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Edited Transcript of PAMP.BA earnings conference call or presentation 13-Aug-19 2:00pm GMT

Q2 2019 Pampa Energia SA Earnings Call

Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Pampa Energia SA earnings conference call or presentation Tuesday, August 13, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gabriel Cohen

Pampa Energía S.A. - CFO & Director

* Gustavo Mariani

Pampa Energía S.A. - CEO, Executive VP & Vice Chairman

* Lida Wang

Pampa Energía S.A. - IR Officer

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Conference Call Participants

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* Bruno Montanari

Morgan Stanley, Research Division - Equity Analyst

* Catherine Braganza

Insight Investment Management (Global) Limited - Senior Credit Analyst

* Daniel Guardiola

Banco BTG Pactual S.A., Research Division - Director of Equity Research

* Frank J. McGann

BofA Merrill Lynch, Research Division - MD

* John Puerto Wiske

HSBC Global Asset Management (USA) Inc. - Credit Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Pampa Energía's Second Quarter 2019 Results Conference Call. We would like to inform you that this event is being recorded. (Operator Instructions)

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Pampa Energía's management and on information currently available to both companies. They involve risks and uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Pampa Energía and could cause results to differ materially from those expressed in such forward-looking statements.

Now I'll turn the conference over to Lida Wang, Investor Relations officer of Pampa Energía. Ms. Lida, you may begin your conference.

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Lida Wang, Pampa Energía S.A. - IR Officer [2]

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Good morning, everyone, and thank you for joining our conference call. I will briefly go through every business segment with you, the quarter's key figures and the latest events since our last call in May. Our CEO, Mr. Gustavo Mariani; and our CFO, Mr. Gabriel Cohen, are here joining us for the Q&A session.

So last April, Pampa adopted the U.S. dollar as functional currency. Therefore, transactions are rounded in U.S. dollars -- recorded in U.S. dollars since January of this year. For the comparative period of 2018, according to IFRS, figures are reported in pesos adjusted by inflation as of December 31, 2018, and shown in U.S. dollars at the closing FX. This comparison might be difficult to read as inflation outpaced devaluation by 20% as the slide shows. Therefore, for a like-for-like basis, to analyze the performance organically, we are considering nominal figures reported last year in Q2 and converted to dollars at an average FX.

In the case of Refinor and our utilities, Edenor, Transener, TGS and OldelVal, which are mostly likely -- mostly peso-linked businesses, they continue to have functional currency in pesos, so they keep reporting in pesos adjusted by inflation. Figures are shown in U.S. dollars converted at the June 2019 closing FX. In order to analyze the performance organically and to be in line with the reporting, the comparative figure is in pesos adjusted by inflation until the end of June 2019 and shown in dollars at the closing FX.

So after making these clarifications, we can start. On Slide 4, we wanted to make a quick stop and review the quarter's financial highlights. Revenues fell year-on-year by 3% mainly because of lower gas prices, reduced legacy power plants remuneration and the impact of devaluation higher than inflation in our peso-linked business.

These negative effects were offset by the commissioning of new capacity since June 2018, adding more than 400 megawatts to the grid; higher sales due to the pass-through at power generation of gas; and onetime sales deal to the federal government regarding the shantytowns consumption and reimbursement of Social Tariff benefits at Edenor.

On the other hand, quarter-on-quarter, revenues improved by 12% mainly because of higher gas production, new wind farms and gas turbines online since last May and this onetime sales I mentioned before at Edenor.

EBITDA also fell year-on-year by 11%, mainly explained by lower gas prices and the expiration of Plan Gas at E&P, reduced legacy power plants remuneration and devaluation effect on our peso inflation-adjusted utilities, partially offset by Edenor's lagged revenues recorded last May and lower peso-linked expenses due to the deval. Quarter-on-quarter, EBITDA keeps improving, having increased by 22% mainly because of higher gas production; building of new PPAs at our wind farms, PEPE II and PEPE III; and Edenor's lagged sales.

As we show on the right below, oil and gas shares peaked at 1/3 of Pampa's consolidated EBITDA given the current pricing environment at E&P; while in electricity, it's led by power generation, takes the other 2/3 of this EBITDA. Also, it is worth to highlight that almost 60% of Pampa's consolidated EBITDA is dollar-linked, mainly from gas and power.

Moreover, as shown in the chart left below, in the second quarter of this year, our CapEx decreased 12% compared to the same period of last year, mainly explained by lower expansion CapEx in oil and gas segment, and because on Q2 2018 we commissioned Mario Cebreiro wind farm, partially offset by investment on Genelba closing to combined cycle, ongoing projects and Edenor's maintenance and catch-up investment plan. If we compare to the last quarter, CapEx increased 21%, mainly driven by CapEx of the commissioning at PEPE wind farms, increased gas production at El Mangrullo block.

As you can see on Slide 5, the adjusted EBITDA in the second quarter of 2019 recorded $266 million, 11% less compared to the EBITDA of $300 million recorded in same period of 2018 mainly explained by decreases of 34% in oil and gas, 21% in holding and others and 6% in power generation, partially offset by increases of 17% in electricity distribution, and to a lower extent, to petrochemicals.

Moving to power generation segment. During the second quarter of 2019, we posted an adjusted EBITDA of $100 million, 6% lower than the Q2 2018, mainly driven by a reduction in legacy thermal remuneration as per Resolution 1 effective from March 2019 by which capacity payments during autumn season of April and May have been reduced around 40% in dollars for Güemes steam turbines and Piedra Buena as they are the lowest dispatch rate units in our portfolio.

The impact on our highest load factor units under thermal legacy, Genelba and Loma de la Lata combined cycle, is smoother but still 20% lower off-peak season -- during the off-peak season. These effects were partially offset by -- mainly by the commissioning of Mario Cebreiro and PEPE wind farms with PPAs as well as Genelba Plus' gas turbines and, to a lesser extent, increased dispatch at our thermal and renewable power plants. Quarter-on-quarter, PEPE wind farms with business-to-business PPAs contributed to the slight increase in the EBITDA.

Generation was slightly higher year-on-year because of the operation of the wind farms, which ranked senior in the dispatch priority because its variable cost is close to 0. And addition -- in addition to that, the gas turbines at Genelba Plus thermal power plant that are part of the closing to combined cycle projects, as well as higher dispatch at Piedra Buena because we managed to get cheap gas, and therefore, be competitive in the variable cost to get dispatch.

These effects were partially offset by lower load factors at Güemes, Piquirenda and Pilar thermal power plant caused by a higher CV -- variable cost from the partial recognition of imported gas, therefore placing them behind the dispatch priority in the grid. Plus lower water level in our dams mainly affecting the Los Nihuiles hydropower plant that is also going through an overhaul. Quarter-on-quarter, power generation decreased mainly because of lower electricity demand in the grid as weather is milder, partially offset by commissioning of gas turbines at Genelba and PEPE wind farms.

The availability rates in the second quarter of 2019 was 95.4%, with installed capacity of 4.8 gigawatts. That includes the operations of recently acquired Ensenada de Barragán thermal power plant, slightly lower than the 98.2% availability achieved in the same quarter last year but similar compared quarter-on-quarter.

Moving to news in the power generation. On June 26, we jointly were awarded with YPF, Ensenada de Barragán thermal power plant, 567 megawatts located close to Buenos Aires City, with a PPA running until 2022 April. This power plant also has an expansion project to close the combined cycle increasing 280 megawatts more its capacity with a PPA for 10 years as the project is finished, which is estimated by Q1 2021, with a total investment also estimated at $200 million.

The acquisition price amounted to $282 million, of which $200 million was equally contributed by Pampa and YPF, and the balance through syndicated loans of $170 million nonrecourse to Pampa and YPF as long as we finish the project by the end of 2021. On top of that, the underlying assets carry existing debt of $229 million with 2 years of credit, so we can focus this power plant's cash flow proceeds first to complete the combined cycle works and then to repay the debt.

Regarding the expansions we have in the pipeline, we are currently in the midst of closing to combined cycle of 383 megawatts at Genelba as you can see in the picture on Slide 7. We increased current gas turbine #3 capacity by 19 megawatts as from June. And also, CAMMESA granted the commercial commissioning of the new turbine #4 for 188 megawatts. This is -- has been done 12 days earlier than the committed date. They are billing as legacy capacity until the closing to combined cycle begins operation. Additionally, we have been advancing in the rest of the infrastructure work there, which are ahead of the original schedule.

Moving on briefly on the distribution segment, which was reviewed by our CEO -- CFO at Edenor, Leandro Montero, yesterday in their earnings call as shown in Slide 8. During the second quarter of 2019, the EBITDA increased by 17% compared to the same period of 2018 amounting to $71 million in the quarter mainly because of the lagged sales of $33 million to the federal government regarding the consumption at shantytowns and reimbursement of social tariff benefits. Now that Edenor's license was transferred to the city and to the Province of Buenos Aires, these sales are going to be -- these sales to the shantytowns and social tariffs are going to be borne by the local government.

The accrual of this lagged sale was triggered as a consequence of the settlement for regulatory liabilities agreement signed last May, which it offset certain legacy regulatory debts Edenor held since 2012 with the losses Edenor filed back in 2013 and regularized unpaid penalties between 2006 and 2015 of around ARS 3 billion by deploying additional CapEx within the next 5 years on top of the investment plan timely committed under the tariff review.

Though the settlement recorded on a onetime -- recorded a onetime profit of $308 million before tax, we haven't considered this in our EBITDA as it is a noncash effect. But it does set an income tax statement next year that added to this additional CapEx that I was talking about. And as a result, the outflow for the next 5 years is estimated to be a total of ARS 7.6 billion.

Year-on-year, during Q2 2019, we experienced lower demand of electricity by 9% due to mild weather, downturn in the economic activity and tight demand elasticity. Moreover, this quarter's EBITDA was negatively affected by the FX variation higher than the own distribution cost update, which is known as CPV, which is overweighted in the salary index that is also lagging the CPI and the PPI in addition to higher operating cost and energy losses.

The energy losses reached 19.2% on the second quarter of 2019, 60 basis higher than the 18.6% in the same period of 2018 and 180 basis above last quarter identified in residential end users, especially low-income users that do not have access to the gas distribution grid, partially offset by lower volume of energy demand. We are targeting end users that steal electricity from us by performing market discipline actions and installing customized pre-charged meters. Therefore, we are increasing our customer base, but this is being offset by plugging offs at SMEs and large users due to the GDP recession.

Energy cost increased by 19% in Argentine pesos but decreased 40% in dollars year-on-year due to the gradual subsidies removal, but this is still subsidized compared to the full cost of generation, currently it's standing at a half of it.

As you can see on Slide 9 (sic) [10], during the Q2 2019 in the oil and gas segment, we posted an adjusted EBITDA of $53 million, 34% lower than the same quarter of 2018, mainly because this is still reflecting the downward trend in gas sale prices, lower oil prices year-on-year and the expiration of the Plan Gas second generation in July 2018, partially offset by 6% higher production of gas driven by intersegment sales to power generation for fuel self-procurement and lower expenses that are peso-linked.

On the other hand, quarter-on-quarter EBITDA improved by 11% mainly explained in higher -- by higher gas production due to the better pricing and seasonal demand started on June. Our overall production in Q2 2019 increased 6% year-on-year and 4% quarter-on-quarter, reaching to 48.5 thousand barrels of oil equivalent per day, of which 90% is composed by natural gas.

On the oil side, production levels year-on-year remained unchanged at 4.8 thousand barrels per day. But quarter-on-quarter, oil production decreased 10% as Chirete, an exploratory block that we recently made oil discovery is in the process of facilities accommodation since April of this year.

During Q2 2019, the crude oil sales price decreased year-on-year by $3 but increased quarter-on-quarter by $6, reaching $60 per barrel because the domestic price follows the Brent, and this international price rebounded by the end of 2018. And Escalante heavy oil, that is 60% of our production, that is characterized to be sweet, and given the current clean fuels trend, narrows the Medanito prices.

Please turn to Slide 10 (sic) [11], where we want to explain in deeper detail the situation in gas. Regarding the gas production, the quarter reached an average of 262 million cubic feet per day, 6% increase year-on-year and 5% quarter-on-quarter, mainly explained by the production increase at El Mangrullo, a block in which gas evacuation capacity was expanded since the end of last year and we fully operate. By June 2019, the production level at El Mangrullo reached 151 million cubic feet per day, 55% than June last year.

This positive effect was partially offset by lower production in gas-bearing blocks because of lack of visibility on gas -- in sale prices, which was affected by the excess of supply of gas driven by the disruption in shale development, specifically backed up by the Unconventional Gas Plan resolution 46, kind of affected by the economic downturn and specifically during the winter season bottlenecks at the main transportation pipeline. This effect negatively impacted the Rincón del Mangrullo block and with lower drilling rate and natural decline, and a minor decrease at Sierra Chata, Aguaragüe and Parva Negra. In this case, Sierra Chata is awaiting the completion of the wells drilled during the Q2 2019, and Río Neuquén maintained the same production level year-on-year.

During the second quarter of 2019, our actual weighted average sales price was -- for gas was $3.1 per million BTU, 43% lower year-on-year and similar to the last quarter, mainly due to the 36% decline in the end users' sales price compared to the second quarter of 2018. The lower sales price to end users was mainly driven by the reduction on the reference price for gas fired at power plants and the gas tenders on an interruptible basis conducted by CAMMESA, which reflected the demand seasonality and excess of supply in April and May, also impacting negatively the commercialization in the industrial segment.

In June, gas prices rebounded as it marked the beginning of the winter season, with a 37% increase in dollars at power plant's reference price and higher spot prices due to the seasonal demand. Moreover, in Q2 2018, the price was $5.5 per million BTU. That included the Plan Gas, which expired by the end of June 2018 and represented $0.60 per million BTU. The fuel self-procurement of our power generation helped the recover the gas production levels, and we are destining almost all our production there. Though it is -- it doesn't improve pricing, it helps us to have a certain offtake specifically during the weak demand periods and monetize some synergies between power and gas businesses.

As you can see on Slide 10, the average gas sale prices that we recorded to the demand having plunged since August 2018 falling to the lowest point in years and hardly covering the marginal breakeven profit. Winter season picked up prices, but as evidence showed in the past, the domestic production was not enough to cover the domestic gas demand needed to cover 22% of the deficit in the country consumed in June, with gas imports from LNG and Bolivia, with much higher pricing than those paid to the domestic players.

Going on to the update in the segment, the government announced deferrals of 22% on the residential gas bills issued between July and October to be recovered later in 5 monthly installments from December aiming at smoothening residential users' bills that are seasonal due to the higher winter consumption. The financing cost will be borne by the federal government as a subsidy. Our E&P exposure to the residential segment have been diminished a lot and therefore the impact of this measure is marginal to Pampa.

On the other hand, in June, we increased our equity stake at OCP, our subsidiary in Ecuador, amounting to a total of 16% equity interest and recording a provisional profit of $22 million subject to changes as we are assessing OCP's fair value.

Before I move on from oil and gas, I wanted to give you a quick update of our operations during the second quarter of 2019. 13 wells were drilled and 5 were completed. Our focus is the development of blocks in tight gas reservoirs. During the Q2 2019, we drilled 1 tight gas well at El Mangrullo and 2 horizontal tight gas wells at Sierra Chata.

Since the beginning of the last year, we began with shale gas exploratory activity at Vaca Muerta reservoir. We built the side tracks for 2 Vaca Muerta wells at El Mangrullo block with each -- with a horizontal extension of 8.2 thousand feet. These are the first horizontal wells to Vaca Muerta we operate, and they are estimated to be completed soon in which approximately 36 hydraulic fractures are estimated to be performed in each objective.

Additionally, we drilled one well in Q2 in El Mangrullo and we are drilling also one well to shale oil window in Rincón de Aranda block, an exploratory block operated by us with 55% stake. We partnered here with Total. As of today, we are finishing the vertical section of that block of that well in Rincón de Aranda with a depth of approximately 9.2 thousand feet and we'll continue with the drilling of our horizontal branch targeting the Vaca Muerta formation.

In petrochemicals, we posted an EBITDA of $3 million during the second quarter of 2019, higher than the year-on-year and quarter-on-quarter mainly because of the optimization of fixed cost and lower peso-linked costs due the deval plus lower cost of gas. These effects were partially offset by the downward trend on the international prices and weaker demand, export duties and higher cost of imported virgin naphtha. In operating terms, the total sales remain unchanged year-on-year and in this quarter, totaling 95,000 tons. But quarter-on-quarter, we increased 15%.

Finally, in our holding and others segment, presented an EBITDA of $40 million in the second quarter of 2019, 21% lower than the same period of 2018 but similar to the last quarter. This is mainly due to the lower income from fees collected for -- at holding in addition to a lower EBITDA adjusted by our ownership from our affiliates, TGS and Transener, because the peso depreciation outpaced the cost variation adjustment that they have been granted.

I'm going to only briefly review TGS as they had their call on Thursday. TGS EBITDA adjusted by our indirect stake is -- of 25.5% contributed to Pampa's $33 million in the quarter for an implicit total of $129 million, 10% lower than last year's Q2, mainly due to FX variation higher than the lagged-granted PPI that covers cost variation for gas importation business, the drop on the reference prices for NGLs, lower gas processing volumes at Cerri and higher export duties partially offset by lower cost of gas per million BTU.

In relation to the expansion of main gas transportation pipeline, on July 30, the government announced a public tender -- launched for a new pipeline from Neuquina to the Province of Buenos Aires. The first tranche is from Neuquina to the town called Salliqueló with an initial capacity of 530 million cubic feet per day, and then from Salliqueló to the city of San Nicolás with a capacity of 700 million cubic feet per day.

In order to allow the repayment of this investment, the first 17 years of the concession are going to be under a Temporary Special Regime, so remuneration will be freely negotiated with large users, not residential, among them CAMMESA, that already offer a take-or-pay transportation of 350 million cubic feet per day for 15 years. The total license period is for 35, extendable for another 10. And the opening of the proposal is scheduled for next September 12. TGS is finalizing the bid terms of this participation.

As for Transener, the EBITDA adjusted by our indirect shareholding of 26.3% contributed $11 million for the second quarter for an implicit total of $42 million, 7% lower than the same period of 2018, mainly because the lagged cost variation update was lower than the FX variation, partially offset by lower operating cost mainly due to the higher awards for quality of service and lower charges of penalties.

Regarding the power outage that occurred in the morning of June 16 of this year, it was due to a concurrence of multiple shortcomings within the grid, including a specific technical problem in the transmission system under Transener's responsibility and is not related to the lack of investment and maintenance but to improper adjustment of the auto-disconnect generation system, called DAG, following the configuration change of certain lines of the Littoral Corridor. The high-voltage lines recovered immediately, and within 8.5 hours, 75% of the country's demand was restored.

In mid-June, we suspended the buyback program in Pampa as quoted prices exceed the repurchase cap, so total treasury shares under this buyback program reached 79.8 million ordinary shares representing 4.2% of the capital stock. However, given the market's volatility and the gap between the value of the assets and the quoted price, plus our strong cash position, yesterday, the Board of Pampa approved a new share buyback program for $50 million. We consider the value of these assets will be -- materialized soon and the market turmoil -- as the market turmoil goes away. In the meantime, we consider repurchasing our own shares as one of the best investments and accretive actions towards shareholders that we are undertaking.

So in the net -- in terms of the net income attributable to the owners of the company, Pampa reported a consolidated gain of $394 million in the second quarter of this year, whereas in the same period, we recorded a loss of $72 million, mainly explained by the settlement of Edenor's regulatory liabilities, which is noncash, and lower accruals of FX difference as a result of change in the reported methodology as I explained at the beginning of this call.

Finally, moving to the Slide 14. We must highlight the low and well-spread leverage of the company as well as the solid cash position held compared to other peers in the industry and in Argentina.

We have always been very proactive towards the cash and liability management, specifically after witnessing so much volatility, high yields and narrow window in the international financing market. We continue redeeming the short-term facilities highlighting that, so far this year, Pampa redeemed at maturity or pre-canceled roughly a total of $225 million. The consolidated gross debt, including affiliates at ownership, increased to $2.5 billion, almost $500 million higher than the March 2019 mainly because we issue a 10-year bond last month at 9 3/8% yield and we are adding Ensenada's power plant debt at ownership, a power plant that we acquired last June, all offset by debt cancellation.

Consolidated gross debt is 99% in dollars or linked in dollars, bearing an average interest rate of 7.2%, and the 75% is placed at the parent. Consolidated cash amounted to $863 million, which is higher than the $704 million recorded in March 2019 mainly because of the bond proceeds and the acquisition -- offset by the acquisition of Ensenada. Closing Q2 2019, we are holding 70% of our cash in dollars. But as of last week, more than 90% was dollarized. Therefore, net debt slightly increased to $1.7 billion, and the net debt to last 12 months EBITDA remained low at 1.7x. We also show here the stand-alone key debt figures for our bondholders.

So after canceling roughly $225 million, the principal maturities belonging to Pampa stand-alone that are left in 2019 combined to 2020 and '21 amounts to a total of $316 million, which is by far exceeded by the $682 million cash position pro forma at the parent. This $682 million includes the $300 million proceeds from the 10-year bond that we successfully placed at 9 3/8% last July as well as last week we executed with CAMMESA an agreement to settle all legacy receivables. We've been haircut -- but the balance was -- we collected $38 million. That will trigger a profit in the P&L next quarter of ARS 3.4 billion before tax. Also, we continue to collect the Plan Gas credit. After the closing of the second quarter, we already collected so far $15 million in our cash.

So this concludes our presentation. Now I will turn the word to the operator who will open the floor for questions. Thank you so much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Bruno Montanari of Morgan Stanley.

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Bruno Montanari, Morgan Stanley, Research Division - Equity Analyst [2]

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First one, wanted to understand, given the turmoil in Argentina after yesterday's events, I was wondering what would be the company's options in case policymaking in the country shuts down investment climate? In that hypothetical scenario, should we expect Pampa to retrace and control capital expenditures more aggressively, look for acquisition opportunities in Argentina or eventually thinking about going international to diversify the regional risk?

My second question is specifically about the midstream business. What would the company say -- what are the odds of the pipeline auction actually happening under the current environment if you expect perhaps a delay in the bidding process? And third and last question is about the company's desired minimum liquidity. So what will be the minimum cash position that management is comfortable to navigate these more challenging waters now?

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Gustavo Mariani, Pampa Energía S.A. - CEO, Executive VP & Vice Chairman [3]

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Bruno, Gustavo Mariani is speaking. Next time, we will let you do 3 questions one at a time so we don't have to write so much. Obviously, we are reassessing our plans although as I guess you will know, we have been saying for over a year already that this was a high probability scenario, no, we -- and I think the way our financial position and the way we collect that view that we have for a long time. But this scenario for the change of regime was highly probable and that's why we prepared with a lot of liquidity and lengthening our debt profile as much as we could.

So going forward, we -- I cannot give you a straight answer. I think going internationally that you suggest is probably out of the question. That's not something that we are envisioning. Obviously, CapEx plan on revision on all our lines of business. We do have some, especially in power generation, that are well underway, like for example the closing of the cycle of Genelba that we will continue at full speed until May or June of next year. Hopefully, sooner than that we will have the combined cycle working. But we will be revising on the CapEx plan.

And regarding M&A opportunities, we -- there's nothing that we are starting at the moment, but we will obviously analyze any opportunity that this environment may bring. Regarding the midstream project, the pipeline from Neuquén to Buenos Aires, the government announced that the bidding date is September 13. We have been advising the government regarding this construction that it's such an important project that whomever -- that the next administration needs to confirm their willingness to go forward. So in this environment, yes, I do envision that there's going to be a delay in the bidding process and -- but haven't heard anything from the authority so far. I think it's very likely that there is going to be a delay. Regarding the cash position, I'll let Gabby answer.

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Gabriel Cohen, Pampa Energía S.A. - CFO & Director [4]

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In respect of the new cash position, we say that a very comfortable cash position is between $200 million and $300 million under normal circumstances. As it was pointed out by Lida, as of today, our cash positioning in line of $700 million. And as also Gustavo was pointing out, the last bond issuance was following our investment in Barragán and taking into consideration uncertainty of the election results. So as of today, we still are -- we are much more comfortable and ready to navigate the uncertain scenario and able to eventually, in the future, take advantage of investment opportunities.

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Operator [5]

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Our next question comes from Frank McGann of Bank of America.

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Frank J. McGann, BofA Merrill Lynch, Research Division - MD [6]

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Just a question in terms of gas production and looking forward out of the next 6 to 12 months, how you see the market. Is there any opportunities you have for increased gas production to supply demand for additional thermal plants or exports to Chile? Or how do you see the outlook for demand for the gas that you produce?

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Gustavo Mariani, Pampa Energía S.A. - CEO, Executive VP & Vice Chairman [7]

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Well, country-wise, I don't see the relevant change in demand for natural gas in the next couple of years especially. The opportunity for the Neuquina Basin is once this pipeline that we have been talking about in the previous question, once that pipeline is completed, then the Neuquina Basin will be able to supply more gas to the metropolitan area of the Buenos Aires and the Littoral. Only during the winter season is when the excess demand over the production of the country.

In our special case, because we are a very important consumer of natural gas and because we are adding more power generation capacity that consumes natural gas, we are starting the possibility of increasing production working with what we consider is a low price for -- of $3, that's at the current price that we are perceiving. So we are starting our portfolio and we have the possibility of increasing production by around 20% with projects that may make -- still make a lot of sense even with a $3 scenario. That is because these are tight gas projects, basically in the El Mangrullo, which I think Lida has talked about at length during her presentation. So prior to that, what we are doing? We haven't made a decision yet whether we will go after this increase in CapEx in order to increase production, but it's something that is in a possibility for Pampa of doing next year.

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Frank J. McGann, BofA Merrill Lynch, Research Division - MD [8]

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Okay. So that 20% is not approved yet internally, but it's something that's possible?

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Gustavo Mariani, Pampa Energía S.A. - CEO, Executive VP & Vice Chairman [9]

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Exactly.

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Operator [10]

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Our next question comes from Daniel Guardiola of BTG.

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Daniel Guardiola, Banco BTG Pactual S.A., Research Division - Director of Equity Research [11]

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I have a couple of questions here. My first question is on leverage. Now I'd like to know if you can share with us what is the maximum leverage level at which you will feel comfortable to operate? My second question is regarding, how can I say it, your view on the trends forward for 2020. I would like to know if you can share with us your view on which sectors could be more exposed to potential changes in the regulation.

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Gabriel Cohen, Pampa Energía S.A. - CFO & Director [12]

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Yes. Gabriel speaking. In terms of leverage, first of all, I think the most relevant aspect to answer is our projections in terms of cash flow generation. As of today, where we feel confident it's up to 2.5x net debt-to-EBITDA. And I would like to highlight to you that as of today, in our projections, our debt at the parent level is repaid between 4 maximum -- maybe 4x free cash flow after interest for debt repayment. So those are basically the key aspects that we look for. The second question was...

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Lida Wang, Pampa Energía S.A. - IR Officer [13]

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What's the segment exposed to changes?

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Gustavo Mariani, Pampa Energía S.A. - CEO, Executive VP & Vice Chairman [14]

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Sorry. Gustavo speaking. I would say that regarding E&P, as you know, for us, it's basically gas prices. I don't think that Argentina can or will be able to sustain a $3 price. I think in the medium term, that means a few years, most of our colleagues are reducing significantly their investment programs in natural gas. So with the current market price, I see a decline in investment and a decline in production especially because of the fact that in unconventional production, especially shale gas, declines had a very, very high rate. And unconventional gas is already a high percentage of the total gas produced. So with low investment, I think in the next few years we'll see a decline in production in natural gas and that might help a recovery in prices. So I don't see -- given the current scenario, I don't see regulatory changes that could significantly impact that segment going forward.

Then on the -- what would have more impact in terms of Pampa's portfolio, and there has been a lot of talk about the last year, is about modification in the PPAs in the contracts of our power generation segment. Still my answer there is the same that we have been giving for a while. That this will obviously depend on the degree of the macro deterioration in Argentina. And I think any -- I think the new administration will try to avoid unilaterally changing those contracts because it will have a huge impact not only in the electricity sector but on the whole economy in terms of the credibility of the country and the, again, changing of rules. But definitely, if it happens, the change in the PPAs will have probably the most significant impact on Pampa's EBITDA.

On the legacy capacity, there, it's easier and it's in the hands of the regulators to change the regime. Probably a change back to pesos adjusted by inflation as it was before. It's probably something that is more in line with what the new candidates have been -- or with what Fernandez has been saying in the campaign. And the degree and how that impacts -- will impact Pampa will depend on, again, on the macro scenario and on the level of inflation and how often this new [peso regulation] could -- will be adjusted.

And lastly, on our subsidiaries, which are already with the peso-denominated tariffs, it will -- I personally, despite all that has been said during the campaign, I don't envision the new administration doing the same mistakes that the Cristina administration did in terms of letting the tariff get so cheap or with such a lag as it happened before. So I'm still optimistic here. So, Gabby?

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Gabriel Cohen, Pampa Energía S.A. - CFO & Director [15]

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I think also, it's also important to highlight that despite the comments on the press, tariffs are in pesos for the end user, they are not in dollars. So clearly, in terms of the dollars, there is a pass-through in terms of the equation and the cost. But the deal that every person will save is in pesos, it's not a dollar deal.

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Operator [16]

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(Operator Instructions) Our next question comes from John Wiske of HSBC.

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John Puerto Wiske, HSBC Global Asset Management (USA) Inc. - Credit Analyst [17]

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I'm just wondering if you could tell us what is the current proportion of electricity sales, both in terms of volume and revenues that are sold to CAMMESA versus sold under bilateral PPAs?

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Lida Wang, Pampa Energía S.A. - IR Officer [18]

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Today, 95% of the transactions are for CAMMESA. And then there is more Energía Plus and MATER that started last May that impacted B2B, business-to-business.

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John Puerto Wiske, HSBC Global Asset Management (USA) Inc. - Credit Analyst [19]

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And do you see that proportion staying the same through the short to medium term?

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Lida Wang, Pampa Energía S.A. - IR Officer [20]

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Well, here's the thing. Energía Plus has been -- our client's Energía Plus. Energía Plus is the very first form of new capacity. They are migrating -- these businesses are migrating little by little to renewables and to MATER. MATER is backed up by a law, national law, that says that 8% last year's consumption has to be met with renewables. By 2025, 20% of the consumption in this last year's must be met for renewables. But the supply is not enough for that. So there's quite a lot of supply in the MATER, that's why we built 2 wind farms there.

But eventually, this has to do with supply. If we keep continuing increasing our supply there, we can outnumber this 5%. But another thing is that what to do with Energía Plus. Energía Plus is still ongoing. But year-on-year, the Q2 sales dropped to half. Dropped to half. Though the margins didn't drop. Because of cost of gas and cost of electricity to cover those contracts are getting cheaper year-on-year, the margin and the EBITDA actually didn't change at all. The sales dropped by the half. So we foresee in the future that a lot Energía Plus clients will migrate to the MATER, to this renewal B2B.

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Gustavo Mariani, Pampa Energía S.A. - CEO, Executive VP & Vice Chairman [21]

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Just one more thing to add in that respect. The market is still very regulated. So the only 2 regulatory-wise alternatives to not to sell to CAMMESA is, as Lida said, the Energía Plus market and the MATER. In both those segments, we are by far the leaders with 35% or 40% market share of -- in MATER even higher than that. So we are as aggressive as -- or we have been always in the past as aggressive as we can in going directly to these industries because we know it's a way to reduce exposure and risk. But still, it's a small percentage of our total portfolio because that's the way the regulation in Argentina is conceived.

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Operator [22]

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Our next question comes from Catherine Braganza of Insight.

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Catherine Braganza, Insight Investment Management (Global) Limited - Senior Credit Analyst [23]

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I missed the amount of your cash balance that's actually in U.S. dollars. Would you mind repeating it, please?

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Lida Wang, Pampa Energía S.A. - IR Officer [24]

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Yes. For you only. It's, so far, as of the Q2 stand-alone basis, we closed at $373 million. But we issued a bond of $300 million, so you have to add that. You have to add $38 million that we collected from this settlement that the CAMMESA did from the old credits, $48 million plus another $15 million that we collected after the quarter's closing in Plan Gas. And you have to deduct $44 million of redemptions in debt that we've been doing. We'll recall -- we will redeem a bond that was maturing in 2020. And we also canceled some bank facilities for $10 million, including this $44 million. So it's $682 million exactly pro forma, right?

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Gabriel Cohen, Pampa Energía S.A. - CFO & Director [25]

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(inaudible)

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Lida Wang, Pampa Energía S.A. - IR Officer [26]

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How much in dollars? I'm sorry. How much in dollars is 90% in dollars?

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Gabriel Cohen, Pampa Energía S.A. - CFO & Director [27]

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More than 90%.

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Lida Wang, Pampa Energía S.A. - IR Officer [28]

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More than 90%.

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Catherine Braganza, Insight Investment Management (Global) Limited - Senior Credit Analyst [29]

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And if I remember correctly, you pool all your cash at central entity. Where is that entity? Is it onshore or offshore?

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Gabriel Cohen, Pampa Energía S.A. - CFO & Director [30]

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First of all, could you repeat, in terms of the entity, we're speaking about -- what Lida was saying is about Pampa Energía, the parent company, the operating company. That's, I think, the first important thing. Then we hold most of our cash position in offshore, okay, significantly in T bills. A major part is in T bills.

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Catherine Braganza, Insight Investment Management (Global) Limited - Senior Credit Analyst [31]

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Okay. And can I ask how you move the cash around the group to pay the various needs? Is it through dividend payments through the groups? Or do you have a series of intercompany loans?

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Gabriel Cohen, Pampa Energía S.A. - CFO & Director [32]

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Every company is managed independently, okay? So within the group, the only flow between subsidiaries to Pampa was dividend payments from TGS and Transener. Then there is no intercompany movement between Pampa, Transener, TGS and Edenor.

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Catherine Braganza, Insight Investment Management (Global) Limited - Senior Credit Analyst [33]

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So when you do your cash pooling, it is -- how do you send your cash up to the central entity where it's cash -- where you have your cash pooling?

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Gabriel Cohen, Pampa Energía S.A. - CFO & Director [34]

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Pampa Energía is the parent company of these operating companies, it's not a cash pooling.

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Operator [35]

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Our next question comes from Richard Siegel of (inaudible).

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Unidentified Analyst, [36]

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A couple of quick questions. First, I was wondering what percentage of your revenues are dollarized or dollar-linked just to get an idea of the natural hedge. And second, I was wondering if you've been able to have any discussions with the opposition -- or advisers for the opposition party to have a general idea of their philosophy about contract renewal and the possible risk of [pre-specification] of contracts, which Fitch has discussed this afternoon.

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Gustavo Mariani, Pampa Energía S.A. - CEO, Executive VP & Vice Chairman [37]

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Sorry, can you repeat the second question?

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Unidentified Analyst, [38]

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Yes. There was a press release from Fitch Ratings regarding the risk of the possibility of [pre-specification] of contracts. I was wondering if you've been able to have any discussions with anyone in Argentina about the likelihood and mention the damage you think that, that would cause. Because obviously, it caused a lot of damage when it was imposed 10 or 15 years ago.

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Gustavo Mariani, Pampa Energía S.A. - CEO, Executive VP & Vice Chairman [39]

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Okay. Regarding our percentage of the dollars in revenue, it's 100% when we are talking out of Pampa on the stand-alone basis, no, at the Pampa level, basically the power generation segment and the E&P business. So those 2 segments are fully dollarized. The PPA, the power generation PPAs, the legacy capacity, the price of natural gas that is basically. Then we have the business of petrochemicals which is also dollarized, but it's a business that doesn't add much to the bottom line. On the consolidated level, it's at 60%, but it's a figure that is really not relevant. But our 3 main subsidiaries, Transener, TGS and Edenor, have peso-denominated tariffs, adjusted by inflation every 6 months.

Regarding the specification of contracts, I haven't seen the news of the rating agency you mentioned and I don't know what it's referring to. Fernandez, during his campaign has been saying several times that he will reverse the dollarization of the tariff and that he will revert tariff to pesos. I think that it's -- that's just a campaign statement because tariffs are already in pesos, so residential tariffs of electricity, of natural gas, they're already in pesos. What he was referring to changing the price of the megawatt hour, that's currently dollar-denominated, or the price of the million of BTU in natural gas. And honestly, I don't think that he will change the price of natural gas to pesos. But I don't think he will do that with the price of oil that -- change it pesos.

And regarding the megawatts, in the case of the legacy capacity, it was peso-denominated a couple of years ago with annually inflation adjustment. Which honestly it was very painful, because at the beginning of the year when the price was adjusted, we were doing okay, cash flow positive. But because of the high inflation environment, we were struggling at the end of the year.

So -- and regarding specification of contracts, obviously, what comes to mind is the PPA. And again, I think I already answered that question, and I think it will depend on the degree of deterioration of the macroeconomic situation in the country. You asked also whether we have spoken with the opposition. And we have some conversations with people that is part of the team but still has -- I mean you don't know for sure who's going to be running the energy policy. You don't know who's going to be running the economic policy, so you can imagine that completely uncertainty, who's going to be within Fernandez' team on the energy policy side.

So the answer is no, we don't have any close conversation in order to know what they are concrete or seriously thinking of doing or what their policies will be like. Honestly, at this moment, I don't think they know. So unfortunately, as has happened in Argentina, they're concentrated in winning. Once they win, they will build up the teams and they will start thinking seriously what they will do.

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Unidentified Analyst, [40]

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Right. Do you think they were surprised with the results as everyone else then?

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Lida Wang, Pampa Energía S.A. - IR Officer [41]

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(inaudible)

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Gustavo Mariani, Pampa Energía S.A. - CEO, Executive VP & Vice Chairman [42]

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If the results are surprising, that was the question?

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Unidentified Analyst, [43]

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Do you think the results surprised Fernandez as much as anyone else?

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Gustavo Mariani, Pampa Energía S.A. - CEO, Executive VP & Vice Chairman [44]

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Yes. I think even the polls that they did, they had a 7%, 8% difference. So 15% difference was, I believe, even a surprise for Fernandez.

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Operator [45]

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This concludes the question-and-answer section. At this time, I would like to turn the floor back to Ms. Wang for any closing remarks.

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Lida Wang, Pampa Energía S.A. - IR Officer [46]

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Well, thank you so much for attending our call. I hope it was useful for you. Any questions you may have, Margarita, all the team is available for you. Thank you, and have a good day.

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Operator [47]

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Thank you. This concludes today's presentation. You may disconnect your line at this time.