador. To such effect, a mediation proceeding In order to evaluate if there is evidence that a CGU could be affected, both external and internal sources of has been brought before the Center for Mediation of the Attorney General’s Office of the Government of information are analyzed. Specific facts and circumstances are considered, which generally include the discount Ecuador sitting in the City of Quito. rate used in the estimates of the future cash flows of each CGU and the business condition as regards economic and market factors, such as the cost of raw materials, oil and gas, international petrochemical product’s price, In January 2018, EcuadorTLC assigned to PEO a transportation capacity of 10,000 barrels/day. In consideration the regulatory framework for the energy industry (mainly expected price recognition and compensation costs thereof, EcuadorTLC will pay to PEO U$S 2.9 million. methodology), the projected capital investments and the evolution of the energy demand. In January 2018 PEO declared the Equity Expropriation Event, whereby, under certain circumstances stipulated The value in use of each CGU is estimated on the basis of the present value of future net cash flows that in the agreement, the Company, in its capacity as guarantor, will bear the payments for the capital charges these units will generate. The Company Management uses approved budgets up to one year as the base for cash associated with the assigned transportation capacity. flow projections that are latter extrapolated into a term consistent with the assets’ remaining useful life, taking into consideration the appropriate discount rates. Discount rates used to discount future net cash flows is WACC, The agreement terminated on November 10, 2018 and, therefore collaterals held to ensure compliance with for each asset or CGU a specific WACC was determined which considered the business segment and the country related financial commitments were gradually released as those commitments become extinguished. As of conditions where the operations are performed. In order to calculate the fair value less the costs to sale, the December 31, 2018, the Company does not hold any collaterals in this respect. Company Management uses the estimated value of the future cash flows that a market participant could generate from the appropriate CGU, and deducts the necessary costs to carry out the sale of the corresponding CGU. Investment in Oleoductos de Crudos Pesados (OCP) - Ecuador The Company Management is required to make judgments at the moment of the future cash flow estimation. The Company has a 11.42% equity interest in OCP, an oil pipeline in Ecuador that has a transportation The actual cash flows and the values may differ significantly from the expected future cash flows and the capacity of 450,000 barrels/day. See detail in Note 5.3.4 related values obtained through discount techniques. 6.1.2 Current and deferred Income tax / Minimum notional income tax The Company Management has to regularly assess the positions stated in the tax returns as regards those situations where the applicable tax regulations are subject to interpretation and, if necessary, establish provisions according to the estimated amount that the Company will have to pay to the tax authorities. When the final tax 244 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 245 CONSOLIDATED FINANCIAL STATEMENTS NOTE 6: (Continuation) NOTE 6: (Continuation) result of these items differs from the amounts initially acknowledged, those differences will have an effect on In order to estimate collections related to the energy generation segment we mainly consider the ability of the income tax and on the deferred tax provisions in the fiscal year when such determination is made. CAMMESA to meet its payment obligations to generators, and the resolutions issued by SE, which allow the Company to collect its credits with CAMMESA through different mechanisms. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Company recognizes liabilities for eventual tax claims based on estimates of whether additional taxes will be Future adjustments to the allowance may be necessary if future economic conditions differ substantially due in the future. from the assumptions used in the assessment for each year. Deferred tax assets are reviewed at each reporting date and reduced in accordance with the probability that 6.1.6 the sufficient taxable base will be available to allow for the total or partial recovery of these assets. Deferred tax Actuarial assumptions in defined benefit plans assets and liabilities are not discounted. In assessing the realization of deferred tax assets, Management considers that it is likely that a portion or all of the deferred tax assets will not be realized. The ultimate realization of Actuarial commitments with defined benefit plans to employees are recognized as liabilities in the statement deferred tax assets depends on the generation of future taxable income in the periods in which these temporary of financial position based on actuarial estimates revised annually by an independent actuary, using the projected differences become deductible. To make this assessment, Management takes into consideration the scheduled unit credit method. reversal of deferred tax liabilities, the projections of future taxable income and tax planning strategies. The present value of pension plan obligations depends on multiple factors that are determined according 6.1.3 to actuarial estimates which are revised annually by an independent actuary, net of the fair value of the plan Provision for contingencies assets, when applicable. For this purpose, certain assumptions are used including the discount rate and wage growth rate assumptions. The Company is subject to various claims, lawsuits and other legal proceedings that arise during the ordinary course of its business. The Company’s liabilities with respect to such claims, lawsuits and other legal proceedings 6.1.7 cannot be estimated with certainty. Periodically, the Company reviews the status of each contingency and ENRE Penalties and discounts assesses potential financial liability, applying the criteria indicated in Note 4.22, for which elaborates the estimates mainly with the assistance of legal advisors, based on information available to the Management at Edenor considers its applicable accounting policy for the recognition of ENRE penalties and discounts critical financial statements date, and taking into account our litigation and resolution/settlement strategies. because it depends on penalizable events, which are valued on the basis of Edenor’s management best estimate of the expenditure required to settle the present obligation at the date of these financial statements. The Contingencies include outstanding lawsuits or claims for possible damages to third parties in the ordinary balances of ENRE penalties and discounts are adjusted in accordance with the regulatory framework applicable course of the Company’s business, as well as third party claims arising from disputes concerning the thereto and have been estimated based on the description made in Note 2.3. interpretation of legislation. 6.1.8 The Company evaluates whether there would be additional expenses directly associated to the ultimate Revenue recognition resolution of each contingency, which will be included in the provision if they may be reasonably estimated. In the distribution of energy business segment, revenue is recognized on an accrual basis upon delivery to customers, which includes the estimated amount of unbilled distribution of electricity at the end of each year. We However, if the Company´s Management estimates are not correct, current provisions might be inadequate consider our accounting policy for the recognition of estimated revenue critical because it depends on the amount and could have an adverse effect on the Company’s results of operations, financial position and cash flows. of electricity effectively delivered to customers which is valued on the basis of applicable tariffs. Unbilled revenue is classified as current trade receivables. 6.1.4 Asset retirement obligations In the oil and gas business segment, the fair value of the consideration receivable corresponding to revenues Asset retirement obligations after completion of operations require the Company’s Management to estimate from gas sales to Distributors is recognized based on the volume of gas delivered and the price established by the the number of wells, long-term well abandonment costs and the time remaining until abandonment. Technology, SE (in accordance with applicable resolutions). costs and political, environmental and safety considerations constantly change and may result in differences between actual future costs and estimates. 6.1.9 Oil and gas reserves Asset retirement obligations estimates are adjusted when it is justified by changes in the evaluation criteria Reserves mean oil and gas volumes (in m3 of oil equivalent) that are economically producible, in the areas or at least once a year. where the Company operates or has a (direct or indirect) interest and over which the Company has exploitation rights, including oil and gas volumes related to those service agreements under which the Company has no 6.1.5 ownership rights on the reserves or the hydrocarbons obtained and those estimated to be produced for the Impairment of financial assets contracting company under service contracts. The Group is exposed to losses for uncollectible receivables. The Company Management estimates the final collectability of the accounts receivable. There are numerous uncertainties in estimating proved reserves and future production profiles, development costs and prices, including several factors beyond the producer’s control. Reserve engineering is a subjective The accounting of expected credit losses for trade receivables and other receivables with similar risk process of estimating underground accumulations involving a certain degree of uncertainty. Reserves estimates characteristics is based on the Company’s best estimate of the default risk and the calculation of the expected depend on the quality of the available engineering and geological data as of the estimation date and on the credit losses rates, based on historical information of the behavior of the Company’s clients, current market interpretation and judgment thereof. conditions and forward-looking estimates at the end of each reporting period. Reserve estimates are adjusted when so justified by changes in the evaluation criteria or at least once a year. These reserve estimates are based on the reports of oil and gas consulting professionals. 246 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 247 CONSOLIDATED FINANCIAL STATEMENTS NOTE 6: (Continuation) NOTE 6: (Continuation) The Company uses the information obtained from the calculation of reserves in the determination of The Company’s risk management strategy seeks to achieve a balance between profitability targets and risk depreciation of assets used in the areas of oil and gas, as well as assessing the recoverability of these assets exposure levels. Financial risks are those derived from financial instruments the Company is exposed to during (Notes 4.8 and 4.9). or at the closing of each fiscal year. The Company uses derivative instruments to hedge certain risks when it deems it necessary according to its risk management internal policies. 6.1.10 Environmental remediation Financial risk management is controlled by the Financial Department, which identifies, evaluates and covers financial risks. Risk management systems and policies are reviewed on a regular basis to reflect changes The costs incurred to limit, neutralize or prevent environmental pollution are only capitalized if at least one in market conditions and the Company’s activities, and have been applied consistently during the periods of the following conditions is met: (a) such costs relate to improvements in safety; (b) the risk of environmental comprised in these financial statements. This section includes a description of the main risks and uncertainties pollution is prevented or limited; or (c) the costs are incurred to prepare the assets for sale and the book value which may adversely affect the Company’s strategy, performance, operational results and financial position. (which considers those costs) of such assets does not exceed their respective recoverable value. 6.2.1.1 Market risks Liabilities related to future remediation costs are recorded when, on the basis of environmental assessments, such liabilities are probable to materialize, and costs can be reasonably estimated. The actual recognition and Foreign exchange risk amount of these provisions are generally based on the Company’s commitment to an action plan, such as an The Company’s financial situation and the results of its operations are sensitive to variations in the exchange approved remediation plan or the sale or disposal of an asset. The provision is recognized on the basis that a rate between the Argentine peso and other currencies, primarily with respect to U.S. dollar. In some cases, the future remediation commitment will be required. Company may use derivative financial instruments to mitigate associated exchange rate risks. The Company measures liabilities based on its best estimation of present value of future costs, using currently The Company collects a meaningful portion of its revenues in Argentine pesos pursuant to prices which are available technology and applying current environmental laws and regulations as well as the Company’s own indexed to the U.S. dollar, mainly revenues resulting from: i) the sale of energy (sales within the spot market, internal environmental policies. agreements with CAMMESA and contracts within the MAT) and ii) the sale of gas. 6.1.11 Furthermore, as of December 31, 2018, excluding CAMMESA’s regulatory liabilities, approximately 85% of Business Combinations the Company’s consolidated financial debt consisted mainly of long-term borrowings in the international capital market, 99% of which are nominated in U.S. dollar and 93% are subject to a fixed rate. The peso-denominated The acquisition method involves the measurement at fair value of the identifiable assets acquired and the debt represents approximately 5% of the total debt. liabilities assumed in the business combination at the acquisition date. Debt maturities in 2018 totaling approximately U$S 300 million were refinanced through financial loans and For the purpose to determine the fair value of identifiable assets, the Company uses the valuation approach pre-export finance facilities with different local banks and with short- and medium-term maturities. considered the most representative for each asset. These include the i) income approach, through indirect cash flows (net present value of expected future cash flows) or through the multi-period excess earnings method, Additionally, the Company has undertaken several investment commitments, mainly projects to increase its ii) cost approach (replacement value of the good adjusted for loss due to physical deterioration, functional and thermal generation capacity and projects for the generation of energy from renewable sources, most of which are economic obsolescence) and iii) market approach through comparable transactions method. denominated in foreign currency, which exposes the Company to a risk of loss resulting from the devaluation of the Argentine peso. Specifically, the Company entered into off shore and on shore agreements euro-denominated Likewise, in order to determine the fair value of liabilities assumed, the Company’s Management considers related to Genelba’s extension project. These commercial commitments are subject to the risk of variations in the the probability of cash outflows that will be required for each contingency, and elaborates the estimates with euro’s exchange rate. assistance of legal advisors, based on the information available and taking into account the strategy of litigation and resolution / liquidation. Taking into consideration that the Company has a net liability position in U.S. dollars, as of December 31, 2018 the Company recorded net foreign exchange losses in the amount of $ 32,048 million. However, considering Management critical judgment is required in selecting the approach to be used and estimating future cash that the collection of almost all peso-denominated income is indexed to the U.S. dollar and that most debt is flows. Actual cash flows and values may differ significantly from the expected future cash flows and related denominated in U.S. dollars and has long-term maturities, the devaluation during 2018 is not expected to have a values obtained through the mentioned valuation techniques. significant impact on the future cancellation of the company’s indebtedness. In the Distribution segment, the subsidiary Edenor collects revenues in pesos pursuant to regulated tariffs which are not indexed to the U.S. dollar, whereas a significant portion of its existing financial debt is denominated 6.2 in that currency, which exposes the Company to a risk of loss resulting from a devaluation of the Argentine peso. Edenor can manage this risk through the execution of forward contracts denominated in foreign currency. As Financial risk management of the year ended December 31, 2018, Edenor has not hedged its exposure to the US dollar. Edenor does not currently hedge its exposure to currency risk. Therefore, any devaluation of the peso could significantly increase 6.2.1 its debt service burden, which, in turn, could have a substantial adverse effect on its financial and cash position Financial Risk Factors (including its ability to repay its Corporate Notes) and the results of its operations. The Company’s activities are subject to several financial risks: market risk (including the exchange rate risk, During 2018, U.S. Dollar currency appreciated by approximately 102% against the Argentine peso, from $ 18.65 the interest rate risk and the price risk), credit risk and liquidity risk. in December 2017 to $37.70 in December 2018. Financial risk management is encompassed within the Company’s global policies, there is an integrated In 2018, the global economy was under severe strain. With a higher risk aversion and a generalized increase in risk management methodology, where the focus is not placed on the individual risks of the business units’ the financial pressure on emerging countries, countries in greater need of external financing, such as Argentina, operations, but there is rather a wider perspective focused on monitoring risks affecting the whole portfolio. were the most adversely affected. 248 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 249 CONSOLIDATED FINANCIAL STATEMENTS NOTE 6: (Continuation) NOTE 6: (Continuation) In Argentina, the fiscal adjustment and changes necessary to attain economic recovery did not occur fast enough to guarantee the sustainability of medium- and long-term debt levels, which resulted in decreased access to external credit markets for the country and heightened tension in the domestic exchange market. In June, the Government entered into a three-year stand-by arrangement with the IMF amounting to U$S50 billion, conditional upon the meeting of rigorous fiscal and monetary targets. However, the exchange volatility persisted until the end AMOUNT of September, with the exchange rate reaching a peak of $ 41.25 on September 30, 2018, which forced the BCRA OF FOREIGN EXCHANGE TOTAL TOTAL (1) to increase and maintain a 40% reference rate and to deepen monetary contraction policies through interventions TYPE CURRENCY RATE 12.31.2018 12.31.2017 in the LEBAC’s secondary market and an increase in minimum reserve requirements. LIABILITIES NON CURRENT LIABILITIES On September 26, an extension of the IMF arrangement to U$S 57 billion, with an accelerated disbursement Financial instruments schedule, was announced. Compared with the previous arrangement, available resources increased by U$S19 Trade and other payables billion until the end of 2019, and funds available under the program would no longer be treated as precautionary Third parties U$S 6.7 37.700 251 185 and would be available for use as budget support. With this new announcement and under the new BCRA’s Borrowings management, a more restrictive monetary policy was instrumented with the resulting increase in the domestic Related parties U$S - - - 21 market’s interest rates and a decrease in the system’s liquidity. Third parties U$S 1,717.5 37.700 64,750 47,842 Non financial instruments With the change in BCRA’s management, the inflation goal was abandoned, and a new monetary-exchange Provisions scheme was adopted seeking to maintain a constant monetary base in nominal terms until June 2019 and creating Third parties U$S 104.8 37.700 3,951 4,317 a wide non-intervention exchange zone, with limited intervention outside this band. The goal of this new scheme Taxes payables is to control the demand for dollars by vacuuming all surplus peso liquidity. Third parties U$S 7.7 37.700 290 - Total non current liabilities 69,242 52,365 The following table shows the Company’s exposure to the exchange rate risk for financial assets and liabilities denominated in a currency different from the Company’s functional currency. CURRENT LIABILITIES Financial instruments Trade and other payables Related parties U$S 3 37.600 105 59 AMOUNT Third parties U$S 132.5 37.700 4,995 6,867 OF FOREIGN EXCHANGE TOTAL TOTAL EUR 4.3 43.160 186 741 TYPE CURRENCY RATE (1) 12.31.2018 12.31.2017 CHF - - 18 ASSETS SEK 1.0 4.200 4 71 NON CURRENT ASSETS Borrowings Financial instruments Other receivables Third parties U$S 306.4 37.700 11,551 5,875 Related parties U$S 38.2 37.600 1,436 1,165 Derivative financial instruments Third parties U$S 129.3 37.500 4,849 1,717 Third parties U$S 1.3 37.700 49 - Financial assets at fair value through profit and loss Non financial instruments Third parties U$S 3.6 37.500 135 - Salaries and social security payable Total non current assets 6,420 2,882 Third parties U$S 0.3 37.700 11 4 U$ 1.7 1.157 2 - CURRENT ASSETS Taxes payables Financial instruments Third parties U$S 5.9 37.700 222 28 Financial assets at fair value through Provisions profit and loss Third parties U$S 300.6 37.500 11,272 7,204 Related parties U$S - 37.600 - 585 Derivative financial instruments Third parties U$S 18.1 37.700 682 413 Third parties U$S - - - 6 Total current liabilities 17,807 14,661 Trade and other receivables Liabilities associated to assets U$S - - - 1,897 Related parties U$S 9.9 37.600 372 279 classified as held for sale Third parties U$S 180.8 37.500 6,780 8,600 Total liabilities 87,049 68,923 U$ 4,050.9 1.157 4,688 - Net Position Liability (50,624) (48,279) EUR 0.4 42.840 17 - Cash and cash equivalents U$S 163.6 37.500 6,135 596 EUR 17.3 42.840 741 10 Total current assets 30,005 16,695 NOTE: (1) The exchange rates correspond to December 31, 2018 released by the National Bank of Argentine for U.S. dollars (U$S), euros (EUR), Swiss francs (CHF) and Norwegian kroner (SEK). For balances with related parties, the Exchange rate used is the average. Non current assets classified as held U$S - - - 1,067 for sale Total assets 36,425 20,644 250 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 251 CONSOLIDATED FINANCIAL STATEMENTS NOTE 6: (Continuation) NOTE 6: (Continuation) The Company estimates that provided all other variables remain constant, a 10% revaluation/(devaluation) In the case of fixed rates and in view of the market’s current conditions, the Company considers that the of U.S. Dollar as compared to the Argentine peso would generate in absolute values an increase or decrease risk of a significant decrease in interest rates is low and, therefore, does not foresee a substantial risk in its of $5,588 million and $ 4,746 million in the 2018 and 2017 fiscal years, respectively. The Group´s exposure to indebtedness at fixed rates. other foreign currency movements is not material. As of the date of issuance of these financial statements, the Company is not exposed to a significant risk of Price risk variable interest rate increases since most of the financial debt is subject to fixed rate. The Company’s financial instruments are not significantly exposed to hydrocarbon international price risks The following chart shows the breakdown of the Company’s borrowings classified by interest rate and the on account of the current regulatory, economic, governmental and other policies in force, gas domestic prices currency in which they are denominated: are not directly affected in the short-term due to variations in the international market. Additionally, the Company’s investments in financial assets classified as “at fair value through profit or loss” are sensitive to the risk of changes in the market prices resulting from uncertainties as to the future value of such financial assets. 12.31.2018 12.31.2017 The Company estimates that provided all other variables remain constant, a 10% revaluation/(devaluation) of Fixed interest rate: each market price would generate the following increase/(decrease) in the fiscal year’s income/(loss) in relation Argentinian pesos 550 3,352 to financial assets at fair value through profit and loss detailed in Note 12.6 to these financial statements: U.S dollar 70,149 49,858 Subtotal loans granted at a fixed interest rate 70,699 53,210 Floating interest rates: Argentinian pesos 4,074 5,320 INCREASE (DECREASE) OF THE U.S dollar 4,950 3,112 RESULT FOR THE YEAR Subtotal loans granted at a floating interest rate 9,024 8,432 Non interest accrued FINANCIAL ASSETS 12.31.2018 12.31.2017 U.S dollar 1,165 1,029 Argentinian pesos 1,202 768 Shares 47 29 Subtotal no interest accrued 2,367 1,797 Government securities 1,123 741 Total borrowings 82,090 63,439 Investment funds 400 1,416 Variation of the result of the year 1,570 2,186 Based on the conducted simulations, and provided all other variables remain constant, a 10% increase/decrease in variable interest rates would generate the following (decrease)/increase in the fiscal year’s results of $ 208 million. Cash flow and fair value interest rate risk The management of the interest rate risk seeks to reduce financial costs and limit the Company’s exposure 6.2.1.2 Credit risk to interest rate increases. The Company establishes individual credit limits according to the limits defined by the Board of Directors and approved by the Financial Department based on internal or external ratings. The Company makes constant Indebtedness at variable rates exposes the Company to the interest rate risk on its cash flows due to the credit assessments on its customers’ financial capacity, which minimizes the potential risk for bad debt losses. possible volatility they may experience. Indebtedness at fixed rates exposes the Company to the interest rate risk on the fair value of its liabilities, since they may be considerably higher than variable rates. The credit risk represents the exposure to possible losses resulting from the breach by commercial or financial counterparties of their obligations taken on with the Company. This risk stems mainly from economic As of December 31, 2018, excluding CAMMESA’s regulatory liabilities, approximately 6% of the indebtedness and financial factors or a possible counterparty default. was subject to variable interest rates. Approximately 14% of the indebtedness at variable rates is denominated in pesos, mainly at the Private Badlar rate plus an applicable margin, except for CAMMESA financing. The rest The credit risk is associated with the Company’s commercial activity through customer trade receivables, as of the Company’s indebtedness subject to variable interest rates is denominated in U.S. dollar, based on Libor well as available funds and deposits in banking and financial institutions. rate plus an applicable margin. The Company, in its ordinary course of business and in accordance with its credit policies, grants credits to The Company seeks to mitigate its interest-rate risk exposure through the analysis and evaluation of (i) a large customer base, mainly large sectors of the industry, including petrochemical companies, natural gas the different liquidity sources available in the financial and capital market, both domestic and (if available) distributors, electricity large users and electricity distributors. international; (ii) interest rates alternatives (fixed or variable), currencies and terms available for companies in a similar sector, industry and risk than the Company; (iii) the availability, access and cost of interest-rate hedge As of December 31, 2018, the Company’s trade receivables, without considering Edenor, totaled $ 15,798 agreements. On doing this, the Company evaluates the impact on profits or losses resulting from each strategy million, out of which 78% are short-term receivables and the remaining 22% are classified as non-current and over the obligations representing the main interest-bearing positions. correspond mainly to CAMMESA (national company responsible for purchasing electric power from generators 252 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 253 CONSOLIDATED FINANCIAL STATEMENTS NOTE 6: (Continuation) NOTE 6: (Continuation) and selling it to distributors). With the exception of CAMMESA, which represents approximately 52% of all trade The Company management supervises updated projections on liquidity requirements to guarantee the receivables, the Company does not have a significant credit risk concentration, as this exposure is distributed sufficiency of cash and liquid financial instruments to meet operating needs while keeping at all times a sufficient among a large number of customers and other counterparties. No other client has a meaningful percentage of margin for unused credit facilities. In this way, the aim is that the Company does not breach indebtedness levels or the total amount of these receivables. the Covenants, if applicable, of any credit facility. Those projections take into consideration the Company’s debt financing plans, the meeting of the covenants and, if applicable, the external regulatory or legal requirements The impossibility by CAMMESA to pay these receivables may have a substantially adverse effect on cash such as, for example, restrictions on the use of foreign currency. income and, consequently, on the result of operations and financial situation which, in turn, may adversely affect the Company’s repayment capacity. Excess cash and balances above working capital management requirements are managed by the Company’s Treasury Department, which invests them in term deposits, mutual funds and marketable securities, selecting The credit risk of liquid funds and other financial investments is limited since the counterparties are high instruments having proper currencies and maturities, and an adequate credit quality and liquidity to provide a credit quality banking institutions. If there are no independent risk ratings, the risk control area evaluates the sufficient margin as determined in the previously mentioned projections. customer’s creditworthiness, based on past experiences and other factors. The Company keeps its sources of financing diversified between banks and the capital market, and it is In the case of Edenor, delinquent trade receivables increased from $ 1,536 million as of December 31, 2017 exposed to the refinancing risk at maturity. to $ 1,971 million as of December 31, 2018, mainly due to the tariff increase during the fiscal year (Note 2.3). One of the significant items of delinquent balances is that related to the receivable amounts with Municipalities, The determination of the Company’s liquidity index for fiscal years ended December 31, 2018 and 2017 is in respect of which Edenor either applies different offsetting mechanisms against municipal taxes it collects on detailed below: behalf of the municipalities, or implements debt refinancing plans, with the aim of reducing them. The inability to collect the accounts receivable in the future could have an adverse effect on the Company’s results of operations and its financial position, which, in turn, could have an adverse effect on the Company’s 12.31.2018 12.31.2017 ability to repay loans, including payment of the Corporate Notes. Current assets 57,361 55,331 The Company applies the simplified approach of IFRS 9 to measure the expected credit losses trade Current liabilities 44,606 44,236 receivables and other receivables in accordance with the policy described in Note 4.10.4. Index 1.29 1.25 The expected credit loss on trade receivables and financial assets as of December 31, 2018 amounts to $ 1,562 million (Note 12.2) and was determined based on credit loss rates calculated for days past due detailed below: The following table includes an analysis of the Company financial liabilities, grouped according to their maturity dates and considering the period remaining until their contractual maturity date from the date of the financial statements. Derivative financial liabilities are included in the analysis if their contractual maturities are 30 60 90 120 150 180 +180 essential for the understanding of the cash flow calendar. The amounts shown in the table are the contractual UNDUE DAYS DAYS DAYS DAYS DAYS DAYS DAYS undiscounted cash flows. Generation 0.04% 0.09% 2.62% 3.39% 9.37% 13.56% 19.82% 28.88% Oil and Gas 2.20% 4.42% 11,11% 20.42% 42.85% 47.32% 49.20% 56.32% Distribution of energy 8% 8% 12% 19% 26% 59% 69% 69% Petrochemicals 0.03% 0.08% 1.41% 4.98% 11.52% 20.36% 24.91% 25.24% TRADE AND Holding 0.96% 1.25% 2.03% 2.85% 19.86% 26.41% 32.95% 32.97% AS OF DECEMBER 31, 2018 OTHER PAYABLES BORROWINGS TOTAL Less than three months 12,412 4,217 16,629 Three months to one year 20,072 12,007 32,079 One to two years 334 9,130 9,464 Two to five years 100 33,634 33,734 Loss allowance evolution as of December 31, 2018: it is detailed in Note 12.2. More than five years - 36,844 36,844 Total 32,918 95,832 128,750 The Company’s maximum exposure to credit risk is based on the book value of each financial asset in the financial statements. On the basis of the change in an assumption, while holding all other assumptions AS OF DECEMBER 31, 2017 constant, a 5% increase / decrease in the estimated trade receivables’ uncollectibility rate would result in $ 60 Less than three months 17,778 20,576 38,354 million decrease / increase in fiscal year’s results. Three months to one year 8,865 19,102 27,967 One to two years 326 6,151 6,477 6.2.1.3 Liquidity risk Two to five years 180 24,545 24,725 More than five years - 44,647 44,647 The liquidity risk is associated with the Company’s capacity to finance its commitments and conduct its Without established term 8,963 8,964 17,927 business plans with stable financial sources, as well as with the indebtedness level and the financial debt Total 36,112 123,985 160,097 maturities profile. The cash flow projection is made by the Financial Department. 254 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 255 CONSOLIDATED FINANCIAL STATEMENTS NOTE 6: (Continuation) 6.3 NOTE 7: Capital risk management SEGMENT INFORMATION On managing capital, the Company aims to safeguard its capacity to continue operating as an on-going business with the purpose of generating return for its shareholders and benefits to other stakeholders, and keeping an optimal capital structure to reduce the cost of capital. The Company is an integrated energy company in Argentina, which participates in the various segments of the electricity sector, in the exploration and production of gas and oil, in petrochemicals and in the refining and To keep or adjust its capital structure, the Company may adjust the amount of the dividends paid to its distribution of fuels. shareholders, reimburse capital to its shareholders, issue new shares, conduct stock repurchase programs or sell assets to reduce its debt. Through its own activities, subsidiaries and share holdings in joint ventures, and based on the business nature, customer portfolio and risks involved, we were able to identify the following business segments: In line with industry practices, the Company monitors its capital based on the leverage ratio. This ratio is calculated by dividing the net debt by the total capital. The net debt equals the total indebtedness (including Electricity Generation, consisting of the Company’s direct and indirect interests in CPB, HINISA, HIDISA, current and non-current indebtedness) minus cash and cash equivalents and current financial assets at fair value Greenwind, PEFM, PEA, Enecor, TMB, TJSM and through its own electricity generation activities through thermal through profit and loss. The total capital corresponds to the shareholders’ equity as shown in the statement of plants Güemes, Piquirenda, Loma de la Lata, Genelba and Ecoenergía, Pilar, I. White and the Pichi Picún Leufú financial position, plus the net debt. hydroelectric complex. Financial leverage ratios as at December 31, 2018 and 2017 were as follows: Electricity Distribution, consisting of the Company’s direct interest in Edenor. Oil and Gas, consisting of the Company’s own interests in oil and gas areas and through its direct interest in PACOSA and investments in Oldelval and OCP associates. As of December 31, 2018 and 2017, the Company has classified the results corresponding to the divestment mentioned in Note 5.2.1 as discontinued operations. 12.31.2018 12.31.2017 Refining and Distribution, As of December 31, 2018 and 2017, the Company has classified the results Total borrowings 82,090 63,439 corresponding to the divestment mentioned in Note 5.2.2 as discontinued operations. Continuing operations Less: cash and cash equivalents, and financial assets at fair (24,370) (22,755) relates to storage and logistics services provided by Dock Sud. value through profit and loss Net debt 57,720 40,684 Petrochemicals, comprising of the Company’s own styrenics operations and the catalytic reformer plant Total capital attributable to owners 109,243 65,649 operations conducted in Argentine plants. Leverage ratio 52.84% 61.97% Holding and Other Business, principally consisting of financial investment transactions, holding activities, and interests in joint businesses CITELEC and CIESA and their respective subsidiaries, which hold the concession over the high voltage electricity transmission nationwide and over gas transportation in the South of the country, respectively. 6.4 The Company manages its operating segment based on its individual net results. Regulatory risk factors Pursuant to caption C of Section 37 of the Edenor’s Concession Agreement, the Grantor of the Concession may, without prejudice to other rights to which he is entitled thereunder, foreclose on the collateral granted by Edenor when the cumulative value of the penalties imposed to Edenor in the previous one-year period exceeds 20% of its annual billing, net of taxes and rates. Edenor’s Management evaluates the development of this indicator on an annual basis. As of the date of issuance of these financial statements, there are no events of non-compliance by Edenor that could lead to that situation. 256 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 257 CONSOLIDATED FINANCIAL STATEMENTS NOTE 7: (Continuation) NOTE 7: (Continuation) CONSOLIDATED PROFIT AND LOSS INFORMATION GENERATION DISTRIBUTION OIL REFINING & PETROCHEMICALS HOLDING ELIMINA- CONSOLIDATED AS OF DECEMBER 31, 2018 OF ENERGY AND GAS DISTRIBUTION AND OTHERS TIONS Revenue 22,763 55,954 17,261 - 12,748 1,354 - 110,080 Intersegment sales 62 - 2,377 - - - (2,439) - Cost of sales (10,274) (42,839) (10,822) - (12,602) (4) 2,380 (74,161) Gross profit (loss) 12,551 13,115 8,816 - 146 1,350 (59) 35,919 Selling expenses (54) (5,033) (721) (159) (484) (1) 1 (6,451) Administrative expenses (1,535) (2,872) (2,110) - (212) (1,022) - (7,751) Exploration expenses - - (45) - - - - (45) Other operating income 405 322 5,320 281 205 309 - 6,842 Other operating expenses (640) (1,648) (4,304) - (752) (210) 28 (7,526) Impairment of property, plant and equipment and intangible assets (7) - - - (1,188) - - (1,195) Share of profit (loss) from joint ventures and associates (414) 2 1,421 (138) - 3,593 - 4,464 Income from the sale of companies - - 1,052 - - - - 1,052 Operating profit (loss) 10,306 3,886 9,429 (16) (2,285) 4,019 (30) 25,309 Gain (Loss) on monetary position 8,789 8,504 4,037 (15) 1,850 464 67 23,696 Financial income 1,949 672 594 - 50 519 (33) 3,751 Financial expenses (3,218) (4,977) (2,978) - (566) (237) 32 (11,944) Other financial results (13,772) (1,879) (19,288) 32 (1,481) 4,023 - (32,365) Financial results, net (6,252) 2,320 (17,635) 17 (147) 4,769 66 (16,862) Profit (loss) before income tax 4,054 6,206 (8,206) 1 (2,432) 8,788 36 8,447 Income tax (107) (1,865) 2,124 (32) 471 (1,249) - (658) Profit (loss) for the year from continuing operations 3,947 4,341 (6,082) (31) (1,961) 7,539 36 7,789 Profit (loss) for the year from discontinued operations - - 1,868 1,167 - - (16) 3,019 Profit (loss) for the year 3,947 4,341 (4,214) 1,136 (1,961) 7,539 20 10,808 Depreciation and amortization 2,488 2,611 3,472 20 222 3 - 8,816 Total (loss) profit attributable to: Owners of the Company 3,734 2,273 (4,306) 1,136 (1,961) 7,539 20 8,435 Non - controlling interest 213 2,068 92 - - - - 2,373 CONSOLIDATED STATEMENT OF FINANCIAL POSITION GENERATION DISTRIBUTION OIL REFINING & PETROCHEMICALS HOLDING ELIMINA- CONSOLIDATED AS OF DECEMBER 31, 2018 OF ENERGY AND GAS DISTRIBUTION AND OTHERS TIONS Assets 53,256 80,423 46,638 2,319 5,767 30,572 (5,140) 213,835 Liabilities 39,738 46,801 48,003 1,070 7,456 8,254 (5,170) 146,152 ADDITIONAL CONSOLIDATED INFORMATION GENERATION DISTRIBUTION OIL REFINING & PETROCHEMICALS HOLDING ELIMINA- CONSOLIDATED AS OF DECEMBER 30, 2018 OF ENERGY AND GAS DISTRIBUTION AND OTHERS TIONS Increases in property, plant and equipment 8,911 8,550 7,221 50 140 199 - 25,071 258 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 259 CONSOLIDATED FINANCIAL STATEMENTS NOTE 7: (Continuation) NOTE 7: (Continuation) CONSOLIDATED PROFIT AND LOSS INFORMATION GENERATION DISTRIBUTION OIL REFINING & PETROCHEMICALS HOLDING ELIMINA- CONSOLIDATED AS OF DECEMBER 31, 2017 OF ENERGY AND GAS DISTRIBUTION AND OTHERS TIONS Revenue 13,250 39,603 16,695 - 11,825 635 - 82,008 Intersegment sales 61 - 707 - - - (768) - Cost of sales (7,335) (30,117) (11,695) - (10,915) (27) 750 (59,339) Gross profit (loss) 5,976 9,486 5,707 - 910 608 (18) 22,669 Selling expenses (161) (3,568) (600) - (471) - 24 (4,776) Administrative expenses (1,189) (2,505) (2,053) - (622) (1,118) 6 (7,481) Exploration expenses - - (71) - - - - (71) Other operating income 725 158 4,123 - 103 505 (6) 5,608 Other operating expenses (357) (1,261) (1,410) - (363) (501) - (3,892) Share of profit (loss) from joint ventures and associates (73) 10 41 (113) - 1,948 - 1,813 Operating profit (loss) 4,921 2,320 5,737 (113) (443) 1,442 6 13,870 Gain (Loss) on monetary position 654 5,457 (687) (276) 58 6,272 - 11,478 Financial income 1,453 441 209 - 16 286 (72) 2,333 Financial expenses (2,618) (2,607) (2,932) - (387) (278) 72 (8,750) Other financial results (1,265) 19 (3,493) - (241) 1,206 - (3,774) Financial results, net (1,776) 3,310 (6,903) (276) (554) 7,486 - 1,287 Profit (loss) before income tax 3,145 5,630 (1,166) (389) (997) 8,928 6 15,157 Income tax (137) (449) 893 - 728 (50) - 985 Profit (loss) for the year from continuing operations 3,008 5,181 (273) (389) (269) 8,878 6 16,142 Profit for the year from discontinued operations - - (1,328) (599) - - 34 (1,893) Profit (loss) for the year 3,008 5,181 (1,601) (988) (269) 8,878 40 14,249 Depreciation and amortization 2,029 2,198 3,273 - 152 87 - 7,739 Total profit (loss) attributable to: Owners of the Company 2,841 2,719 (2,373) (988) (269) 8,878 40 10,848 Non - controlling interest 167 2,462 772 - - - - 3,401 CONSOLIDATED STATEMENT OF FINANCIAL POSITION GENERATION DISTRIBUTION OIL REFINING & PETROCHEMICALS HOLDING ELIMINA- CONSOLIDATED AS OF DECEMBER 31,2017 OF ENERGY AND GAS DISTRIBUTION AND OTHERS TIONS Assets 42,018 74,362 43,510 8,847 5,328 46,761 (7,571) 213,255 Liabilities 12,556 43,958 16,748 5,314 3,552 64,445 (7,588) 138,985 ADDITIONAL CONSOLIDATED INFORMATION GENERATION DISTRIBUTION OIL REFINING & PETROCHEMICALS HOLDING ELIMINA- CONSOLIDATED AS OF DECEMBER 31, 2017 OF ENERGY AND GAS DISTRIBUTION AND OTHERS TIONS Increases in property, plant and equipment 10,380 8,483 5,295 255 182 192 - 24,787 Accounting criteria used by the subsidiaries to measure results, assets and liabilities of the segments is consistent with that used in the consolidated financial statements. Transactions between different segments are conducted under market conditions. Assets and liabilities are allocated based on the segment’s activity. 260 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 261 CONSOLIDATED FINANCIAL STATEMENTS NOTE 8: NOTE 9: REVENUE COST OF SALES 12.31.2018 12.31.2017 12.31.2018 12.31.2017 Sales of energy to the Spot Market 12,229 8,869 Inventories at the beginning of the year 4,266 6,191 Sales of energy by contract 10,483 4,304 Other sales 51 77 Plus: Charges for the period Generation subtotal 22,763 13,250 Purchases of inventories, energy and gas 46,175 32,903 Energy sales 55,690 39,328 Salaries and social security charges 6,807 7,602 Right of use of poles 190 213 Benefits to personnel 218 267 Connection and reconnection charges 74 62 Accrual of defined benefit plans 150 276 Distribution subtotal 55,954 39,603 Works contracts, Fees and compensation for services 3,686 3,174 Property, plant and equipment depreciations 7,766 7,342 Oil, Gas and liquid sales 17,123 15,766 273 53 Other sales 138 929 Intangible assets amortization Oil and gas subtotal 17,261 16,695 Transport of energy 155 128 Consumption of materials 2,406 1,091 Administrative services sales 1,347 627 Penalties (1) 2,093 425 Other sales 7 8 Maintenance 908 688 Holding and others subtotal 1,354 635 Canons and Royalties 2,782 2,110 Environmental control 193 105 Petrochemicals sales 12,748 11,825 Petrochemicals subtotal 12,748 11,825 Rental and insurance 502 430 Total revenue 110,080 82,008 Surveillance and security 209 230 Taxes, rates and contributions 183 109 Other 558 486 Subtotal 75,064 57,419 Revenue is recognised: Less: Inventories at the end of the year (5,169) (4,271) 1. At a point in time, that is the effective delivery of the energy, the product or the provision of Total cost of sales 74,161 59,339 connection or reconnection services for a total amount of $ 95,844 million, $ 74,492 million and $ 46,939 million as of December 31, 2018, 2017 and 2016, respectively; 2. Over time in case of power availability, technical assistance services and right to use poles for a NOTE: (1) In 2017, includes $ 720 million of recover by penalties (Note 2.3.4). total of $ 14,236 million, $ 7,516 million and $ 4,323 million as of December 31, 2018, 2017 and 2016, respectively. 262 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 263 CONSOLIDATED FINANCIAL STATEMENTS NOTE 10: (Continuation) NOTE 10: OTHER ITEMS OF THE STATEMENTO OF COMPREHENSIVE INCOME 10.3 Exploration Expenses 10.1 Selling Expenses 12.31.2018 12.31.2017 Geological and geophysical expenses 17 27 Decrease in unproductive wells 28 44 12.31.2018 12.31.2017 Total exploration expenses 45 71 Salaries and social security charges 972 1,007 Accrual of defined benefit plans 16 22 Fees and compensation for services 1,126 963 Compensation agreements 81 221 10.4 Property, plant and equipment depreciations 322 127 Taxes, rates and contributions 1,244 1,137 Other Operating Income and Expenses Communications 270 289 Penalties 1,052 434 Net impairment losses on financial assets (Note 4.1.1.2) 1,067 418 Transport 211 137 Other 90 21 NOTES 12.31.2018 12.31.2017 Total selling expenses 6,451 4,776 Other operating income Compensation for transaction agreemnet in Ecuador 5.6 3,721 - Recovery of doubtful accounts 7 154 Surplus Gas Injection Compensation 866 3,820 Commissions on municipal tax collections 77 52 Services to third parties 503 313 10.2 Profit for property, plant and equipment sale 118 7 Administrative Expenses Dividends received 29 56 Reversal of contingencies provision 140 915 Other 1,381 291 Total other operating income 6,842 5,608 12.31.2018 12.31.2017 Other operating expenses Provision for contingencies (1,320) (765) Salaries and social security charges 3,044 2,898 Decrease in property, plant and equipment (217) (38) Benefits to the personnel 206 205 Allowance for uncollectible tax credits (1) (27) Accrual of defined benefit plans 30 220 Tax on bank transactions (1,136) (1,035) Fees and compensation for services 2,548 2,032 Cost for services provided to third parties (57) (62) Compensation agreements 115 754 Compensation agreements - (80) Directors’ and Syndicates’ fees 173 155 Donations and contributions (82) (62) Property, plant and equipment depreciations 455 217 Institutional relationships (114) (105) Consumption of materials 149 99 Maintenance 88 77 Extraordinary Canon (117) (511) Transport and per diem 82 63 Contingent consideration - (304) Rental and insurance 212 220 Onerous contract (Ship or Pay) (265) (142) Surveillance and security 171 151 Tax contingencies in Ecuador 5.6 (2,605) - Taxes, rates and contributions 317 145 Other (1,612) (761) Communications 74 74 Total other operating expenses (7,526) (3,892) Institutional advertising and promotion 49 89 Other 38 82 Total administrative expenses 7,751 7,481 264 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 265 CONSOLIDATED FINANCIAL STATEMENTS NOTE 10: (Continuation) NOTE 10: (Continuation) Other operating income – Recovery of contingencies and tax charges – Regularization regime (Moratorium) 10.5 Between the 29 and the 31 of March 2017, the Company adhered to the regularization regime (moratorium) provided for Law No. 27,260 in relation to certain tax claims and provisions. The Company related liabilities Financial Results were mainly attributable to contingencies identified in Petrobras’s acquisition process including interpretation differences with the Argentine tax authority regarding i) the time of recording well abandonment expenses for income tax purposes, ii) the exemption from the Tax on Personal Assets as Substitute Taxpayer for the shareholder PPSL; iii) the Tariff heading used by the Company for certain exported products; and iv) inaccurate NOTE 12.31.2018 12.31.2017 customs regarding the importation of a turbine supplied by Siemens Germany, including certain spare parts Finance income that had not been required nor declared by the Company. In relation to the last matter described before, the Commercial interest 2,230 1,605 Company entered into an agreement with Siemens pursuant to which Pampa received the reimbursement of Financial interest 1,270 540 related incurred costs. As of December 31, 2016, the carrying amount of the matters that were included in the Other interest 251 188 moratorium amounted to $ 1,332 million and $ 668 million disclosed as provisions and tax payables, respectively. Total finance income 3,751 2,333 Finance expenses As the adhesion to the regularization regime established benefits of releasing tax fines and reducing Commercial interest (2,957) (1,679) compensatory interests, the Company has recorded, during 2017 fiscal year, a net gain after income tax effects Fiscal interest (318) (415) of $ 558 million. Financial interest (1) (7,922) (6,107) Other operating income - Incident at Central Térmica Genelba Other interest (549) (387) Other financial expenses (198) (162) On September 22, 2017 a major incident occurred in the TG11 unit, which makes up Central Térmica Genelba’s Total financial expenses (11,944) (8,750) combined cycle plant, and which resulted in severe damage to the turbine’s generator. Following the incident, Gain on net monetary position 23,696 11,478 the combined-cycle generation capacity has been reduced by 50% (330 MW). Other financial results After evaluating the causes of the failure, the Company, together with the generator’s manufacturer Foreign currency exchange difference, net (32,549) (5,819) (SIEMENS), started the works for the installation of a new generator. Changes in the fair value of financial instruments 2,415 2,324 Discounted value measurement (2,713) (213) On January 5, 2018, works concluded and TG11 became operative again, thus regaining 100% of the Discounted value measurement - asset retirement obligation accretion (79) (69) combined cycle capacity. Results for the repurchase of corporate bonds 59 - Other financial results 1 3 As of the date of issuance of these financial statements, the Company has collected U$S 23.9 million from Total other financial results (32,365) (3,774) the insurance companies. Total financial results, net (16,862) 1,287 NOTE: (1) Net of $ 282 million and $ 602 million capitalized in property, plant and equipment for the years ended December 31, 2018 and 2017, respectively. 10.6 Income Tax and Minimum Notional Income Tax The breakdown of income tax charge is: 12.31.2018 12.31.2017 Current tax 1.465 2.061 Deferred tax (713) (2.708) Other comprehensive income 19 - Difference in the estimate of previous fiscal year income tax (113) (456) and the income return Direct charges for income tax - 118 Income tax expense (benefit) 658 (985) 266 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 267 NOTE 10: (Continuation) Below is a reconciliation between income tax expense and the amount resulting from application of the tax rate on the income before taxes: 12.31.2018 12.31.2017 Profit before tax 8,447 15,157 Current tax rate 30% 35% Result at the tax rate 2,534 5,305 Share of profit of joint ventures and associates (125) (4,403) Non-taxable results (740) (2,235) Non-deductible cost 18 322 Non-deductible provisions - 201 Other 80 19 Gain (Loss) on monetary position (434) 2,476 Effect of tax rate change in deferred tax (983) (746) Difference in the estimate of previous fiscal year income tax and the income 165 (741) tax statement Deferred tax assets not recognized 143 - Deferred tax not previously recognized - (1,183) Income tax expense (benefit) 658 (985) As of December 31, 2018 and 2017 consolidated accumulated tax losses amount to $ 6,651 million and $ 7,357 million, respectively, which may be offset, pursuant to the applicable tax laws, with tax profits corresponding to future fiscal years, at the tax rate that is estimated to apply, based on the following breakdown: FISCAL YEAR FISCAL YEAR GENERATION PRESCRIPTION 12.31.2018 12.31.2017 2013 2018 - 1 2014 2019 - 1 2015 2020 98 15 2016 2021 667 1,010 2017 2022 161 1,389 2018 2023 1,050 - 1,976 2,416 Unrecognized deferred assets (1) - Recognized Tax loss-carryforwards 1,975 2,416 268 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 CONSOLIDATED FINANCIAL STATEMENTS NOTE 11: (Continuation) NOTE 11: NON-FINANCIAL ASSETS AND LIABILITIES 11.1 Property, Plant and Equipment ORIGINAL VALUES TYPE OF GOOD AT THE TRANSLATION IMPAIRMENT INCREASES TRANSFERS DECREASES AT THE END BEGINNING EFFECT Land 818 - - 2 - - 820 Buildings 7,497 - - 20 332 (35) 7,814 Equipment and machinery 36,569 5 (244) 32 3,244 - 39,606 High, medium and low voltage lines 36,429 - - 381 1,595 (344) 38,061 Substations 13,471 - - 113 188 (3) 13,769 Transforming chamber and platforms 7,532 - - 32 354 (59) 7,859 Meters 7,516 - - 18 356 - 7,890 Wells 18,580 - - 26 3,892 (1,324) 21,174 Mining property 8,910 - - 995 164 - 10,069 Vehicles 641 - - 192 (4) (16) 813 Furniture and fixtures and software equipment 2,169 - - 268 98 (3) 2,532 Communication equipments 535 - - 3 16 - 554 Materials and spare parts 1,068 - - 216 (49) (13) 1,222 Distribution storage center 332 - - - 31 - 363 Petrochemical industrial complex 2,287 - (1,837) - 108 - 558 Work in progress 17,155 - - 22,623 (10,255) - 29,523 Advances to suppliers 1,081 - - 150 (70) (439) 722 Other goods 168 - - - - - 168 Total at 12.31.2018 162,758 5 (2,081) 25,071 - (2,236) 183,517 Total at 12.31.2017 164,176 (430) - 24,787 (139) (25,636) 162,758 NOTE: (1) Includes the transfer of materials and spare parts to the item “Inventories” of the current asset. 270 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 271 CONSOLIDATED FINANCIAL STATEMENTS NOTE 11: (Continuation) NOTE 11: (Continuation) DEPRECIATION NET BOOK VALUES TYPE OF GOOD AT THE DECREASES IMPAIRMENT FOR THE YEAR AT THE END AT THE END AT 12.31.2017 BEGINNING Land - - - - - 820 818 Buildings (2,544) 35 - (294) (2,803) 5,011 4,953 Equipment and machinery (12,126) - 120 (2,454) (14,460) 25,146 24,443 High, medium and low voltage lines (11,250) 247 - (1,169) (12,172) 25,889 25,179 Substations (3,571) 1 - (404) (3,974) 9,795 9,900 Transforming chamber and platforms (1,940) 23 - (243) (2,160) 5,699 5,592 Meters (2,698) 1 - (304) (3,001) 4,889 4,818 Wells (10,165) - - (1,922) (12,087) 9,087 8,415 Mining property (3,512) - - (993) (4,505) 5,564 5,398 Vehicles (441) 16 - (167) (592) 221 200 Furniture and fixtures and software equipment (1,489) 2 - (341) (1,828) 704 680 Communication equipments (357) - - (21) (378) 176 178 Materials and spare parts (57) - - (11) (68) 1,154 1,011 Distribution storage center (74) - - (19) (93) 270 258 Petrochemical industrial complex (834) - 773 (195) (256) 302 1,453 Work in progress - - - - - 29,523 17,155 Advances to suppliers - - - - - 722 1,081 Other goods (129) - - (6) (135) 33 39 Total at 12.31.2018 (51,187) 325 893 (8,543) (58,512) 125,005 Total at 12.31.2017 (46,227) 5,349 - (10,309) (51,187) 111,571 NOTE: (1) Includes $ 2,623 million corresponding to discontinued operations for 2017. 272 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 273 CONSOLIDATED FINANCIAL STATEMENTS NOTE 11: (Continuation) NOTE 11: (Continuation) Edenor’s direct own costs capitalized in the book value of property, plant and equipment during the year ended December 31, 2018 and 2017 amounted to $ 1,021 million and $ 870 million respectively. 11.2 Borrowing costs capitalized in the book value of property, plant and equipment during the year ended December 31, 2018 and 2017 amounted to $ 282 million and $ 602 million, respectively. Intangible Assets 11.1.1 Impairment of Property, Plant and Equipment in the Petrochemicals segment The recoverability assessment of Petrochemicals segment’s assets resulted in the recognition of an ORIGINAL VALUES impairment of $ 1,188 million as of December 31, 2018 as a consequence of the fall in this segment’s margins resulting from a sustained increase in operating costs, mainly impacted by the cost of raw material processed TYPE OF GOOD AT THE BEGINNING INCREASE IMPAIRMENT DECREASE AT THE END in the Catalytic Reform unit, and the drop in international reference prices. Concession agreements 10,267 - - - 10,267 Cash flows were prepared based on estimates on the future behavior of certain variables that are sensitive Goodwill 1,309 - - - 1,309 in the determination of the recoverable value, which is measured as the value in use, including the following: (i) reference prices for products; (ii) demand projections per type of product; (iii) costs evolution and; (iv) Intangibles identified in 264 6 (7) - 263 macroeconomic variables such as inflation and exchange rates, among others. acquisitions of companies Total at 12.31.2018 11,840 6 (7) - 11,839 Key assumptions used in the calculation of the recoverable value as of December 31, 2018 are as follows: Total at 12.31.2017 11,937 - - (97) 11,840 - Gross margin 7% - Discount rate (WACC) 11.8% DEPRECIATION - International Average Styrene Price 1,138 u$s/tn (1) - Average gasoline 87 octane price 2.06 u$s/gallon TYPE OF GOOD AT THE BEGINNING FOR THE YEAR AT THE END Concession agreements (5,416) (259) (5,675) As regards these assumptions, the Company’s management has determined the estimated gross margin Goodwill - - - based on past yields and its market growth expectations (including projections of demand, prices and costs); Intangibles identified in (70) (14) (84) the discount rate used reflects specific risks associated with the Petrochemicals segment. acquisitions of companies Total at 12.31.2018 (5,486) (273) (5,759) The Company has conducted a sensitivity analysis of the recoverable value of the segment regarding: Total at 12.31.2017 (5,372) (114) (5,486) i) discount rate: a 1% increase or decrease in the discount rate would imply a 10% decrease or increase in the recoverable value, respectively, ii) international average styrene price: a 2% increase or decrease in the international styrene price would imply a 10% increase or decrease in the recoverable value, respectively and iii) average gasoline 87 octane price: a 1% increase or decrease in the gasoline 87 octane price would imply a 7% NOTE: (1) Includes $ 61 million corresponding to discontinued operations for 2017 year. increase or decrease in the recoverable value, respectively. NET BOOK VALUES TYPE OF GOOD AT THE END AT 12.31.2018 Concession agreements 4,592 4,851 Goodwill 1,309 1,309 Intangibles identified in 179 194 acquisitions of companies Total at 12.31.2018 6,080 Total at 12.31.2017 6,354 274 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 275 CONSOLIDATED FINANCIAL STATEMENTS NOTE 11: (Continuation) NOTE 11: (Continuation) 11.3 Deferred Tax Assets and Liabilities, Income Tax and Minimum Notional Income Tax The composition of the deferred tax assets and liabilities is as follows: OTHER OTHER RECLASIFICATION PROFIT COMPREHENSIVE PROFIT COMPREHENSIVE 12.31.2016 TO HELD FOR SALE (LOSS) INCOME (LOSS) 12.31.2017 12.31.2017 (LOSS) (1) INCOME (LOSS) 12.31.2018 Tax los-carryforwards 1,736 - 680 - 2,416 Tax los-carryforwards 2,416 (441) - 1,975 Trade and other receivables 357 (9) (173) - 175 Trade and other receivables 175 289 - 464 Derivative financial instruments - - - - - Derivative financial instruments - - - - Financial assets at fair value through - - 18 - 18 Financial assets at fair value through profit 18 (16) - 2 profit and loss and loss Trade and other payables 2,071 - (326) - 1,745 Trade and other payables 1,745 210 - 1,955 Salaries and social security payable - - - - - Salaries and social security payable - 56 - 56 Defined benefit plans 666 (93) (184) (5) 384 Defined benefit plans 384 (98) 41 327 Provisions 3,173 (508) (1,569) - 1,096 Provisions 1,096 105 - 1,201 Taxes payable 413 - (164) - 249 Taxes payable 249 (36) - 213 Liabilities associated to assets - 610 (68) - 542 Liabilities associated to assets classified as 542 (542) - - classified as held for sale held for sale Other 232 - (165) - 67 Other 67 8 - 75 Deferred tax asset 8,648 - (1,951) (5) 6,692 Deferred tax asset 6,692 (465) 41 6,268 Property, plant and equipment (23,565) 1,395 5,483 - (16,687) Property, plant and equipment (16,687) 4,089 - (12,598) Investments in companies (2,449) - 554 (67) (1,962) Investments in companies (1,962) 1,328 (67) (701) Intangible assets (542) - 434 - (108) Intangible assets (108) (7,178) - (7,286) Trade and other receivables (1,568) - 571 - (997) Trade and other receivables (997) 723 - (274) Financial assets at fair value through (176) - 87 - (89) Financial assets at fair value through profit (89) (233) - (322) profit and loss and loss Borrowings (112) - (89) - (201) Borrowings (201) 79 - (122) Assets classified as held for sale - (1,395) 154 - (1,241) Assets classified as held for sale (1,241) 1,241 - - Other (6) - (159) - (165) Other (165) (74) - (239) Deferred tax liabilities (28,418) - 7,035 (67) (21,450) Deferred tax liabilities (21,450) (25) (67) (21,542) 276 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 277 CONSOLIDATED FINANCIAL STATEMENTS NOTE 11: (Continuation) NOTE 11: (Continuation) Deferred tax assets and liabilities are offset in the following cases: a) when there is a legally enforceable right to offset tax assets and liabilities; and b) when deferred income tax charges are associated with the same fiscal authority. The following amounts, determined after their adequate offset, are disclosed in the statement 12.31.2018 of financial position: FOR ASSET RETIREMENT FOR ENVIRONMENTAL CONTINGENCIES OBLIGATION REMEDIATION At the beginning of the year 5,311 1,579 210 12.31.2018 12.31.2017 Increases 4,013 1,391 208 Reclasifications - (677) - Deferred tax asset 80 6,692 Decreases (904) (190) (184) Deferred tax liabilities (15,354) (21,450) Gain on monetary position (1,965) (677) (74) Deferred tax liabilities, net (15,274) (14,758) Reversal of unused amounts (1,123) (591) - At the end of the year 5,332 835 160 11.4 12.31.2017 Inventories FOR ASSET RETIREMENT FOR ENVIRONMENTAL CONTINGENCIES OBLIGATION REMEDIATION At the beginning of the year 7,500 3,430 642 12.31.2018 12.31.2017 Increases 1,627 1,053 162 Reclasifications (347) (27) 27 Materials and spare parts 3,538 3,067 Reclasification to liabilities associated - (1,292) (272) Advances to suppliers 71 211 to assets classified as held for sale In process and finished products 1,516 945 Gain on monetary position (1,404) (695) (123) Stock crude oil 46 43 Decreases (1,461) (276) (223) Total 5,169 4,266 Reversal of unused amounts (604) (614) (3) At the end of the year 5,311 1,579 210 11.5 Provisions 11.5.1 Provision for Environmental remediation The Company is subject to extensive environmental regulations in Argentina and in the other countries in which it operates. The Company’s management believes that its current operations are in compliance with NOTE 12.31.2018 12.31.2017 applicable environmental requirements, as currently interpreted and enforced, including regulatory remediation Non Current commitments assumed. The Company undertakes environmental impact studies for new projects and Provisions for contingencies 4,674 5,121 investments and, to date, environmental requirements and restrictions imposed on these new projects have Asset retirement obligation 770 1,355 not had any material adverse impact on Pampa Energía’s business. Environmental remediation 13 22 Other provisions 42 51 The Company has performed a sensitivity analysis relating to the discount rate. The 1% increase or decrease 5,499 6,549 in the discount rate would not have a significant impact on the Company’s results of operations. Current Provisions for contingencies 658 190 11.5.2 Asset retirement obligation 65 224 Provision for well plugging and abandonment Environmental remediation 147 188 Onerous contract (Ship or pay) 5.6 - 576 In accordance with the regulations applicable in the countries where the Company (directly or indirectly Other provisions 1 1 through subsidiaries) performs oil and gas exploration and production activities, the Company must incur costs 871 1,179 associated with well plugging and abandonment. The Company has not pledged any assets for the purpose of settling such obligations. The Company has performed a sensitivity analysis relating to the discount rate. The 1% increase or decrease in the discount rate would not have a significant impact on the Company’s results of operations. 278 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 279 CONSOLIDATED FINANCIAL STATEMENTS NOTE 11: (Continuation) NOTE 11: (Continuation) 11.5.3 As of December 31, 2018 Pampa, HIDISA and HINISA will hold a provision for the additional income tax Provision for legal proceedings liabilities assessable for fiscal years mentioned in case the inflation adjustment had not been deducted. This provision amounts to $ 1,034 million including compensatory interest and was disclosed in the line “Income tax The Company (directly or indirectly through subsidiaries) is a party to several commercial, tax and labor liability and minimum notional income tax non-current”. proceedings and claims that arise in the ordinary course of its business. In determining a proper level of provision, the Company has considered its best estimate mainly with the assistance of legal and tax advisors. On March 27, 2019, Pampa has decided to exercise the tax revaluation optional regime in relation to property, plant and equipment as of December 31, 2017, provided for by Title X of Law Nro. 27,430, and must withdraw The determination of estimates may change in the future due to new developments or unknown facts any judicial or administrative process promoted or to be promoted in relation to the application of inflation at the time of evaluation of the provision. As a consequence, the adverse resolution of the evaluated adjustment in the income tax. Consequently, Pampa is taking the corresponding formal steps intending to pay proceedings and claims could exceed the established provision. the income tax corresponding to the fiscal period as of October 31, 2016, without considering the application of the adjustment for inflation mechanism (see Note 23). The Company has recorded provisions for labor, civil and commercial complaints brought against the Company corresponding to atomized claims with individual unsubstantial amounts, as well as charges for judicial costs and expenses which, as of December 31, 2018, amount to $ 3.603 million. Minimun Notional Income tax The Company and certain subsidiaries filed a petition for declaratory relief pursuant to Section 322 of the We hereinafter detail the nature of significant judicial proceedings for which provisions have been recorded Federal Code of Civil and Commercial Procedure against AFIP in order to obtain assurance as to the application as of December 31, 2018: of the minimum notional income tax for the fiscal years from 2010 to 2016, based on the decision by the CSJN in “Hermitage” dated on September 15, 2010. - Relevant Customs Summary Proceedings - Gasoline Exports: there is an important number of customs summary proceedings in which the tax authority challenges the tariff heading used by In this established precedent, the Court had declared this tax unconstitutional since it may be considered Petrobras during 2008-2014. The Fiscal authority’s position involves a higher export duty rate. As unreasonable under certain circumstances and since it breaches the tax capacity principle. December 31, 2018, the associated provision amounts to $ 3,375 million. From AFIP’s validation to the said precedent, through General Instruction 2/2017, the Company and its subsidiaries have resolved not to file a declaratory of relief as from 2017 fiscal year. 11.6 Furthermore, the Company and certain subsidiaries have requested the granting of interim injunctive relief Income Tax and Minimum Notional Income Tax Liability so that AFIP may refrain from demanding payment or instituting tax execution proceedings on the tax and for the fiscal year mentioned. The Court seized of in the proceedings decided to reject the precautionary measures. During 2015 and 2017 year, CTLL and EGSSA (currently merged with the Company) received a favorable 12.31.2018 12.31.2017 decision by the first-instance Court and the Chamber of Appeals, respectively, on the declaratory relief claim Non current filed for fiscal period 2010 and 2011. Additionally, favorable decisions have been obtained in other subsidiaries. Income tax, net of witholdings and advances 1,034 1,252 Minimum notional income tax, net of witholdings and advances - 22 During December 2016, the Fiscal authority concluded an inspection on Edenor for fiscal year 2014, during Total non current 1,034 1,274 which Edenor had applied the criterion established by the “Hermitage” decision in its IGMP. Current Taking into consideration the different rulings favorable to the Company and its subsidiaries, and in line with Income tax, net of witholdings and advances 930 1,299 the case law established by the “Hermitage” decision and the Treasury’s position on closing several verifications Minimum notional income tax, net of witholdings and advances 154 93 for periods where taxpayers do not have any taxable income (before the calculation of tax losses), in which the Total current 1,084 1,392 Treasury has waived its claims for these debts based on the unfavorable case law and in line with the criterion established by the Court, the Company has decided to derecognize the liabilities it had previously disclosed for the IGMP it should have assessed if the provisions of the Hermitage decision had not applied. Income tax Pampa has assessed income tax for the fiscal period between January and October 2016 and HIDISA and HINISA have assessed their income taxes for fiscal years 2012 to 2017, taking into consideration the application of the inflation adjustment mechanisms set forth in Title VI of the Income Tax Act, the update of Property, plant and equipment amortizations (Sections 83, 84 and 89), a cost restatement on account of the disposal of shares and mutual funds quotas (Sections 58, 61 and 89), and the update of intangible assets amortizations (Sections 81.c, 84 and 89, and Section 128 of its regulatory decree), to such effect using the domestic wholesale price index (IPIM) published by the National Institute of Statistics and Censuses, until October 2015 and the index of consumer prices City of Buenos Aires (IPCBA) for the November-December 2015 period, based on the similarity with the parameters put forward in the matter of “Candy S.A.” heard by the National Supreme Court of Justice, which on July 3, 2009 ruled for the application of the inflation adjustment mechanism. 280 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 281 CONSOLIDATED FINANCIAL STATEMENTS NOTE 11: (Continuation) NOTE 11: (Continuation) 11.7 c. Collective agreements: Benefit plan whereby Company employees covered by certain collective bargaining agreements and meeting certain conditions are eligible to receive upon retirement or Tax Liabilities disability a certain number of salaries according to the provisions of the plan. As of December 31, 2018 and 2017, the most relevant actuarial information corresponding to the described benefit plans is the following: 12.31.2018 12.31.2017 Non current Value added tax 160 323 12.31.2018 Sales tax 33 25 Payment plans 60 192 PRESENT VALUE OF FAIR VALUE OF NET LIABILITY AT THE Extraordinary Canon 289 - THE OBLIGATION PLAN ASSETS END OF THE YEAR Total non current 542 540 Current Liabilities at the beginning 1,760 (117) 1,643 Value added tax 786 777 Items classified in profit or loss Municipal, provincial and national contributions 130 588 Current services cost 75 - 75 Payment plans 53 90 Cost for interest 339 (31) 308 Municipal taxes 108 102 Contributions paid (187) - (187) Tax withholdings to be deposited 337 288 Items classified in other comprehensive Stamp tax payable 10 15 income Royalties 202 204 Actuarial losses (gains) 225 (65) 160 Extraordinary Canon 374 816 Exchange differences on translation 4 - 4 Other 52 21 Benefit payments (130) - (130) Total current 2,052 2,901 Gain (loss) on net monetary position (586) 50 (536) At the end 1,500 (163) 1,337 11.8 Defined Benefits Plans 12.31.2017 The main characteristics of benefit plans granted to Company employees are detailed below. PRESENT VALUE OF PRESENT VALUE NET LIABILITY AT THE THE OBLIGATION OF ASSETS END OF THE YEAR a. Indemnity plan: Benefit plan whereby Company employees meeting certain conditions are eligible to receive upon retirement a certain number of salaries according to the provisions of the plan. Liabilities at the beginning 2,189 (286) 1,903 Items classified in profit or loss b. Compensatory plan: Benefit plan whereby Company employees meeting certain conditions are Current services cost 95 - 95 eligible to receive upon retirement a certain amount according to the provisions of the plan (based on Cost for interest 457 (38) 419 the last computable salary and the number of years working for the Company) after deducting the Past services cost 46 - 46 benefits from the pension system. This plan requires the Company to make contributions to a fund. Items classified in other comprehensive The plan calls for a contribution to a fund exclusively by the Company and without any contribution income by the employees. The assets of the fund are contributed to a trust fund and invested in US dollar- Actuarial losses (gains) (32) 16 (16) denominated money market instruments in order to preserve the accumulated capital and obtain a Exchange differences on translation 52 (26) 26 return in line with a moderate risk profile. In addition, although there is no target asset allocation for Benefit payments (87) 11 (76) the following years, funds are mainly invested in US government bonds, commercial papers rated A1 Contributions paid - (11) (11) or P1, AAAm-rated mutual funds and time deposits in banks rated A+ or higher in the United States of Reclasification to liabilities associated (420) 165 (255) America, in accordance with the Trust Agreement dated on March 27, 2002 entered with The Bank of to assets classified as hed for sale New York Mellon, duly amended by the Permitted Investment Letter dated on September 14, 2006. The Gain (loss) on net monetary position (540) 52 (488) Bank of New York Mellon is the trustee and Willis Towers Watson is the managing agent. In case there At the end 1,760 (117) 1,643 is an excess (duly certified by an independent actuary) of the funds to be used to settle the benefits granted by the plan, the Company will be entitled to choice to use it, in which case it may have to notify the trustee thereof. 282 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 283 CONSOLIDATED FINANCIAL STATEMENTS NOTE 11: (Continuation) NOTE 11: (Continuation) As of December 31, 2018, net liability by type of plan, is as follows: a) $ 146 million corresponding to Indemnity plan; The sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. b) $ 404 million corresponding to Compensatory plan and c) $ 368 million corresponding to Collective agreements. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. Therefore, the presented analysis may not be representative of the actual change in the defined benefit obligation. The methods As of December 31, 2017, net liability by type of plan, is as follows: a) $ 261 million corresponding to Indemnity plan; and types of assumptions used in preparing the sensitivity analysis did not change compared to the prior period. b) $ 405 million corresponding to Compensatory plan and c) $ 454 million corresponding to Collective agreements. Estimated expected benefits payments for the next ten years are shown below. The amounts in the table represent 11.9 the undiscounted cash flows and therefore do not reconcile to the obligations recorded at the end of the year. Salaries and Social Security Payable 12.31.2018 Less than one year 162 12.31.2018 12.31.2017 One to two years 94 Non current Two to three years 111 Seniority - based bonus 148 171 Three to four years 100 Early retirements payable 15 6 Four to five years 92 Total non current 163 177 Six to ten years 449 Current Salaries and social security contributions 918 855 Provision for vacations 711 991 Provision for gratifications and annual bonus for efficiency 1,087 1,327 Significant actuarial assumptions used were as follows: Early retirements payable 10 7 Total current 2,726 3,180 12.31.2018 12.31.2017 Discount rate 5% 5% Salaries increase 1% 1% Average inflation 27% 21% NOTE 12: FINANCIAL ASSETS AND LIABILITIES The following sensitivity analysis shows the effect of a variation in the discount rate and salaries increase on the obligation amount: 12.1 12.31.2018 Discount rate: 4% Financial Assets at Fair Value Through Profit and Loss Obligation 1,637 Variation 137 10% Discount rate: 6% 12.31.2018 12.31.2017 Obligation 1,383 Non current Variation (117) Shares 422 286 (9%) Total non current 422 286 Salaries increase: 0% Current Obligation 1,425 Government bonds 11,234 7,418 Variation (75) Shares 44 - (6%) Investment funds 3,995 14,158 Salaries increase: 2% Total current 15,273 21,576 Obligation 1,587 Variation 87 6% 284 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 285 CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: (Continuation) NOTE 12: (Continuation) 12.2 Compensations pending settlement and/or payment for the year 2017 Trade and Other Receivables under Natural Gas Injection Promotion Programs On May 2, 2018, the Group filed with the Ministry of Energy an application form to adhere to the program for the cancellation of compensations pending settlement under the natural gas injection encouragement programs approved by MINEM Resolution No. 97/18 (Note 2.4.2) expressing its consent and acceptance of the terms and NOTE 12.31.2018 12.31.2017 scope of such resolution. The resolution provides an estimated compensation in the amount of U$S 148 million Non Current for the Group, payable in thirty monthly consecutive installments as from January 1, 2019. The compensable CAMMESA Receivable 2,647 4,234 credit balance pending collection as of December 31, 2017 amounts to $ 2,364 million. As of December 31, Other 853 9 2018, the Company has reassessed the present value of the credit taking into consideration collection dates Trade receivables, net 3,500 4,243 provided for in the resolution; as a result of such reassessment, the recorded credit amounts to $ 5.338 million. Non Current On February 21, 2019, SGE Resolution No. 54/19 established that cancellations will be implemented through the Tax credits 503 241 delivery of public debt securities. Allowance for tax credits (11) (21) Related parties 17 1,860 1,172 Gas Distributors’ receivables Prepaid expenses 28 30 Financial credit 30 55 As regards receivables resulting from differences between the price stipulated in gas sale agreements and Guarantee deposits 1 136 that recognized in the distributors’ final tariffs during the April-September 2018 period for approximately U$S Contractual receivables in Ecuador 6 - 1,474 34 million, as of December 31, 2018 and taking into consideration that as of the issuance of these financial Receivable for sale of property, plant and equipment 112 99 statements the Company has not adhered to the collection procedure established by PEN Decree No. 1,053/18 Natural Gas Surplus Injection Promotion Program 2,671 - (see Note 2.4.2.2), the Company has estimated the value of this credit claim considering the collection scenario Credit with RDSA 20 766 - resulting from the scheme provided for by PEN Decree No. 1,053/18 mentioned above, as well as the judicial Other 61 15 collection scenario; as a result of such estimate, the related receivables amounts to $ 923 million. Other receivables, net 6,021 3,201 Total non current 9,521 7,444 Current Unaffected CAMMESA’s receivables Receivables from energy distribution sales 8,392 9,029 The Company holds unaffected receivables from CAMMESA for a total nominal value plus accrued interest Receivables from MAT 1,035 644 of $ 3,564 million and $ 4,049 million as of December 31, 2018 and 2017, respectively corresponding to LVFVDs CAMMESA 4,943 4,263 under SE Resolution No. 406/2003 (2004-2006 and 2008-2013 periods) and Trust under SE Resolution No. CAMMESA Receivable 574 622 Receivables from oil and gas sales 2,923 1,135 95/2013 (2013-2016 periods). As of December 31, 2017 the credit balance amounts to $ 2,452 million. As of Receivables from refinery and distribution sales 218 1,414 December 31, 2018 and taking into consideration that no bids have been placed under the tenders launched Receivables from petrochemistry sales 2,544 1,364 pursuant to PEN Decree No. 882/2017 accepting as payment LVFVDs issued under Resolution No. 406/2003 Related parties 17 384 251 and other provisions passed by the SE, the Company has reassessed the receivable present value by weighting Other 139 201 the possibility of receivable assignments to a third-party with projects accepting LVFCDs as payment, as well Allowance for doubtful accounts (1,266) (822) as the possibility of recovering the receivables through the judicial claim; as a result of such reassessment, the Trade receivables, net 19,886 18,101 related receivables amounts to $ 668 million. Current Tax credits 1,020 1,905 The movements in the allowance for the impairment of trade receivables are as follows: Advances to suppliers 83 16 Advances to employees 8 37 Related parties 17 201 317 Prepaid expenses 61 102 Receivables for non-electrical activities 539 322 NOTE 12.31.2018 12.31.2017 Financial credit 209 123 Guarantee deposits 475 1,555 At the beginning 4.1 975 790 Natural Gas Surplus Injection Promotion Program 2,667 3,827 Allowance for impairment 1,266 480 Insurance to recover 212 298 Utilizations (389) (76) Expenses to be recovered 417 548 Reversal of unused amounts (31) (2) Credits for the sale of property, plant and equipment 783 573 Gain on net monetary position (555) (179) Other 213 778 Reclasification to assets held for sale - (191) Allowance for other receivables (285) (235) At the end of the year 1,266 822 Other receivables, net 6,603 10,166 Total current 26,489 28,267 Due to the short-term nature of trade and other receivables, its book value is not considered to differ from its fair value. For non-current trade and other receivables, fair values do not significantly differ from book values, with the exception of the items expressly mentioned below: 286 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 287 CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: (Continuation) NOTE 12: (Continuation) The movements in the allowance for the impairment of other receivables are as follows: As of December 31, 2018 and 2017, the fair values of the Company’s non-current borrowings (Corporate Bonds) amount approximately to $ 49,026 million and $ 45,156 million, respectively. Such values were calculated on the basis of the determined market price of the Company’s corporate notes at the end of each year (fair value level 1 and 2). NOTE 12.31.2018 12.31.2017 The carrying amounts of short-term borrowings approximate their fair value due to their short-term maturity. At the beginning 4.1 217 372 Allowance for impairment 248 55 Financial borrowings and CAMMESA financing approximate their fair value as they are subjected to a Decreases - (25) variable rate. (Gain) loss on net monetary position (115) 15 Reversal of unused amounts (54) (161) The other long-term borrowings were measured at amortized cost, which does not differ significantly from its fair value. At the end of the year 296 256 The maturities of the Company’s borrowings (excluding finance lease liabilities) and its exposure to interest rates are as follow: 12.3 12.31.2018 12.31.2017 Cash and Cash Equivalents Fixed rate Less than one year 9,032 6,891 One to two years 4,109 812 Two to five years 10,732 11,087 Up to five years 46,825 34,421 12.31.2018 12.31.2017 70,698 53,211 Floating rates Cash 17 44 Less than one year 2,680 877 Banks 3,133 483 One to two years 1,809 901 Time deposits 5,947 652 Two to five years 2,106 3,780 Total 9,097 1,179 Up to five years 2,430 2,873 9,025 8,431 Non interest accrues Less than one year 1,189 855 One to two years 31 - Two to five years 1,147 784 12.4 Up to five years - 158 Borrowings 2,367 1,797 The movements in the borrowings are as follows: NOTE 12.31.2018 12.31.2017 Non Current Financial borrowings 9,743 8,785 (1) Corporate bonds 54,927 40,993 12.31.2018 12.31.2017 CAMMESA financing 4,519 5,017 Related parties 17 - 21 At the beginning 63,439 47,855 69,189 54,816 Current Proceeds from borrowings 9,250 47,130 Financial borrowings 11,811 7,527 Payment of borrowings (9,057) (27,650) Corporate bonds 934 1,091 Accrued interest 6,766 5,396 Payment of borrowings’ interests (5,004) (4,072) CAMMESA financing 127 - Net foreign currency exchange difference 46,895 8,546 Related parties 17 29 5 Costs capitalized in property, plant and equipment 282 546 12,901 8,623 Decrease through offsetting with trade receivables - (6) Gain on net monetary position (29,974) (14,301) Repurchase and redemption of corporate bonds (448) (47) Other financial results (59) 42 NOTE: (1) Net of the repurchase of Corporate bonds Class I maturity 2027 of Pampa Energía for a nominal value of U$S 8.85 million and Edenor’s Corporate bonds 2022 for a nominal value of U$S 0.4 million as of At the end of the year 82,090 63,439 December 31, 2018. 288 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 289 CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: (Continuation) NOTE 12: (Continuation) During the years ended December 31, 2018 and 2017, the Company and its subsidiaries acquired and/or redeem its own corporate bonds or corporate bonds of various subsidiaries at their respective market value for BOOK a total face value of U$S 13.2 million and U$S 15.1 million, respectively. Due to these debt-repurchase and/or TYPE RESIDUAL VALUE AS redemptions, the Company and its subsidiaries recorded a loss of $ 59.4 million in the year ended December OF INSTRUMENT COMPANY CURRENCY VALUE INTEREST RATE EXPIRATION OF 12.31.2017 31, 2018, disclosed under the line “Result from repurchase of corporate bonds” within Other financial results. Corporate bonds: 2022 CB Edenor U$S 172 Fixed 10% 2022 4,903 During 2018, the Company had debt maturities of approximately U$S 300 million that were refinanced through Class 4 CB PAMPA U$S 34 Fixed 6% 10/30/2020 942 financial loans and pre-financing of exports with different local banks and with short and medium term maturities. Class E CB PAMPA ARS 575 Variable Badlar 11/13/2020 871 Class A CB PAMPA ARS 282 Variable Badlar 10/5/2018 439 Subsequently, after the end of 2018 fiscal year (mainly during the month of February 2019), the Company (1) paid a total of U$S 24 million at maturity, net of refinancing, pre-paid a total of U$S 105 million, and refinanced T Series CB PAMPA U$S 500 Fixed 7% 7/21/2023 14,013 a total of U$S 36 million with financial institutions, with a short-term maturity. Class 1 CB PAMPA (2) U$S 750 Fixed 8% 1/24/2027 20,942 42,110 As of the date of issuance of these financial statements, the Company is in compliance with the covenants Regulatory: established in its indebtedness CAMMESA 2014 PAMPA ARS 855 Variable CAMMESA (4) 2,321 Agreement 12.4.1 CAMMESA Mapro PAMPA ARS 140 Variable CAMMESA (3) 285 Details of borrowings CAMMESA Mapro CPB ARS 1,080 Variable CAMMESA (3) 2,411 5,017 Financial loans: PAMPA U$S 352 Fixed Between 2.9% Feb-2018 to 9,786 BOOK and 6% May-2021 TYPE RESIDUAL VALUE AS OF INSTRUMENT COMPANY CURRENCY VALUE INTEREST RATE EXPIRATION OF 12.31.2018 PAMPA U$S 63 Fix and 6% + Libor Sep-2018 to 1,719 Variable May-2024 Corporate bonds: PAMPA ARS 2,270 Fixed Between 22% Aug-2018 to 3,417 2022 CB Edenor U$S 166 Fixed 10% 2022 6,360 and 22.25% Oct-2019 Class 4 CB PAMPA U$S 34 Fixed 6% 10/30/2020 1,291 Edenor U$S 50 Variable Libor + 4.27% 10/11/2020 1,390 Class E CB PAMPA ARS 607 Fixed Badlar 11/13/2020 607 16,312 (1) T Series CB PAMPA U$S 741 Fixed 8% 1/24/2027 28,404 63,439 Class 1 CB (2) PAMPA U$S 500 Fixed 7% 7/21/2023 19,228 55,890 Regulatory: NOTES: (1) On January 24, 2017, the Company issued Class 1 Corporate Bonds for a face value of U$S 750 million with an issuance price of 99.136%. CAMMESA 2014 PAMPA ARS 855 Variable CAMMESA (4) 2,158 Funds derived from the issuance of these CBs will be destined to investing in physical assets located in Argentina; financing working capital in Argentina; refinancing liabilities and/or making capital contributions in controlled companies or affiliates to use funds for the above-mentioned purposes. Agreement (2) Corresponds to the mutual contracts entered into with CAMMESA to finance major maintenance works related to the different generation units (3) CAMMESA Mapro PAMPA ARS 174 Variable CAMMESA 254 approved by the SE. The financing will be amortized in 36 monthly and consecutive installments as from the completion of the works, this term could CAMMESA Mapro CPB ARS 1,085 Variable CAMMESA (3) 2,234 be extended by 12 months. Maintenance Remuneration will be used to cancel the financing granted. As a result of the entry into force of the new remuneration scheme (Resolution SE No. 19/17), the Maintenance Remuneration was discontinued and it was defined that the balance of the financing 4,646 will be repayable through the discount of U$S 1 / MWh for the energy generated until its total cancellation. Financial loans: (3) On December 1, 2014, CTLL and CAMMESA signed a Financing and Assignment of Loan Agreement in order to finance the works of the 2014 Agreement Project. The financing will be canceled, at Pampa option, through a payment in cash or through offsetting with CAMMESA receivables of the PAMPA U$S 17,116 Fixed Between 2.9% Feb-2018 to 17,357 Company and other subsidiaries, 36 months as from the month following the commercial commissioning of the last generating unit making up the Projects. and 7.5% May-2021 PAMPA U$S 1,746 Variable 6% + Libor May-2024 1,732 PAMPA ARS 550 Fixed Between 22% Sep-2019 to 561 and 22.25% Oct-2019 Edenor U$S 1,885 Fixed Libor + 4.27% 10/11/2020 1,904 21,554 82,090 290 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 291 CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: (Continuation) NOTE 12: (Continuation) 12.4.2 Global Corporate Bonds Program 12.5 The Company has the following programs in place: (i) a simple CBs Program (non-convertible into shares) for a maximum amount of U$S500 million, which was authorized by CNV Resolution No. 17,162, effective until Trade and Other Payables August 15, 2018; and (ii) a simple or convertible CBs Program for up to U$S 2,000 million, which was authorized by CNV Resolution No. 18,426, effective until December 29, 2021. 12.31.2018 12.31.2017 The Company’s Shareholders’ Meeting held on April 7, 2017 approved the issuance of CBs convertible into Non Current common shares and American Depositary Shares (“ADRs”) for a face value of U$S 500 million subject to certain Customer contributions 112 118 conditions, mainly regarding the Company’s ADR price. Funding contributions for substations 33 89 Customer guarantees 141 149 On January 16, 2018, the Company informed the CNV that, following the sales transactions in the refining Trade payables 286 356 and distribution segment (Note 5.2.2) and of certain oil assets (Note 5.2.1), the resulting fund inflow would allow the Company to afford the defined strategic investments. Therefore, the issuance of corporate bonds ENRE Penalties and discounts 5,097 5,738 convertible into shares is not deemed necessary. Loans (mutuums) with CAMMESA 2,282 2,782 Compensation agreements 251 183 12.4.3 Liability with FOTAE 207 281 Guarantees on loans Payment agreement with ENRE 37 108 Other 2 9 On September 27, 2017, Greenwind entered into a loan agreement with Corporación Interamericana de Inversiones, Other payables 7,876 9,101 Banco Interamericano de Desarrollo, Banco Santander, and Industrial and Commercial Bank of China Limited (ICBC) Total non current 8,162 9,457 Dubai Branch in the amount of U$S 104 million, which will be used to finance the construction, operation and maintenance of the 100 MW wind farm currently being developed in Bahía Blanca, Province of Buenos Aires. NOTE 12.31.2018 12.31.2017 Current The facility will have a nine-year term as from its execution date and will be repaid in 14 six-monthly Suppliers 9,371 12,826 consecutive installments, the first one becoming due on May 15, 2020. CAMMESA 11,909 11,214 Customer contributions 15 28 Pampa granted a bond for the whole facility’s principal to guarantee the operation. Discounts to customers 37 55 Funding contributions substations 17 12 On October 20 and November 13, 2017, Greenwind collected the entire financing. Customer advances 244 303 Related parties 17 245 117 Other 19 19 Trade payables 21,857 24,574 ENRE Penalties and discounts 1,836 425 Related parties 17 11 17 Advances for works to be executed 14 21 Compensation agreements 481 830 Payment agreements with ENRE 65 93 Other creditors 305 303 Other 187 392 Other payables 2,899 2,081 Total current 24,756 26,655 Due to the short-term nature of the current payables and other payables, their carrying amount is considered to be the same as their fair value. For the majority of the non-current payables and other payables, the fair values are also not significantly different to their carrying amounts The fair values of non-current customer contributions as of December 31, 2018 and 2017 amount to $ 108 million and $ 141 million, respectively. The fair values are determined based on estimated discounted cash flows in accordance with a market rate for this type of transactions. This fair value is classified as level 3. The book value of the compensation agreements approximates their fair value given the valuation characteristics (Note 4.17). 292 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 293 CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: (Continuation) NOTE 12: (Continuation) The categories of financial instruments have been determined according to IFRS 9. 12.6 The income, expenses, gains and losses derived from each of the financial instrument categories are Financial Instruments by Category indicated below: The following chart presents financial instruments by category: FINANCIAL ASSETS/ SUBTOTAL NON FINANCIAL ASSETS/ LIABILITIES AT FAIR FINANCIAL FINANCIAL FINANCIAL LIABILITIES AT VALUE THROUGH ASSETS/ ASSETS/ ASSETS/ FINANCIAL ASSETS/ SUBTOTAL NON AS OF DECEMBER 31, 2018 AMORTIZED COST PROFIT AND LOSSS LIABILITIES LIABILITIES TOTAL LIABILITIES LIABILITIES AT FAIR FINANCIAL FINANCIAL AT AMORTIZED VALUE THROUGH ASSETS/ ASSETS/ AS OF DECEMBER 31, 2018 COST PROFIT AND LOSSS LIABILITIES LIABILITIES TOTAL Interest income 3,555 196 3,751 - 3,751 Interest expense (10,902) - (10,902) (844) (11,746) Assets Foreign exchange, net (32,653) 3,260 (29,393) (3,156) (32,549) Trade receivables and other receivables 34,217 122 34,339 1,671 36,010 Results from financial instruments - 2,415 2,415 - 2,415 Financial assets at amortized cost at fair value Government securities 1,330 - 1,330 - 1,330 Discounted value measurement (2,713) - (2,713) - (2,713) Financial assets at fair value through Other financial results 363 - 363 (79) 284 profit and loss Total (42,350) 5,871 (36,479) (4,079) (40,558) Government securities - 11,234 11,234 - 11,234 Shares - 466 466 - 466 Investment funds - 3,995 3,995 - 3,995 Derivative financial instruments - 3 3 - 3 Cash and cash equivalents 9,097 - 9,097 - 9,097 Total 44,644 15,820 60,464 1,671 62,135 FINANCIAL ASSETS/ SUBTOTAL NON FINANCIAL ASSETS/ LIABILITIES AT FAIR FINANCIAL FINANCIAL Liabilities LIABILITIES AT VALUE THROUGH ASSETS/ ASSETS/ AS OF DECEMBER 31, 2017 AMORTIZED COST PROFIT AND LOSSS LIABILITIES LIABILITIES TOTAL Trade and other liabilities 22,833 576 23,409 9,509 32,918 Borrowings 82,090 - 82,090 - 82,090 Derivative financial instruments - 49 49 - 49 Interest income 2,076 257 2,333 - 2,333 Total 104,923 625 105,548 9,509 115,057 Interest expense (8,173) - (8,173) (415) (8,588) Foreign exchange, net (7,138) 1,850 (5,288) (531) (5,819) Results from financial instruments - 2,324 2,324 - 2,324 at fair value Discounted value measurement (213) - (213) - (213) FINANCIAL ASSETS/ SUBTOTAL NON FINANCIAL ASSETS/ LIABILITIES AT FAIR FINANCIAL FINANCIAL Other financial results (167) - (167) (61) (228) LIABILITIES AT VALUE THROUGH ASSETS/ ASSETS/ Total (13,615) 4,431 (9,184) (1,007) (10,191) AS OF DECEMBER 31, 2017 AMORTIZED COST PROFIT AND LOSSS LIABILITIES LIABILITIES TOTAL Assets Trade receivables and other receivables 31,761 870 32,631 3,080 35,711 Financial assets at amortized cost Government securities 16 - 16 - 16 12.7 Trusts 21 - 21 - 21 Financial assets at fair value through Fair value of financial Instruments profit and loss The Company classifies the fair value measurements of financial instruments using a fair value hierarchy, which Government securities - 7,418 7,418 - 7,418 reflects the relevance of the variables used to perform those measurements. The fair value hierarchy has the Shares - 286 286 - 286 following levels: Investment funds - 14,158 14,158 - 14,158 Derivative financial instruments - 6 6 - 6 - Level 1: quoted prices (not adjusted) for identical assets or liabilities in active markets. Cash and cash equivalents 1,179 - 1,179 - 1,179 - Level 2: data different from the quoted prices included in Level 1 observable for the asset or liability, Total 32,977 22,738 55,715 3,080 58,795 either directly (i.e. prices) or indirectly (i.e. derived from prices). Liabilities - Level 3: Asset or liability data based on information that cannot be observed in the market (i.e., Trade and other liabilities 26,789 2,783 29,572 6,540 36,112 unobservable data). Borrowings 63,439 - 63,439 - 63,439 Total 90,228 2,783 93,011 6,540 99,551 The following table shows the Company’s financial assets and liabilities measured at fair value as of December 31, 2018 and 2017: 294 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 295 CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: (Continuation) NOTE 12: (Continuation) - Shares: they were determined based on Income approach through the Indirect Cash Flow method (net present value of expected future cash flows) and the discount rates used were estimated taking the AS OF DECEMBER 31, 2018 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL Weighted Average Cost of Capital (“WAAC”) rate as a parameter. Assets Financial assets at fair value through profit and losss Government securities 11,234 - - 11,234 Shares 44 - 422 466 NOTE 13: Investment funds 3,995 - - 3,995 Derivative financial instruments - 3 - 3 EQUITY COMPONENTS Other receivables 122 - - 122 Total assets 15,395 3 422 15,820 Liabilities Derivative financial instruments - 49 - 49 13.1 Total liabilities - 49 - 49 Share capital and reserves 13.1.1 Share capital AS OF DECEMBER 31, 2017 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL During the year ended December 31, 2018, the Company acquired the equivalent of 202,929,825 own shares Assets for an amount of $ 11,317 million, in relation to the Company Share Repurchase Program. Financial assets at fair value through profit and losss During the year ended December 31, 2018, the Company repurchased 3,000,000 shares corresponding to Government securities 7,418 - - 7,418 the Shared based Compensation Plan in favor of executive employees and other key personnel for an amount Trust - - 221 221 of $ 260 million and delivered 173,891 treasury shares in payment for the mentioned Plan (see Note 19.2). Investment funds 14,158 - - 14,158 Derivative financial instruments - 5 - 5 On October 2, 2018, the Company’s Extraordinary General Meeting resolved a share capital reduction by the Other receivables 870 - - 870 cancellation of 182,820,250 treasury shares acquired as a result of the share repurchase programs, as a result share Total assets 22,446 5 221 22,672 capital total decreased from $ 2,082,690,514 to $ 1,899,870,264 (1,874,434,580 and 25,435,684 corresponding to outstanding shares and treasury shares, respectively). This reduction was registered by the IGJ on November 28, Liabilities 2018. In addition, on January 9, 2019, the CNV granted partial cancellation of the related public offer. Derivative financial instruments - 120 - 120 Total liabilities - 120 - 120 As of December 31, 2018, treasury shares represent 1.34% of share capital, of which 20,109,575 shares correspond to the Company Share Repurchase Program (see detail below) and 5,326,109 shares correspond to Shared based Compensation Plan in favor of executive employees and other key personnel. The value of the financial instruments negotiated in active markets is based on the market quoted prices as Company Share Repurchase Program (the “Program”) of the date of these consolidated financial statements. A market is considered active when the quoted prices are regularly available through a stock exchange, broker, sector-specific institution or regulatory body, and those prices In view of the fact that the Company’s share price does not reflect either the value or the economic reality reflect regular and current market transactions between parties that act in conditions of mutual independence. its assets currently or potentially have, this being detrimental to the interests of the Company’s shareholders, The market quotation price used for the financial assets held by the Company is the current offer price. These and taking into consideration the Company’s strong cash position and fund availability, on April 27, 2018, the instruments are included in level 1. Company’s Board of Directors approved the repurchase of portfolio shares for up to U$S 200 million for an initial term of 120 calendar days. On June 22, 2018 the Program was extended by the Board of Directors for an The fair value of financial instruments that are not negotiated in active markets is determined using valuation additional maximum amount of up to U$S 200 million for an initial term of 120 calendar days. techniques. These valuation techniques maximize the use of market observable information, when available, and rely as little as possible on specific estimates of the Company. If all significant variables to establish the fair value Under the program, portfolio shares may not exceed, as a whole, the limit of 10% of the capital stock, and of a financial instrument can be observed, the instrument is included in level 2. may be purchased for a maximum price of $ 50 per common share and U$S 60 per ADR, for the initial program, and $ 62 per common share and U$S 55 per ADR for the program extension. If one or more variables used to determine the fair value cannot be observed in the market, the financial instrument is included in level 3. Publicly traded shares The Company’s shares are listed for trading on Buenos Aires Stock Exchange, forming part of the Merval The techniques used for the measurement of assets at fair value with changes in income, classified as Level 2 Index. Also, on August 5, 2009, the SEC authorized the Company for the registration of ADSs representing 25 and 3, are detailed below: common shares each. On October 9, 2009, the Company started to market its ADSs on the NYSE. calculated from variations between market prices at the closing - Derivative Financial Instruments: The listing of the ADSs with the NYSE is part of the Company’s strategic plan to increase its liquidity and the date of the year, and the amount at the time of the contract. volume of its shares. 296 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 297 CONSOLIDATED FINANCIAL STATEMENTS NOTE 13: (Continuation) NOTE 13: (Continuation) 13.1.2 Other reserves 13.3 13.1.2.1 Acquisition of own ADRs by Edenor Profit distributions As of December 31, 2018, pursuant to the own shares repurchase program approved by its Board of Directors, Edenor acquired at the NYSE a total number of 779,543 ADRs equivalent to 15,590,860 Series B common shares Dividends for an amount of $ 1,069 million. As of December 31, 2018, Edenor’s treasury shares amount to 23,385,028. Pursuant to Law No. 27,430, enacted in December 2017 (Note 2.7), dividends distributed to individuals, undivided estates or beneficiaries residing abroad, derived from profits generated during fiscal years beginning 13.1.2.2 Acquisition of Edenor’s ADRs by the Company on or after January 1, 2018 through December 31, 2019, are subject to a 7% withholding tax. The distribution of During 2018 year, the Company acquired a total number of 346,270 Edenor’s ADRs, which equal 6,583,320 dividends is made based on the Company’s Stand-Alone Financial Statements. million Series B common shares, at a U$S 9 million acquisition cost. Additionally, in the month of October 2018, the Company acquired 17,104 Edenor’s ADRs, which equal 342,080 million Series B common shares, at a $13 million acquisition cost. NOTE 14: STATEMENT OF CASH FLOWS’ 13.2 COMPLEMENTARY INFORMATION Earning (loss) per share a. Basic 14.1 Basic earnings (loss) per share are calculated by dividing the result attributable to the Company’s equity interest holders by the weighted average of outstanding common shares during the year. Adjustments to reconcile net profit (loss) to cash flows b. Diluted generated by operating activities Diluted earnings (loss) per share are calculated by adjusting the weighted average of outstanding common shares to reflect the conversion of all dilutive potential common shares. NOTE 12.31.2018 12.31.2017 Potential common shares will be deemed dilutive only when their conversion into common shares may reduce the earnings per share or increase losses per share of the continuing business. Potential common Income tax 658 (985) shares will be deemed anti-dilutive when their conversion into common shares may result in an increase in the Accrued interest 8,254 6,255 earnings per share or a decrease in the losses per share of the continuing operations. Depreciations and amortizations 9, 10.1 and 10.2 8,816 7,739 Constitution of allowances, net 10.4 1,061 418 The calculation of diluted earnings (loss) per share does not entail a conversion, the exercise or another Constitution (recovery) of provisions, net 10.4 1,180 (150) issuance of shares which may have an anti-dilutive effect on the losses per share, or where the option exercise Share of profit from joint ventures and associates 5.3 (4,464) (1,813) price is higher than the average price of ordinary shares during the period, no dilutive effect is recorded, being the Income from the sale of companies 5.1 (1,052) - diluted earning (loss) per share equal to the basic. As of December 31, 2018 and 2017, the Company does not hold Accrual of defined benefit plans 9, 10.1 and 10.2 196 518 any significant potential dilutive shares, therefore there are no differences with the basic earnings (loss) per share. Net exchange differences 10.5 32,549 5,819 Result from measurement at present value 10.5 2,792 282 Changes in the fair value of financial instruments (2,372) (2,324) Results from property, plant and equipment sale and decreases 126 56 12.31.2018 12.31.2017 Impairment of property, plant and equipment 1,195 - Dividends received 10.4 (29) (56) (Loss) earning for continuing operations attributable to the equity holders of the Company 5,506 12,867 Compensation agreements 10.1 and 10.2 196 1,055 Weighted average amount of outstanding shares 1,959 1,936 Result from the sale of shareholdings in companies and property, 5.1 (1,644) - Basic and diluted (loss) earnings per share from continuing operations 2.8106 6.6462 plant and equipment Other financial results of RDSA 10.5 and 20 (501) - Earning for discontinued operations attributable to the equity holders of the Company 2,929 (2,068) Onerous contract (Ship or pay) 10.4 265 142 Weighted average amount of outstanding shares 1,959 1,936 Gain on monetary position 10.5 (23,696) (11,478) Basic and diluted earnings per share from discontinued operations 1.4952 (1.0682) Other 23 306 Total (loss) earning attributable to the equity holders of the Company 8,435 10,799 23,553 5,784 Weighted average amount of outstanding shares 1,959 1,936 Basic and diluted earnings per share 4.3058 5.5780 298 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 299 CONSOLIDATED FINANCIAL STATEMENTS NOTE 14: (Continuation) NOTE 15: CONTINGENT LIABILITIES 14.2 AND ASSETS Changes in operating assets and liabilities We hereinafter detail the nature of significant legal proceedings as of December 31, 2018, not considered as probable by the Company based on the opinion of the Company’s internal and external counselors. 12.31.2018 12.31.2017 15.1 Increase in trade receivables and other receivables (6,594) (2,430) Labor Claim – Compensatory Plan Increase in inventories (718) (425) Increase in trade payables and other payables 836 385 The Company faces several legal proceedings associated with the Defined Benefit Plan “Compensatory Plan” Increase in deferred income 88 1 (see note 11.8). We hereinafter describe the nature of currently-pending labor claims: Increase (decrease) in salaries and social security payable 511 (55) - Claims by former employees not covered by the plan, seeking their inclusion Decrease in defined benefit plans (130) (115) Increase (Decrease) in tax payables 1,319 (988) - Claims on considering that the index (IPC) used to update the plan benefits are ineffective to keep their Decrease in provisions (2,274) (1,803) “constant value”. Income tax and minimum notional income tax paid (1,841) (2,119) - Claims on an alleged underfunding of the plan upon the elimination of the Company’s contributions (Payments) proceeds from derivative financial instruments, net (897) 873 based on earnings. Net cash (used in) generated by operating activities from discontinued operations (1,726) 3,291 Total changes in operating assets and liabilities (11,426) (3,385) 15.2 Tax claim - Tax on Liquid Fuels and Natural Gas. The AFIP filed a claim in the amount of $54 million against the Company for an alleged omission in the payment 14.3 of Taxes on Liquid Fuels and Natural Gas during fiscal periods 01/2006 through 08/2011, plus compensatory Significant non-cash transactions interest and a penalty of $38 million for such omission. The tax entity supports its claim on the allegation that the tax benefit granted to sales to areas declared exempt by the tax law has been misappropriated. The proceeding is currently being heard before the Federal Tax Court, and the evidentiary period has been completed. 12.31.2018 12.31.2017 15.3 Significant non-cash transactions from continuing operations: Acquisition of property, plant and equipment through an increase in trade payables 639 (3,898) Environmental claims Borrowing costs capitalized in property, plant and equipment (282) (602) - The Association of Land Owners of Patagonia (ASSUPA) has brought a complaint for an indefinite Decreases of property, plant and equipment through an increase in other receivables 439 - amount against the Company and other companies seeking the restoration of the environment to the Increase in asset retirement obligation provision state prior to the exploration, exploitation, production, storage and transportation of hydrocarbon works Constitution of guarantee of derivative financial instruments, net through the 1,272 (59) conducted by the plaintiffs and the prevention of alleged future environmental impacts on certain areas delivery of financial assets at fair value through profit or loss (819) 718 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. Significant non-cash transactions from discontinued operations: Acquisition of property, plant and equipment through an increase in trade payables - (13) - ASSUPA has instituted a complaint before the CSJN against 10 companies, including the Company. Decrease (increase) in asset retirement obligation provision - 464 The National Government and the Provinces of Buenos Aires, La Pampa, Mendoza, Neuquén and Río Dividends pending collection - 551 Negro have been summoned as third parties. The main claim seeks that the plaintiffs should be ordered to redress the alleged environmental damage caused by the hydrocarbon activity developed in the Neuquina Basin and to set up the environmental restoration fund provided for by section 22 of the General Environmental Law. Subsidiarily, and in case restoration is not possible, it seeks the redress of the allegedly sustained collective damages for an amount estimated at U$S54 million based on a PDUN report. The proceeding is in the complaint answer stage. - Beatriz Mendoza and other 16 plaintiffs brought a complaint before the CSJN against the National Government, the Province of Buenos Aires, the Government of the City of Buenos Aires and 44 companies, 300 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 301 CONSOLIDATED FINANCIAL STATEMENTS NOTE 15: (Continuation) NOTE 15: (Continuation) including the Company, conducting industrial activities along the Matanza-Riachuelo River Basin. The - Plaintiff Martinez Lidia and other three plaintiffs claim financial compensation for alleged damage to plaintiffs seek compensation for alleged damages sustained as a result of an alleged environmental their health and property caused by the alleged environmental affectation sustained as a result of impact, its cessation, the environmental recomposition and redress, for an estimated amount of U$S500 living next to Puerto General San Martin petrochemical plant (Rosario-Santa Fe). The proceeding is million for the financing of the Matanza-Riachuelo River Basin Environmental Management Plan aiming currently in the evidentiary stage. 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 15.4 redress of alleged damages for a nominal amount estimated at $1 million and U$S1 million, or the difference between the value of the allegedly affected lot and its valuation. The proceeding is in the Civil and Commercial Claims evidentiary stage. - The “Consumidores Financieros Asociación Civil Para Su Defensa” claim the nominal amount of U$S3,650 million as compensation for damages, Pampa, Petrolera Pampa S.A. and certain Pampa - Fundación SurfRider Argentina has requested the performance of preliminary proceedings on account directors in office during 2016 being co-plaintiffs together with Petroleo Brasileiro S.A. A complaint has of alleged indications of environmental damage in the City of Mar del Plata. The plaintiff seeks the been brought against Petrobras Brasil for the depreciation of the share quotation value as a result of recomposition of the alleged environmental damage having collective impact, or the compensation the “lava jato operation” and the so-called “Petrolao”, and the plaintiffs claim Pampa, Petrolera Pampa for the alleged damages caused by all companies owning gas stations in the coastal area of the City S.A. and the directors’ joint and several liability alleging the acquisition of indirect control in Petrobras of Mar del Plata for an alleged fuel leakage from gas stations’ underground storage tanks into the Argentina S.A. may have thwarted the enforcement of a possible judgment favorable to the plaintiff water, soil and marine system. The Foundation estimates damages in the amount of $200 million. (for up to the amount of the price paid by Pampa for the acquisition of control over Petrobras Argentina The proceeding is pending the resolution of the admissibility of CSJN’s jurisdiction. S.A.). The proceeding is in the integration and complaint answer stage. - A group of neighbors of the City of Bahía Blanca instituted a complaint before the provincial courts - The Company was notified of the institution of a collective action in the City of Rio de Janeiro, Brazil, by of this city for alleged environmental damage having collective impact against the companies of a lawyer of that nationality, Felipe Machado Caldeira, alleging that Petrobras Brasil has not conducted the petrochemical complex, Consorcio de Gestión Del Puerto de Bahía Blanca and the Province of Petrobras Argentina’s sales process pursuant to a competitive bidding process in accordance with Buenos Aires. The plaintiffs seek the redress of collective moral injury (estimated at $52 million), the Brazilian laws applicable to mixed public-private firms in Brazil, for a nominal amount of R$1,000 cessation of the alleged damage to the estuary of Bahía Blanca, and a comprehensive restoration to million. In this proceeding, no specific accusation against Pampa has been filed. The proceeding is its previous state. In case this is not possible, the plaintiffs subsidiarily seek damages, the beneficiary currently suspended in the integration and complaint answer stage. of which would be the Environmental Compensation Fund. They also request a prohibition to install new industrial activities in the area and the development of a new and efficient industrial waste - Messrs. Candoni, Giannasi, Pinasco and Torriani brought arbitration complaints against the Company collection, disposal and treatment system. The proceeding is in the evidentiary stage. before the Buenos Aires Stock Exchange’s Arbitration Court seeking to challenge the price and tender offer for the merger through absorption of Petrobras Argentina S.A. into Pampa Energía S.A. for a - Some neighbors of the Dock Sud area brought a complaint against 14 oil companies, including nominal amount of $148 million. The complaints have been joined. The Court issued a partial award the Company, petrochemical companies and waste incineration plants located in the Dock Sud upholding the challenge under the capital markets law used by the plaintiff to dispute the exchange Petrochemical Complex for an alleged damage to the environment and alleged individual damage to ratio used in the merger and dismissed the Company’s position, which stated that the proper course of their goods, health and morale. The proceeding is in the complaint answer stage. action would be to challenge the shareholders’ meeting pursuant to the Business Organizations Law. - A neighbor of the Province of Salta owning a lot where a joint venture made up of the plaintiffs (the The Company filed an appeal against this partial award and filed a motion for appeal and nullity which Company and other companies) conducted hydrocarbon activities seeks environmental protection and will be resolved by the Chamber of Appeals in Commercial Matters. restoration for alleged damage caused by hydrocarbon prospecting, exploration and/or exploitation activities or, alternatively, a compensation in case such environmental restoration is not possible. The - Las Higuerillas S.R.L. brought a judicial proceeding against the Company for the damages allegedly Province of Salta has been summoned as a third party. The proceeding is in the complaint answer stage. sustained as a result of the early termination of the concession agreement for the exploitation of a gas station for a nominal amount of $9 million. The proceeding is in the evidentiary stage. - 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 - Fees associated with the injunction granted in favor of Oil Combustibles: Oil Combustibles’ attorneys would result from an alleged leakage from the adjacent gas station under the Company’s branding. claim an increase in their fees assessed by the first-instance judge and ratified by the Chamber of Preliminary measures are being conducted in this proceeding. Appeals of Rosario. The Supreme Court of Santa Fe resolved to annul the Camber’s decision and ordered that a new judgment should be passed. A motion for clarification was filed against this judgment before - Neighbors of the Province of Neuquén brought a proceeding against the Company for alleged the Supreme Court of Justice, as well as an extraordinary appeal before the CSJN. 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, - Consumidores Financieros Asociación Civil para su Defensa, claimes Edenor: i) the reimbursement of the they claim a compensation for alleged damages to support the Environmental Restoration Fund. VAT percentage paid on the illegally “widened” taxable basis due to the incorporation of the National Additionally, they request the redress of alleged moral damages to be allocated to the Environmental Electrical Energy Fund that distribution companies, the defendants, had not paid this tax when CAMMESA Restoration Fund. The proceeding is in the lawsuit integration stage. invoiced them the electricity purchased for distribution purposes, ii) the reimbursement of part of the administrative surcharge on “second due date”, in those cases in which payment was made within the - Plaintiffs María Elena Baya de Rudd and David Rudd have filed a complaint against the Company, time period authorized for such second deadline (14 days) but without distinguishing the effective day other companies and the joint venture made up by them for the repair of alleged damages caused of payment, and iii) the application of the “borrowing rate” in case of customer delay in complying with in the Estancia Laguna Esperanza lot owned by them and the remediation of alleged environmental payment obligation, in accordance with the provisions of Law No. 26,361. The Federal Government, the damage caused by the exploitation and abandonment of oil wells in the lot. The Company has filed AFIP and the ENRE are summoned as third-party defendants. These proceedings have been joined to an appeal in this proceeding. 302 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 303 CONSOLIDATED FINANCIAL STATEMENTS NOTE 15: (Continuation) NOTE 15: (Continuation) those mentioned below. Without prejudice thereto, in the framework of the record of the proceedings, the case has been brought to trial. - Asociación de Defensa de derechos de clientes y consumidores (ADDUC) requested that the Company 15.7 be ordered by the Court to reduce or mitigate the default or late payment interest rates charged to customers who pay their bills after the first due date, inasmuch as they violate section 31 of Law Tax claims 24,240, ordering both the non application of pacts or accords that stipulate the interest rates that are - Income tax refund being applied to the users of electricity –their unconstitutional nature– as well as the reimbursement The Company, HIDISA, HINISA and CPB have filed several tax refund claims in the amount of $1,167 of interest amounts illegally collected from the customers of the service from August 15, 2008 through million for overpaid income taxes taking into considerations the effects of the inflation adjustment the date on which the defendant complies with the order to reduce interest. It is also requested that mechanism. On December 7, 2017, CPB collected the amount claimed for the 2002 period, which the VAT and any other taxes charged on the portion of the surcharge illegally collected be reimbursed. amounts to $4 million plus interest. The Company considers it has a high probability of obtaining a These proceedings have been joined to those mentioned above and have been brought to trial. favorable final and conclusive ruling. We hereinafter detail the nature of significant legal proceedings brought by the Company as of December On March 27, 2019, Pampa and CPB have decided to exercise the tax revaluation optional regime in 31, 2018 where the related inflows of economic benefits are estimated to be probable by the Company. relation to property, plant and equipment as of December 31, 2017, provided for by Title X of Law Nro. 27,430, and must withdraw any judicial or administrative process promoted or to be promoted in relation to the application of inflation adjustment in the income tax. Consequently, Pampa and CPB 15.5 have formally submitted its withdrawal to the refund rights mentioned above (see Note 23). Administrative claims - Refund on minimum presumed income tax - CTLL filed a contentious administrative complaint against the National Government for contractual The Company and its predecessor CTLL filed several refund claims before the AFIP on account of breach during the January 2016-July 2017 period. CTLL claims that CAMMESA’s decision should the minimum presumed income tax for fiscal periods 2008 and 2009 requesting the refund of $25 be reversed regarding the renewal and recognition of costs associated with natural gas supply million, including the refund of payments timely made and the release of the payment by offsetting agreements, and that, susbsidiarily, sustained damages for an amount of U$S28 million should against several tax credits. As AFIP didn’t answer the claim, the Company and CTLL brought the tax be redressed. refund claim before the competent National First-Instance Administrative Litigation Court. - Upon the determination of the expiration of the Veta Escondida area concession granted by the On August 25, 2016 CTLL obtained a favorable ruling by the Chamber of Appeals, which upheld the Province of Neuquén, the Company filed a declaratory judgment action to achieve certainty under first-instance decision sustaining the refund claim; however, the payment has not been collected as the original jurisdiction of the Federal Supreme Court of Justice pursuant to section 322 of the of the date of issuance of these financial statements, and the Company is filing all applicable claims Federal Code of Civil and Commercial Procedure. Both parties agreed to suspend the proceeding in this respect. The Company considers it has a high probability of obtaining a favorable final and and settle a solution. Negotiations are currently in progress, and terms have been suspended for conclusive ruling. 20-day periods renewable until settling the conflict. 15.6 NOTE 16: Civil and commercial claims INVESTMENT COMMITMENTS - Edenor seeks to obtain the judicial annulment of the ENRE’s Resolution 32/11 that provided Edenor to: i) be fined in the amount of $ 750 thousand due to its failure to comply with the obligations arising from Section 25, sub-sections a, f and g, of the Concession Agreement and Section 27 of Law No. 24,065, ii) be fined in the amount of $ 375 thousand due to its failure to comply with the obligations arising from Section 25 of the Concession Agreement and ENRE Resolution No. 16.1 905/99 and iii) be ordered to pay customers as compensation for the power cuts suffered the following amounts: $ 180 to each small-demand residential customer (T1R) who suffered power New generation projects cuts that lasted more than 12 continuous hours, $ 350 to those who suffered power cuts that Under the National Government’s call for the expansion of the generation offer, the Company participates lasted more than 24 continuous hours, and $ 450 to those who suffered power cuts that lasted in the following thermal generation closing projects: more than 48 continuous hours. The course of these proceedings is currently suspended due to the fact that an “Agreement of parties” has been entered into with the ENRE. 16.1.1 2014 Agreement for the Increase of Thermal Generation Availability - Edenor’s purpose is to sue for breach of contract due to the Federal Government’s failure to perform in accordance with the terms of the “Agreement on the Renegotiation of the Concession On September 5, 2014, the Company, together with its generation subsidiaries, executed a thermal Agreement” (“Acta Acuerdo de Renegociación del Contrato de Concesion” – the “Adjustment generation availability increase agreement with the National Government through the application of LVFVDs Agreement”) entered into with the Company in 2006, and for damages caused as a result of such and the generators’ own resources. breach. As of the date of issuance of this report, and by “agreement of the parties”, the procedural time-limits continue to be suspended. 304 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 305 CONSOLIDATED FINANCIAL STATEMENTS NOTE 16: (Continuation) NOTE 16: (Continuation) The project consisted of a 120 MW expansion in CTLL’s power plant generation capacity through the 16.1.4 installation of two 8 MW engine generators and a 105 MW high-efficiency gas turbine. SEE Resolution No. 287/2017 On July 15, 2016, the new 105 MW high-efficiency gas turbine was commissioned for service, whereas the Under the call by the National Government to parties interested in developing projects for co-generation second project is currently under construction, and its commissioning is expected for June 2019. and the closing to combined cycles over existing equipment, on October 18, 2017 the SEE, through Resolution No. 926/17, awarded Genelba Plus’ closing to combined cycle, which will add a 383 MW capacity over Genelba’s 16.1.2 power plant existing facilities. 2014 Increase of CTLL Availability The Genelba Plus’ closing to combined cycle project consists of the installation of a new gas turbine, a In August 2011, after postponing the closing to CC’s commissioning in CTLL, the work contractor informed steam turbine, and several enhancement works over the current Genelba Plus gas turbine, which altogether will that Siemens, the equipment supplier, had detected design flaws in other steam turbines using the same complete the second combined cycle at Genelba, with a total gross power capacity of 552 MW. The estimated technology, so it decided to remove the last vane wheel of the steam turbine installed in CTLL; as a result, the investment amounts to U$S 350 million. commissioning was declared for a lower capacity than that originally committed (165 MW instead of 178 MW). Siemens and Techint will be in charge of the equipment supply, and the construction and commissioning of This vane wheel was replaced in October 2017, and after the commercial testing, on January 19, 2018 the project on a turnkey basis. Its commissioning at open cycle is expected for the second quarter of 2019, and CAMMESA declared unit LDLATV01’s commercial commissioning for a 180 MW capacity, with a 15 MW increase, as closed cycle for the second quarter of 2020. thus collecting the remuneration stipulated in the agreement entered into with CAMMESA pursuant to Res. No. 220/07. Thus, CTLL’s total capacity amounts to 765 MW. 16.1.5 RenovAr Program (Round 1) 16.1.3 SE Resolution No. 21/2016 Under the call by the National Government to parties interested in developing projects for generation from renewable sources, on October 7, 2016 the MEyM, through Resolution No. 213/16, awarded the Corti wind farm The following projects were awarded under the call for bids made by the National Government to parties project submitted by Greenwind. interested in offering new thermal power generation capacity pursuant to SE Resolution No. 21/2016. On January 23, 2017, the Company entered into a wholesale power purchase agreement with CAMMESA for For each of the awarded projects, the Company has entered into a wholesale power purchase agreement with a term of 20 years. CAMMESA for a term of 10 years. The remuneration will be 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. On May 23, 2018, before the originally estimated execution period, Greenwind inaugurated its first Wind Farm, called Ingeniero Mario Cebreiro (“PEMC”), which is also the first project of this size and using this technology to 16.1.3.1 Central Térmica Parque Pilar (“CT Pilar”) reach such milestone under the Renovar 1 Open Call for Tenders. This project, which consisted of the construction of a new power plant in the Pilar Industrial Complex (located at Pilar, Province of Buenos Aires), is made up of 6 cutting-edge and high-efficiency Wärtsilä engine generators The PEMC project called for a total U$S139 million investment and consisted of the construction and with a total 100 MW capacity and the possibility to run on natural gas or fuel oil. The total investment was installation of 29 Vestas wind turbines contributing 100 MW of renewable energy to the national system. approximately U$S 103 million. On June 8, 2018, CAMMESA declared PEMC’s commercial commissioning. On August 31, 2017, CAMMESA granted the commercial commissioning of CT Pilar, which became operative as from that date. 16.1.6 Construction of New Wind Farms 16.1.3.2 Extension of Central Térmica Loma de la Lata Pursuant to MEyM Resolution No. 281/2017 of the Renewable Energy Term Market (Mercado a Término The project consists of the expansion of CTLL’s power plant generating capacity through the installation of a de Energías Renovables, “MAT ER”), CAMMESA granted the Company and its subsidiaries PEA and PEFM the new GE aeroderivative gas turbine (model LMS100) with a gross generation capacity of 105 MW. The investment dispatch priority for three new projects in the Province of Buenos Aires, which production will be destined to amounted to approximately U$S 90 million. meet the demand by large users through supply agreements between private parties. On August 5, 2017, CAMMESA declared the commercial commissioning of the new gas turbine, which The projects, called Pampa Energía II Wind Farm (“PEPE II”) at the Company, Pampa Energía III Wind Farm became operative as from such date. (“PEPE III”) at PEFM and Pampa Energía IV Wind Farm (“PEPE IV”) at PEA, will call for a total investment of U$S 209 million and will produce 156 MW of renewable energy. 16.1.3.3 Central Térmica Ingeniero White (“CT I. White”) The first two projects are already in the construction stage, and their commissioning is expected for the The project consisted of the installation of a new power plant in I. White (Bahía Blanca, Province of Buenos second quarter of 2019, the required investment amounting to approximately U$S 135 million. Aires) with similar characteristics as that mentioned in Note 16.1.2.1. The total investment was approximately U$S 90 million. Even though the PEPE IV, with an estimated U$S 74 million investment, was announced on May 23, 2018, the volatility of the economy and changes in the applicable legislation adversely affected the project, and its On December 21, 2017, CAMMESA declared the commercial commissioning of CT I. White, which became feasibility is currently being assessed. As of the issuance of these financial statements, the Company estimates operative as from that date. that the term for execution stipulated for the project is not likely to be met and, therefore, as of December 31, 2018, a provision for the enforcement of the associated guarantee has been set aside for a total amount of U$S12.5 million. However, the Company is currently negotiating the relocalization of the wind farm. 306 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 307 CONSOLIDATED FINANCIAL STATEMENTS NOTE 16: (Continuation) NOTE 17: (Continuation) b. Purchases of goods and services 16.2 Investment commitment for the exploration and 12.31.2018 12.31.2017 exploitation of hydrocarbons Joint ventures As of the issuance of these financial statements, the Company has committed investments for an estimated Transener (3) (11) (1) total amount of U$S587 million, based on its participation, to be disbursed between 2019 and 2023, mainly TGS (783) (319) regarding the Sierra Chata, Las Tacanas, El Mangrullo and Rincón del Mangrullo areas. SACME (82) (77) Other related parties SACDE (4) (69) - Origenes Vida - (21) Refinor (2) (1,275) (639) NOTE 17: RELATED PARTIES´ Oldelval (3) (60) (120) TRANSACTIONS (2,272) (1,187) NOTES: (1) Corresponds to natural gas transportation services. (2) Corresponds to purchase of refined products. a. Sales of goods and services (3) Corresponds to oil transportation services. (4) Corresponds mainly to construction services including execution of work and storage of materials, capitalized in Property, plant and equipment. 12.31.2018 12.31.2017 c. Fees for services Joint ventures Transener (1) 20 48 TGS (2) 1,937 862 Greenwind (3) 12 - 12.31.2018 12.31.2017 Other related parties 35 - Other related parties SACDE (3) 593 205 Salaverri, Dellatorre, Burgio & Wetzler (49) (27) (4) Refinor 6 6 (49) (27) Oldelval (5) 2,603 1,121 Corresponds to fees for legal advice. NOTES: (1) Corresponds to advisory services in technical assistance. (2) Corresponds to advisory services in technical assistance and gas and refined products sales. (3) Corresponds to advisory services including organizational, commercial, administrative, financial and human resources management matters. (4) Corresponds to refined products sales. (5) Corresponds to oil sales. d. Other operating expenses 12.31.2018 12.31.2017 Other related parties OCP (1) (265) - Foundation (2) (76) (55) (341) (55) NOTES: (1) Corresponds to onerous contract (Ship or Pay). (2) Corresponds to donations. 308 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 309 CONSOLIDATED FINANCIAL STATEMENTS NOTE 17: (Continuation) NOTE 17: (Continuation) e. Finance income i. Payment of dividends 12.31.2018 12.31.2017 12.31.2018 12.31.2017 Joint ventures Other related parties TGS 122 106 EMESA (82) (72) 122 106 APCO Oil - (72) (82) (144) Corresponds to finance leases. f. Finance expenses j. Key management personnel remuneration The total remuneration to executive directors accrued during the year ended December 31, 2018 and 2017 amounts to $ 363 million ($ 173 million in Directors’ and Sindycs’ fees and $ 190 million in the accrual of the 12.31.2018 12.31.2017 Company-Value Compensation, EBDA Compensation and Stock-based Compensation Plans, of which $ 48 Other related parties million correspond to shared based compensation) and $ 1.177 million ($ 155 million in Directors’ and Sindycs’ Orígenes Retiro (17) (10) fees and $ 1,022 million in the accrual of the Company-Value Compensation, EBDA Compensation and Stock- (17) (10) based Compensation Plan, of which $ 691 million correspond to shared based compensation), respectively. g. Corporate Bonds transactions k. Balances with related parties Purchase of Corporate Bonds 12.31.2018 12.31.2017 TRADE RECEIVABLES OTHER RECEIVABLES Other related parties AS OF DECEMBER 31, 2018 CURRENT NON CURRENT CURRENT Orígenes Retiro - (10) - (10) Joint ventures: TGS 288 1,436 158 Greenwind - 419 17 SACME - 5 - Associates and other h. Dividends received related parties: Ultracore - - 20 Refinor 91 - - SACDE 5 - 5 12.31.2018 12.31.2017 Other - - 1 Other related parties 384 1,860 201 CIESA 657 - Oldelval 50 12 TJSM 13 13 TMB 15 15 735 40 310 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 311 CONSOLIDATED FINANCIAL STATEMENTS NOTE 17: (Continuation) NOTE 17: (Continuation) TRADE OTHER TRADE OTHER PAYABLES PAYABLES BORROWINGS PAYABLES PAYABLES BORROWINGS PROVISIONS AS OF DECEMBER 31, 2018 CURRENT CURRENT NON CURRENT CURRENT AS OF DECEMBER 31, 2017 CURRENT CURRENT NON CURRENT CURRENT CURRENT Joint ventures: Joint ventures: Transener 4 - - - Transener 1 - - - - TGS 105 - - - TGS 25 - - - - SACME - 8 - - SACME - 7 - - - Associates and other related parties: Associates and other related parties: Orígenes Retiro - - - 29 Orígenes Seguro de vida - - - 3 - OCP - 3 - - Orígenes Retiro - - 21 2 - Refinor 136 - - - OCP - - - - 576 245 11 - 29 Refinor 78 - - - - Oldelval 13 - - - - Other - 10 - - - 117 17 21 5 576 According to paragraphs 25 and 26 of IAS 24, Edenor applied the disclosure exemption in relation to related party transactions with a governmental agency that has control, joint control or significant influence. As of December 31, 2018, ANSES holds Edenor’s Notes due 2022 amounting to $ 752 million (U$S 20 million of nominal value). NOTE 18: TRADE RECEIVABLES OTHER RECEIVABLES LEASES AS OF DECEMBER 31, 2017 CURRENT NON CURRENT CURRENT Joint ventures: Transener 7 - - TGS 191 1,165 110 18.1 Greenwind - - 188 SACME - 7 - Operating Associates and other related parties: a. As lesee Ultracore - - 15 Refinor 15 - - The features that these leases have in common are that payments (installments) are established as fixed SACDE 37 - 3 amounts; there are neither purchase option clauses nor renewal term clauses (except for the leasing contract Other 1 - 1 of the Energy Handling and Transformer Center that has an automatic renewal clause for the term thereof); and 251 1,172 317 there are prohibitions such as: transferring or sub-leasing the building, changing its use and/or making any kind of modifications thereto. All operating leasing contracts have cancelable terms and assignment periods of 2 to 13 years. Among them the following can be mentioned: commercial offices, two warehouses, the headquarters building (comprised of administration, commercial and technical offices of Edenor), the Energy Handling and Transformer Center (two buildings and a plot of land located within the perimeter of Central Nuevo Puerto and Puerto Nuevo) and Las Heras Substation. As of December 31, 2018 and 2017, future minimum payments with respect to operating leases of use are as follow: 312 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 313 CONSOLIDATED FINANCIAL STATEMENTS NOTE 18: (Continuation) NOTE 19: 12.31.2018 12.31.2017 COMPENSATION PLANS 2018 - 124 2019 155 125 2020 138 52 2021 103 5 19.1 Total future minimum lease payments 396 306 Company-Value Compensation (Pampa as successor company of PEPASA) Total expenses for operating leases of use for the years ended December 31, 2018 and 2017 are $ 125 million On November 6, 2013, former PEPASA’s Extraordinary General Meeting of Shareholders resolved to approve and $ 126 million, respectively. a variable and contingent compensation to certain officers equivalent to 7% of the capital stock after the Company’s capital stock increase, valued based on the difference between the share’s market value at the time b. As lessor of exercising the right and a given value of U$S 0.1735 per share determined at the exact moment of the former PEPASA’s capital stock increase. Edenor has entered into operating leasing contracts with certain cable television companies granting them the right to use the poles of Edenor’s network. Most of these contracts include automatic renewal clauses. On January 13, 2014, the former PEPASA’s capital stock increase was carried out and the rights granted to Officers to receive the Company-Value Compensation became effective. As of December 31, 2018 and 2017, future minimum collections with respect to operating leasing are as follow: The fair value of the Option has been measured according to the Black-Scholes valuation model. The main variables considered in such model were the following: 1. 39.1% volatility based on the volatility of Pampa shares in the two listed markets; 12.31.2018 12.31.2017 2. Interest rate composed by 2,7% nominal 10-year risk-free interest rate plus an Argentine country risk premium of 7.3%, in both cases as of December 31, 2018. 2018 - 202 2019 174 194 On January 18, 2017, PEPASA’s executives requested the monetization of a significant part of the right due Total future minimum lease collections 174 396 at that date, which was canceled by the Company on January 31, 2017. Within the framework of the corporate reorganization process described in Note 5.1.3.2, Pampa, as the absorbing company, is the universal successor of all the rights and obligations of the absorbed companies, including PEPASA. Total income from operating leasing for the years ended December 31, 2018 and 2017 is $ 190 million and $ 212 million, respectively. Therefore, as a consequence of the application of the exchange ratio of 2.2699 Pampa shares for each PEPASA share pursuant the merger, the executives who, by virtue of the agreement, had the option of monetizing their right over 2.985.000 PEPASA’ shares, has a post-merger option to monetize its right over a total of 6,775,652 18.2 Pampa’s shares at a U$S 0.0764 per share price, exercisable until November 25, 2020. Financial Corresponds to the financing granted to TGS for the sale of certain properties, plant and equipment belonging 19.2 to the Oil and Gas business segment. This agreement was entered into in August 11, 2016 and consists of the Stock-based Compensation Plan – Certain officers and collection of 119 monthly installments of U$S 623 thousand and a purchase option for the same amount payable at the end of the 120 months of contract life. As of December 31, 2018, this credit is included in other current and other key staff (the “Compensation Plan”) non-current receivables in an amount of $ 158 million and $ 1,436 million, respectively. On February 8, 2017, the Company’s Board of Directors approved the creation of a stock-based compensation plan and the first Specific Program, whereby certain officers and other key staff covered by each Specific Program will receive a certain number of company shares within the stipulated term aiming to encourage the alignment of the employees performance with the Company’s strategy and to generate a clear and direct link between the creation of value for shareholders and the employees’ compensation. Furthermore, the Company’s Board of Directors approved the acquisition of own shares in the market as a means of implementing the Plan (see Note 13.1.1). On April 7, 2017, the Company’s Shareholders’ Meeting ratified the approval of the Compensation Plan by the 314 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 315 CONSOLIDATED FINANCIAL STATEMENTS NOTE 19: (Continuation) Board of Directors, as well as its terms and conditions; and approved the cancellation of the preferential offer to NOTE 20: CONTRACTUAL RESOLUTION shareholders in respect to the disposition of such shares as authorized by Section 67 of Capital Markets’ Act No. 26,831 for the purposes of implementing such Plan. OF REAL ESTATE ASSET The number of shares is calculated based on a percentage over the total annual remuneration, plus the bonus assigned to each covered employee, divided by the weighted average price, in pesos, of the Company’s With the aim of concentrating in one single building Edenor’s centralized functions, and reducing rental share and ADR for the same period; with one-third vesting each year, which will be awarded together with the costs and the risk of future increases, Edenor acquired from RDSA (the “seller”) a real estate asset to be payroll for April of the year following the vesting date, provided the employment relationship continues at least constructed, for a total amount of USD 46 million -equivalent to $ 439 million at the exchange rate in effect as at each vesting date. at the time of entering into the purchase and sale agreement. To guarantee payment of liquidated damages in case of termination on account of the seller’s default, Edenor received a surety bond issued by Aseguradores As of December 31, 2018, the Company has estimated a total quantity of 1,727,878 treasury shares to be de Cauciones S.A. Compañía de Seguros for up to the maximum amount of USD 46 million, plus the private delivered to employees pursuant to Compensation Plan. During 2018, the Company delivered 173,891 shares and banks’ Badlar rate in dollars plus 2%. estimates to deliver 345,329, 557,996, 437,996 and 212,666 shares during 2019, 2020, 2021 and 2022, respectively. The real property had to be delivered by the seller on June 1, 2018, milestone not met. Therefore, Edenor As of the issuance of these Financial Statements, the Company has acquired 717,750 treasury shares and declared the seller in default, notifying the insurance company that issued the surety bond of such situation, 191,290 treasury ADRs for an amount of $ 352 million, 173,891 of which were destined to officers compensation, and collected USD 502.8 thousand in fines accrued during the term of the purchase and sale agreement and remaining 543,859 treasury shares and 191,290 ADRs as of December 31, 2018. duly deposited as bond by the seller for failing to meet the construction project milestones agreed upon in the agreement, amount which was recorded in the Other operating expense, net line item of the Statement of Comprehensive Income. 19.3 On August 27, 2018, upon expiration of the legal time periods set forth in the agreement, Edenor notified Compensation agreements - Senior Management RDSA of the termination of the agreement on account of its default, demanding payment of the liquidated damages: refunding of the purchase price, plus 15% interest in dollars from the purchase price payment date On June 2, 2017, the Board of Directors approved the execution and signing of compensation agreements until the day of default, less the delay penalty amounts indicated in the preceding paragraph. with the Company’s main officers (the “Senior Management”), conditional upon their approval by the Annual Ordinary Meeting of Shareholders to be held each year. Furthermore, on September 3, 2018, Edenor filed a claim against the bond with the insurance company, and subsequently provided the additional documentation and information that had been required. In accordance with international practices, the purpose of these agreements is to efficiently align the Senior Management’s interests with those of the Company and its shareholders, creating value for them only inasmuch Due to RDSA’s failure to reimburse the purchase price plus interest, in November 2018, Edenor initiated an as value is generated for shareholders, that is, if the Company’s market value increases. arbitration process against RDSA before the Arbitral Tribunal of the Buenos Aires Stock Exchange in order for RDSA to be ordered to pay the liquidated damages stipulated in the purchase and sale agreement, which, as of Under these agreements, the Senior Management will be entitled to a fixed compensation and an annual, December 31, 2018 amounts to $ 3 billion. As of to date, said process is in process. Additionally, Edenor initiated variable and contingent long-term compensation related to the Company’s annual market value appreciation, the process aimed at collecting the surety bond that guaranteed RDSA’ obligation, which under the terms of the with a cap on the Company’s operating income. insurance policy results in a claim for USD 50.3 million, covering more than 60% of the amount claimed to RDSA. With the purpose of avoiding duplication, any analogous compensation that the Senior Management had In the opinion of our legal advisors, Edenor’s right to collect the credit is based on extremely solid arguments; received from any of the Company’s subsidiaries, will be deducted from the compensation amount in proportion therefore, the award in the aforementioned arbitration process against RDSA as well as the outcome of the to the Company’s interests in such subsidiaries. lawsuit that could eventually be filed against Aseguradora de Cauciones if it fails to comply with the payment of the above-mentioned surety bond, should be favorable to Edenor. 19.4 However, taking into consideration that on February 1, 2019 RDSA filed a voluntary petition for reorganization proceedings, and that on February 28, 2019 the BO published Resolution No. 207/2019 of the National Insurance Share-based Compensation Plan - Edenor Superintendency forbidding Aseguradora de Cauciones from entering into new contracts and maintaining the prohibition to dispose of property until the latter’s deficitary situation is rectified, Edenor has recorded an In the last months of fiscal year 2016, Edenor’s Board of Directors proposed that the treasury shares be allowance to partially cover the amount of the receivable, considering the possibility of its recovery, not because used for the implementation of a long-term incentive plan in favor of executive directors, managers or other of the quality of its right, about which there is no doubt, but rather because of the financial position of personnel holding key executive positions in the Company in an employment relationship with the latter and its debtors, RDSA and Aseguradora de Cauciones. Accordingly, the balance of the recorded receivable as of those who in the future are invited to participate, under the terms of section 67 of Law No. 26,831 on Capital December 31, 2018, net of allowance, amounts to $ 765.6 million (Note 12.2). Markets, after the effort made by the directors in the negotiation of the RTI. The plan was ratified and approved by the ordinary and extraordinary shareholders’ meeting of Edenor held on April 18, 2017. At the date of issuance of these financial statements, Edenor awarded a total of 1,618,332 shares to executive directors and managers as additional remuneration for their performance in special processes developed during 2016 and 2017 fiscal years. 316 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 317 CONSOLIDATED FINANCIAL STATEMENTS NOTE 21: NOTE 23: DOCUMENTATION KEEPING SUBSEQUENT EVENTS On August 14, 2014, the National Securities Commission issued General Resolution No. 629, which introduced Sale of Dock Sud storage terminal modifications to the provisions applicable to the keeping and conservation of corporate and accounting books On March 6, 2019, the Company entered into an agreement with Raízen Argentina, licensee of Shell brand, and commercial documentation. To such effect, the Company and its subsidiary Edenor, have sent non-sensitive 3 work papers and information corresponding to the periods not covered by the statute of limitations for their for the sale of the Dock Sud storage terminal, with a tank park totaling 228 thousand m of installed capacity. keeping in the Administración de Archivos S.A (AdeA)’s data warehouse located at Ruta 36, km 34.5, Florencio Varela, Provincia de Buenos Aires and in the Iron Mountain Argentina S.A.’s data warehouses located at the The sale price amounts to U$S 19.5 million plus U$S 1.4 million in products, subject to certain price adjustments following addresses: and the closing is subject to the meeting of precedent conditions as usual for this type of transactions. - Azara 1245 –C.A.B.A. New compensation scheme for generation segment - Don Pedro de Mendoza 2163 –C.A.B.A. On March 1, 2019, Res. SRRYME N° 1/19 was published in the BO, abrogating remuneration scheme under - Amancio Alcorta 2482 C.A.B.A. Res. SEE No. 19/17. The new remuneration regime is denominated in U$S and is applicable as from March 1, - San Miguel de Tucumán 601, Carlos Spegazzini, Municipality of Ezeiza, Province of Buenos Aires. 2019. The following are the main changes: i. Thermal generators’ power remuneration that declare guaranteed availability of power offered A list of the documentation delivered for storage, as well as the documentation provided for in Article 5.a.3) (DIGO) is reduced to U$S 5,500 /MW-month for the periods between March to May (autumn) and Section I, Chapter V, Title II of the PROVISIONS (2013 regulatory provisions and amending rules), is available at September to November (spring); the Company headquarters. ii. A coefficient derived from the average utilization factor of the last twelve months of the unit is applied to thermal generator’s power remuneration: to receive 100% of the power payment, a minimum of 70% of the utilization power factor is required; between 30% and 70% of utilization, a percentage is received depending on it; and if the utilization factor is lower than 30%, the resulting NOTE 22: OIL AND GAS RESERVES coefficient is 0.70; and iii. Operation and maintenance remuneration is reduced to U$S 4 / MWh for energy generated with gas (INFORMATION NOT COVERED BY and U$S 7 / MWh for energy generated with fuel oil or gas oil, and energy operated remuneration is reduced to U$S 1.4 / MWh. THE AUDITORS’ REPORT) New Company Share Repurchase Program (the “Program”) In view of the fact that the Company’s share price does not reflect either the value or the economic reality The table below presents the estimated proved reserves of oil (including crude oil, condensate and LNG) and its assets currently or potentially have, this being detrimental to the interests of the Company’s shareholders, natural gas, by geographic area as of December 31, 2018. and taking into consideration the Company’s strong cash position and fund availability, on March 27, 2019, the Company’s Board of Directors approved the repurchase of portfolio shares for up to U$S 100 million for an initial term of 120 calendar days. Under the program, portfolio shares may not exceed, as a whole, the limit of 10% of the capital stock, and may be purchased for a maximum price of U$S 1.04 per common share and U$S 26 per ADR. PROVED RESERVES Optional Tax revaluation adoption PROVED DEVELOPED PROVED DEVELOPED TOTAL PROVED On March 27, 2019, Pampa and CPB, based on their assessment of the international context and the evolution of financial variables (including inflation rate), have decided to exercise the tax revaluation option. As OIL AND LNG (1) NATURAL OIL AND LNG (1) NATURAL OIL AND LNG (1) NATURAL GAS (2) GAS (2) GAS (2) a result, Pampa and CPB have to pay a principal amount of $ 1,495 million plus interest in an amount of $45 million in five monthly installments as special tax on the revaluation. The first installment of $ 299 million was paid on March 28, 2019. Argentina 32,935 12,646 8,695 8,667 41,630 21,313 Total al 12.31.2018 32,935 12,646 8,695 8,667 41,630 21,313 Furthermore, Pampa and CPB must withdraw any tax claim or petition related to the application of inflation adjustment in the income tax (note 11.6 and 15.7). NOTES: (1) In thousands of barrels. Pampa and CPB are currently calculating the impact of the tax revaluation of assets in the deferred tax (2) In millions of cubic meters. liabilities as well as the impact of the increased depreciations in the income tax. 318 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 319 Report of Independent 03 Auditors REPORT OF INDEPENDENT AUDITORS Report of Independent Auditors (Continuation) We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial Report of Independent statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of Registered Public material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting Accounting Firm included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on To the Board of Directors and Shareholders of the assessed risk. Our audits also included performing such other procedures as we considered necessary in Pampa Energía Sociedad Anónima (Pampa Energía S.A.) the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Opinions on the Financial Statements and Internal Control over Reporting Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in We have audited the accompanying consolidated statements of financial position of Pampa Energía Sociedad accordance with International Financial Reporting Standards as issued by the International Accounting Standards Anónima (Pampa Energía S.A.) and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the Board. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to related consolidated statements of comprehensive income, of changes in equity and of cash flows for each of the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions the three years in the period ended December 31, 2018, including the related notes (collectively referred to as of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to the “consolidated financial statements”). We also have audited the Company’s internal control over financial permit preparation of financial statements in accordance with International Financial Reporting Standards as issued reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework by the International Accounting Standards Board, and that receipts and expenditures of the company are being (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the company’s assets that could have a material effect on the financial statements. the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with Because of its inherent limitations, internal control over financial reporting may not prevent or detect International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that our opinion, the Company maintained, in all material respects, effective internal control over financial reporting controls may become inadequate because of changes in conditions, or that the degree of compliance with the as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued policies or procedures may deteriorate. by the COSO. Autonomous City of Buenos Aires, April 5, 2019. Basis for Opinions We have served as the Company’s auditor since 2006. The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. /S/ PRICE WATERHOUSE & CO. S.R.L (Partner) REINALDO SERGIO CRAVERO 322 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 323 Contact For further information, contact: The Pampa Energía Building Maipú 1 (C1084AB), Buenos Aires City, Argentina Tel: +54 11 4344 6000 [email protected] ri.pampaenergia.com/en 324 PAMPA ENERGÍA | ANNUAL REPORT AND FINANCIAL STATEMENTS 2018 www.pampaenergia.com