U.S. Markets open in 2 hrs 13 mins

Edited Transcript of PAMP.BA earnings conference call or presentation 13-Nov-18 3:00pm GMT

Q3 2018 Pampa Energia SA Earnings Call

Jan 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Pampa Energia SA earnings conference call or presentation Tuesday, November 13, 2018 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Gustavo Mariani

* Lida Wang

Pampa Energía S.A. - IR Officer

================================================================================

Conference Call Participants

================================================================================

* Bruno Montanari

Morgan Stanley, Research Division - Equity Analyst

* Ezekiel Fernandez

* Frank J. McGann

BofA Merrill Lynch, Research Division - MD

* Jacob Rabinowitz

* Julián Ríos

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Pampa Energia 3Q '18 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 Energia's management and on information currently available to both companies. They involve risks, 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 Energia and could cause results to differ materially from those expressed in such forward-looking statements.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good morning, everyone, and thank you for joining our conference call. I will briefly go through every business segment, reviewing the quarter's key figures and the latest events since our last call in August, and then head straight to the Q&A. As you know, you can always reach us out for more details on the results or any questions you may have. Remember, as from 2018 and for the comparative periods, we are redistributing expenses and debt at the corporate level among the operating segments at the company, in the parent company, that is power generation, oil and gas and petrochemicals. Also we are not considering the divested assets at oil and gas and refining and marketing segments, which are reported as discontinued operations. And also before we begin, please bear in mind that our financial statements are prepared according to IFRS, not adjusted for inflation. So the large depreciation of the peso against the U.S. dollar affects entirely to our financial liabilities and, therefore, squeezes out our equity net book.

This interim reporting is following local GAAP because in Argentina, there's an executive order that forbids inflation-adjusted reporting. Therefore, the company could not apply the IFRS international accounting standard #29, which provide that entities with high-inflation functional currency defined as cumulative inflation rate over a 3-year period approaching or exceeding 100%, shall state financial information in terms of the measuring unit current at the end of the reporting period. However, there is a law project that renders ineffective that executive order and currently holds approval of the Argentine national Congress lower house. So inflation-adjusted reporting standards can apply. And considering a cumulative inflation rate of 32% at an average inflation rate of 16% for the 9-month period of 2018, the equity estimated by the company will amount to ARS 38 billion instead of the ARS 750 million reported under nominal terms in our balance sheet.

So moving on to quarter's figures. As you can see on Slide 4, we are again delivering strong results and operating metrics despite the challenging quarter we experienced with the second largest flex variation in the year marking a 43% quarter-on-quarter peso devaluation, inflation soaring and gradual deregulation of the industry.

Beginning with the adjusted EBITDA. In the third quarter of 2018, we recorded ARS 9.1 billion, 108% more compared to the EBITDA of ARS 4.4 billion recorded in the same period of 2017. The large variation was due to increases of ARS 2.1 billion in power generation, ARS 1 billion in electricity distribution, ARS 567 million in oil and gas segment, ARS 94 million in refining and distribution and ARS 1.1 billion in holding and others plus intersegment eliminations, partially offset by a decrease of ARS 175 million in petrochemicals. The ARS 3.5 billion EBITDA in our power generation segment was mainly driven by the large peso devaluation impacting our power generation sales invoice in U.S. dollars in addition to the full fare billing since November 2017 for the legacy capacity, which currently is 75% of our total 3.9 gigawatts installed capacity. In Q3 '17, we were remunerated under a lower fare as the legacy scheme was implemented gradually throughout 2017.

The new power generation from Parque Pilar, Ingeniero White, Loma de la Lata and wind farm Mario Cebreiro not only contributed to the EBITDA since all of them are billing PPAs fine with CAMMESA, but also they contributed the energy generation in Q3 2018, along with a higher dispatch at Pichi Picún Leufú hydro power plant due to the rainy season, though consolidated generation remained slightly lower year-on-year. Being positive variation offset by lower dispatch at Piedra Buena and wind turbine in Guemes technical outages at Genelba and lower generation at Mendoza hydro power plant because of low water flow.

Also, we highlight that we managed to maintain an outstanding availability rate of 94% with an increased installed capacity, slightly lower than the 94.7% availability achieved in the same quarter of last year, mainly because of Genelba's out-of-service partially offset by new units' availability and improvements at Piedra Buena.

Moving to news in power generation. On November 6, the secretary of energy, Garmin, published Resolution 70, by which gencos are authorized to acquire fuels for their own power generation. This resolution is a step forward in the normalization of the industry by decentralizing fuel procurement at CAMMESA, optimizing fuel markets and achieving tax efficiencies and vertical integration between our 2 core businesses, gas and power. It is worth highlighting that CAMMESA will remain in charge of the commercial management and fuel dispatch for power genco's that do not or cannot make use of said capacity as well as the PPAs engaged with CAMMESA.

Yesterday, the company started -- the day before actually, the company started to self-procure gas through our genco units under the legacy scheme and Energía Plus as we always did, supplying for now E&P operations around 180 million cubic feet per day, 75% of our current gas production. The generation process with self-procured fuel will be valued according to the bioproduction cost, also known as CVP, that each generation company declares to CAMMESA. CAMMESA runs all of those variable cost in degrees so the lower ones dispatch first.

Before I move on from power generation, I wanted to give you a quick update of our expansion project regarding the closing to combined cycle of 303 -- 383 megawatts of Genelba. As you can see on picture on Slide 7 at the end of September, we sold -- and we announced, the Siemens new gas turbine brought from Germany, and we are building all the needed connection infrastructures so this gas turbine can start up by June 2019 and operate as a combined cycle in Q2 2020.

On the renewal front, the construction of Pampa Energia #2 and #3 wind farms for 106 megawatts is currently in optimal pace. In Parque Eólico, Pampa Energia or PEPE II --number 2 -- as we call them, towers and blades and other main components are arriving to the site as we finish to concrete pouring the 14 foundations. In PEPE III, we are advancing with the foundation already concrete pouring 6 out of 14.

Moving on briefly to the distribution segment, which was previously reviewed by Mr. Montero yesterday in Edenor's earnings call. As shown in Slide 9, during the third quarter of 2018, the EBITDA increased by ARS 1 billion compared to the same period of 2017, amounting to ARS 1.9 billion in the quarter, mainly because of the full fare billing on the distribution tariffs granted by the comprehensive review, RTI, as we call it, as from February 1, 2018, plus the cost variation of cumulative 35% recognized in December 2017, February and August 2018. Additionally, Edenor invoiced another 3 installments generated by the gradual application of 2017 tariff increase for ARS 540 million.

Electricity volume sales contributed to the EBITDA performance increasing 1% year-on-year, led by residential demand due to the colder winter but offset by a decline in large users at wheeling system and SME's demand in-line with the economic downturn. These positive variations from Edenor's EBITDA were mainly offset by the increased energy losses, reaching 20.4% rate in the third quarter 2018 compared to the 18.4% for the same period of 2017, mostly identified in residential end-users as they consume more electricity when the weather is colder, especially low-income users that do not have access to gas distribution rates.

Energy cost increased by 103% year-on-year due to the application of the new seasonal price rate. By the way, it is still subsidized compared to the full cost of generation. However, the undersecretary of electric power established the same seasonal prices as from November.

In line with our actions for energy recovery, we experienced a 3% increase of registered clients compared to Q3 2017, mainly because of installation of special inclusion meters to foster self-management consumption and integration of users having a nonregular income.

Last, in electricity distribution, on September 15, the undersecretary of electric power extended the time to regularize the outstanding regulatory asset and availability issue until the end of November of this year.

In the oil and gas segment, during the third quarter of 2018, we posted an EBITDA of ARS 2.3 billion for the continuing operations, 33% higher than the Q3 2017, mainly due to the fact that the peso devaluation over the oil and gas dollar-linked sales. In addition to higher oil sales price in dollars partially offset by deterioration of Plan Gas second generation, lower gas sales price in dollars and lower crude oil production due to the service termination at Medanito La Pampa block. The adjusted EBITDA considers our 23.1% ownership in the core utility company, OldelVal, which contributed ARS 84 million in the quarter. Our overall production in Argentina in Q3 2018 declined 10% compared to Q3 2017, reaching 45,000 barrels of oil equivalent per day, of which 88% is composed by 238 million cubic feet per day of natural gas and the remaining by 5.4 thousand barrels of crude oil production per day.

On the side -- on the oil side, the decline in production of 3,000 barrels per day responds to the end of service at Medanito La Pampa block in October of last year, partially offset by a slightly higher production at El Tordilla block in San Jorge Basin. During Q3 2018, the crude oil sales price increased year-on-year by almost $17, reaching $66.4 dollars per barrel because the domestic price follows the natural price of barrel of the Brent, and Escalante heavy oil discount -- the discount improved in comparison to Medanito being 61% of our oil production at Escalante. Reaching the gas production in 2018 Q3 is slightly declined year-on-year and quarter-on-quarter, mainly explained by the natural decline and lower drilling rate at Rincón del Mangrullo block, offset by the higher -- by the increase in the drilling activity at El Mangrullo and Río Neuquén blocks. In the case of El Mangrullo block, this acquisition is conditional to expanding the block present in its full capacity, which commissioning was delayed and will contribute an additional production of around 20% by next year Q1.

In the case of Río Neuquén in mid-August 2018, the processing capacity was left to 194 million cubic feet per day. Sierra Chata managed to maintain its production output, but we expect to ramp-up next year since 2 wells will be drilled to Mulichinco formation at the end of the year -- of this year. Also, the weaker gas demand due to seasonality and economic downturn did not help with the production levels.

During Q3 2018, our active weighted average sales price for gas was 4.5 dollars per MMBtu, 28% lower than the same period in 2017, mainly due to the expiration of Plan Gas second generation by the end of June 2018. While in Q3, this compensation represented 1.3 dollars per MMBtu over the 6.3 dollars per MMBtu recorded price. Moreover, there was a 9% decline in end-users sales price, mainly driven by the reduction of the reference price of gas fired at power plants and the subsequent gas tenders on a non-firm basis led by CAMMESA at the beginning of September, which reflected the demand seasonality and the industrial consumption decline because of the economic recession. This drop in prices were partially offset by higher accrual of retail price from gas utility companies, a.k.a., gas cost.

As we mentioned before, on August, reference price will reduce by 20%. And aiming to keep reducing the gas prices for power generation on September 6, CAMMESA launched a GAAP tender on a non-firm basis to supply a short-term period of September to December 2018. As a result, they received price indication for a total of 5 billion cubic feet per day at a weighted average price at well head among all basins of 3.8 dollars per MMBtu. Pampa participated in the auction and install on the CAMMESA on a spot basis, but lower amounts of sale procurement of gas was enacted. However, regarding the actual price, prices from this cost during Q3 2018, we also recorded receivables generated by the FX difference between spot market -- spot rates, sorry, stipulated in the agreement with [fincos] and those recognizing the final tariffs between April to September 2018 as gas fincos were unable to pass nearly through the large peso depreciation to its end-users. We are awaiting a resolution from the secretary of energy, Garmin, to formalize the collection method announced a few weeks ago.

Also as the gas regulated grants a new final tariffs effective from October 2018 to March 2019, in which also considers a price for natural gas as a raw material ranging between $1.70 and $4 per MMBtu, including the reduced tariffs. So in light of this, the gas prices agreed under the contract executed in November 2017 between the [debtcos] and Pampa were rendered ineffective, marking -- making our gas trading debts to settle prices with debtcos on a spot daily basis, currently around $4 per MMBtu. We are still selling to large users, a.k.a. industries, also on a spot basis. Moreover, in August and September 2018, the energy authorities issued a resolution establishing a procedure for the authorization of natural gas exports, which may consist of sales to overseas from 1 year to 10 years on a non-firm or firm basis subject to securing the supply to the domestic market. If the gas corresponds to projects belonging to Plan Gas for unconventional resources, that exposed natural gas may not be applicable to this program. Pampa has submitted the relevant documentation for the granting of this authorization and is currently awaiting for their approval.

In addition, in line with the company's strategy to focus its resources on core businesses, on November 2, Pampa executed an agreement with ExxonMobil for the sale of 21% of the capital stock of OldelVal, a company engaged in the crude oil transportation, keeping a 2.1% equity in OldelVal. The sales price amount to ARS 36 million, being the closing of the transaction subject to certain precedent conditions.

Before I move from oil and gas, I wanted to give you a quick update of our operations. During the third quarter of 2018, we continue with our investment plan, budget plan, of the year of 62 wells to be drilled and 64 to be completed, being in both cases still more 50% targeting unconventional gas. As of September 2018, 48 wells were drilled and 42 were completed. Our focus is the development of blocks with tight gas reservoirs and the exploration of shale gas potential in Vaca Muerta reservoir, which can be done at El Mangrullo and Sierra Chata. During Q3 2018, we drilled 7 tight gas wells and completed another 10.

Finally, regarding our shale activities, once granted, the 35-year unconventional exploitation concession, we started our pilot project for the risk and resources at the potential of Vaca Muerta -- at the El Mangrullo block. The first shale gas wells was drilled during the Q3 2018 with a depth of roughly 9.3 thousand feet and other wells began drilling as well. These 2 wells are in the vertical drilling set and belong to 2 different pilot packs with the purpose of analyzing and defining the landing point in horizontal drilling, which will start by the end of the year for this first well estimating a horizontal branch of 8,200 feet. In the case of Sierra Chata block, due to the delay of the granting of the unconventional exploitation concession, as we mentioned before, Pampa, jointly with Mobil Argentina and Total Austral Argentina branch, will start the drilling campaign to Mulichinco formation by the end of this year and next year, targeting Vaca Muerta formation.

Since we divested most of the assets at refining and marketing, we are going to skip the details. But just to mention that the segment adjusted EBITDA amounted to ARS 112 million in the quarter, mainly due to the activities at Dock Sud dispatch facility and the proportional EBITDA of Refinor, a company which Pampa holds a direct participation of 28.5% for a gain of ARS 28 million.

In petrochemicals, we posted a negative adjusted EBITDA of ARS 155 million during the third quarter of 2018, ARS 175 million lower compared to the same period in 2017, mainly because of lower sales volume, higher labor costs and higher raw materials cost that are mostly denominated in U.S. dollars. In addition, the inability to immediately pass through the FX variation on the sales price. In operating terms, total sales volume of our petrochemicals segment decreased by 32% in Q3 2018. Still going 85,000 tons, mainly to lower availability and cost increase of imported virgin naphtha, impacting on our lower sales of refining products in addition to a labor strike registered at the polystyrene plant in Zarate and a lower demand of styrene products due to the increase in international prices.

Finally, our holding and others segment presented an adjusted EBITDA of ARS 1.4 billion in the third quarter of 2018 compared to ARS 357 million in the same period of 2017. This is mainly due to the adjusted EBITDA by ownership from TGS and Transener, the higher income from fees and lower expenses as they've been redistributed between the operating segments. TGS's EBITDA adjusted by our indirect stake of 25.55%, contributed to EBITDA to Pampa ARS 1 billion in the quarter for an inclusive total of ARS 4 billion, significantly higher compared to the Q3 '17, mainly due to the full implementation of the tariff increase plus recognition of cost variation resulting from the RTI for gas transportation business. There was [3] installments of 335% cumulative. Moreover, the margin in liquids processing segment also contributed to the EBITDA performance in TGS due to higher dollar prices and sales volumes. From this regulated business, TGS was granted deferred cost variation semiannual update of 19.7% as from October 1, 2018. That figure is a simple average of the PPI, the construction cost index and salary variation index, which according to ENARGAS is based on the tariff review that stipulates under certain macroeconomic conditions and circumstances, such as a significant evaluation that took place in April, and considering that the semiannual update is a non-automatic adjustment mechanism. The regulators may use other indexes different from the PPI to determine tariff increases. Since the increase is lower than that requested by TGS at public hearing, which was 30%, TGS is analyzing which further steps to take. Moreover, in September, TGS entered into a sustained sales agreement with PPV Polisul, a subsidiary of Dow Chemical, and TGS is sole customer of this product, retroactively effective as from May 2018 and due December 2027. The attained price is subject to annual delivery volume and the gas price, among other factors, and the agreement includes take-or-pay and delivery-or-pay commitments for minimum annual quantities. Also in September 2018, the executive power passed the application of a duty on the amount exported for the consumption of several products including natural gas, propane, butane and natural gasoline, effective from September 4 of this year to December 31, 2020. This exports duty for recording pesos provide for a ARS 4 withholding for each exported U.S. dollar with a maximum 12% tax rate.

Finally, on September 6, TGS's board announced the payment of ARS 1.6 billion in cash dividends, being the total annual dividend paid of ARS 3.7 billion. In Transener, its EBITDA is adjusted by our indirect shareholding of 26.3% contributed ARS 331 million in the third quarter of 2018, with an implicit total of ARS 1.3 billion, 70% higher than the same period of 2017, mainly because of the award -- appeal awarding on the tariff review in October 2017. Semiannual cost variation update in August -- actually, in December and February of 2018 cumulative 24% and lower penalties, net of rewards. Deferred cost variation update is still pending since August 2018. So in October, Transener through the Association of Electric Power Transmission Companies of the Republic of Argentina, known as AELPTA, submitted a note before the electricity regulators claiming the state tariff update. In October, Transener -- Transener Transba and Enecor submitted the information of cost investment and tariff expectations pursuant to the tariff review process launched by the regulators.

Moving to the latest news in the segment and regarding the share repurchase program. On October 23, the last transaction was made as we reached the legal limit of 10% of the issued capital in treasury shares. Consequently, throughout 2 programs and over a period of 6 months, 203 million common shares or 8 million ADRs were repurchased with a total disbursement of $328 million. On October 2, the extraordinary general meeting of shareholders of Pampa approved the cancellation of 183 million ordinary shares of Pampa in treasury, which represent 8.8% of the issued capital. The withdrawal of the repurchased shares of the capital stock provides the company the possibility to continue repurchasing shares in the market always if it is accretive for shareholders.

Besides shares, in view of the gap between the value of the company and the subsidiaries and companies vis-à-vis its quotation price and taking into consideration our solid cash position, between August and September 2018, Pampa also repurchased Series 1 corporate bonds maturing all in 2027 for a face value of $9 million at an average quoting price of $79.2, 346,000 ADRs of Edenor at an average price of $26.5 per ADR and 78,000 ADRs of TGS at an average price of $12.5 per ADR.

In terms of the net income attributable to the owners of the company, Pampa presented a consolidated loss of ARS 7.1 billion in the third quarter of 2018 compared to a profit of ARS 1.3 billion in the same period of 2017, mainly explained by the accrual of ARS 17.4 billion FX loss due to 43% peso depreciation against U.S. dollar in the quarter

(technical difficulty)

which most of the company's financial liabilities are denominated, whereas the financial statements reports in pesos with Dow inflation adjustment. This was partially offset by better pricing as a result of tariff reviews, increases in remuneration and FX effect.

Finally, moving to the Slide 15. We must highlight the low and well-spread leverage of the company as well as a solid cash position held compared to other peers in the same industry and within the country. Proactive cash and liability management has paid off, especially with the challenging environment we are currently experiencing. In line with the company's policy during Q3 2018, we contributed refinancing -- we continued refinancing and redeeming the short-term facility. As of September 30, the consolidated block that includes affiliates at ownership stayed at $2.3 billion, of which 98% is denominated or linked with U.S. dollars, bearing an average interest rate of 6.9% and 80% is placed at the parent. Most of the principal maturities between 2018 and 2019 belong to Pampa stand-alone, which amounted to $285 million in the Q3 closing, $11 million less than the last quarter's closing. And in the [inflation] scenario, the $500 million cash at the parent can afford these securities comfortably.

Moreover, cash net in the share buyback after Q3 '18 closing amounts to 883 -- $838 million, which is down from the $1.1 billion in June 2018, mainly because of the share repurchases, expansion capital divestment and evaluation of our cash position because of the peso.

Back in 2018 Q3 closing, we were holding 70% of our cash in U.S. dollars. Therefore, net debt is $1.4 billion and net debt to last 12-month EBITDA remained low at 1.2x.

So this concludes our presentation. Here with me is Mr. Gustavo Mariani, our Executive Vice President, and we are ready for your questions. I will turn to the operator. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question will come from Frank McGann with Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Frank J. McGann, BofA Merrill Lynch, Research Division - MD [2]

--------------------------------------------------------------------------------

I just wondered if you can follow up a little bit on the new gas program for generation and exactly how that's going to work. If I heard you right, you said you would price the gas at the marginal price of gas, or I'm assuming that would be just operating cost. But perhaps you could give a better indication of how you're going to set the price of gas that you include -- and then, pardon? And then how that translates into generation prices also that you will bid into the system and for dispatch.

--------------------------------------------------------------------------------

Gustavo Mariani, [3]

--------------------------------------------------------------------------------

Gustavo here. What has been announced so far is just a minor change allowing generators to provide some fuel if they want. So far, for the following 2 weeks for the -- yes, for the second half of November, only CapEx as a generator in Pampa were the ones who took this alternative, so the rest of the generators continue being provided fuel by CAMMESA. Basically, you are capped at the reference price that CAMMESA has for each (foreign language)

--------------------------------------------------------------------------------

Lida Wang, Pampa Energía S.A. - IR Officer [4]

--------------------------------------------------------------------------------

For each basin.

--------------------------------------------------------------------------------

Gustavo Mariani, [5]

--------------------------------------------------------------------------------

For each basin in Argentina. That is like $4.40 for Neuquén and...

--------------------------------------------------------------------------------

Lida Wang, Pampa Energía S.A. - IR Officer [6]

--------------------------------------------------------------------------------

(inaudible)

--------------------------------------------------------------------------------

Gustavo Mariani, [7]

--------------------------------------------------------------------------------

[$3.50] in the Austral basin, et cetera, et cetera. And you are also cap, for example, in the generation plants that are in the [todas] of Buenos Aires have to have a mix of 60% from Neuquén, 40% from the outside basin. So that average is the limit price that you can be clear as the price of gas. In a nutshell, this provides us 2 advantages. One is the tax advantage as we will stop paying the sales tax that is around 3% here in Argentina when we sell natural gas while the sale of electricity is exempted. So we have this improvement of 3%. And we are marginally selling at a higher price than the -- of the gas that we are selling to CAMMESA, now we are selling to our own plants with a slight between 5% and 8% increase in price.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. If I can follow-up maybe just in terms of how you were seeing gas investments now. Your gas production came down in the quarter year-over-year and price obviously came down. Clearly, lower prices are not as good as higher prices. But in terms of your cost structure for new developments and production, many players, I believe, are seeing pretty substantial improvements in technology and in how they are moving forward with developments that are providing pretty significant cost savings. Is that going to be the same, do you think, in your operations that you should be able to find some interesting opportunities to get back on track with new investments?

--------------------------------------------------------------------------------

Lida Wang, Pampa Energía S.A. - IR Officer [9]

--------------------------------------------------------------------------------

Well, if this Q3, we find a production that is meeting the value basically because of demand. Also, in Valley, the seasonal reasons had to do with it. Also pricing had to do with it. Right now, we are positioned around 6.9 cubic meters per day. I don't know how much cumulative it is, but basically, we expect

(technical difficulty)

next year, because of technology -- basically, we are doing evacuation improvements in the block in Mangrullo [Enterra] and Mangrullo that is key for evacuating more gas. So in the Q1 2019, we should expect that well to increase the gas deliveries by 20%. And next year, we are going to start our more in advance in the shale gas derisking. We started at the end of this year in the Q3. We started with drilling to Vaca Muerta. But this year -- next year, it's more in a full development of the shale gas development plant. The technology's the same. Everybody shares the same technology. So I don't see like a disrupted thing coming if that was your question.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

The next question will come from Bruno Montanari with Morgan Stanley.

--------------------------------------------------------------------------------

Bruno Montanari, Morgan Stanley, Research Division - Equity Analyst [11]

--------------------------------------------------------------------------------

I have a few questions. First, just to make sure I get the average gas price because a lot of moving parts here. If you could mention how much you are getting for realized prices right now under the mix with industrials, with CAMMESA and your internal procurement, that'd be great. Also, if you can comment on the cost for these initial shale gas wells, both on the exploration and development phases. And maybe a third question to Gustavo, if you could mention how you are thinking about that capital allocation across the different segments of the conglomerate with the current Argentina situation, with the current gas price situation, that would also be highly appreciated.

--------------------------------------------------------------------------------

Gustavo Mariani, [12]

--------------------------------------------------------------------------------

Price of gas, we are currently selling at around $4 per million of MMBtu. We hope that this will be the...

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

The Valley.

--------------------------------------------------------------------------------

Gustavo Mariani, [14]

--------------------------------------------------------------------------------

The Valley going forward. We are currently in the Spring here, and this is the period of the year with less demand. There is more demand during the summer basically because of more demand for electricity, so more consumption in power generation. So we believe we are at that -- and we hope that we are at the bottom of the prices. And we are currently without any -- we are not accruing any incentive plan, and that is also something that we are still optimistic that we will be granted the incentive plan on 2 areas, in El Mangrullo and on Sierra Chata. We talked about those news before year-end. Then what did you ask about?

--------------------------------------------------------------------------------

Lida Wang, Pampa Energía S.A. - IR Officer [15]

--------------------------------------------------------------------------------

Shale gas.

--------------------------------------------------------------------------------

Gustavo Mariani, [16]

--------------------------------------------------------------------------------

Shale gas. As we began to see, we are just starting our derisking of Vaca Muerta, so we don't have information about whether what's the cost of our shale gas interaction. We were not producing any shale gas yet. Everything is tight gas. And we will be spending next year over $200 million in derisking 2 areas. One is El Mangrullo and Sierra Chata. And regarding capital allocation at Pampa, we are on an overall basis on a conservative mode going -- getting into 2019, which we think is going to be a challenging year for Argentina. So in terms of on the LMP business, production will -- we hope will remain flat. But we will be investing more than we invested this year because of the derisking of these 2 areas that I just mentioned. We think it makes all the sense to do this derisking to add proven reserves to the company and to be in a position by the end of next year to decide how to develop and what to do with these proven reserves of shale gas. In power generation, we don't have any new CapEx on the pipeline. We will continue, what Lida already explained, with the closing of the cycle of Genelba, which next year is going to be around $150 million. The remaining CapEx was for that. And also, the 2 -- finishing the 2...

--------------------------------------------------------------------------------

Lida Wang, Pampa Energía S.A. - IR Officer [17]

--------------------------------------------------------------------------------

Wind farms.

--------------------------------------------------------------------------------

Gustavo Mariani, [18]

--------------------------------------------------------------------------------

The 2 wind farms for 100 megawatts that will be online by May or June of next year.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

The next question will come from Ezekiel Fernandez with Scotiabank.

--------------------------------------------------------------------------------

Ezekiel Fernandez, [20]

--------------------------------------------------------------------------------

I have 3 questions. I would like to go one by one, if you don't mind. The first one is related to the distribution segment. Given the postponement of the tariff increase and the complex situation in the country regarding tariffs overall, are you in conversations with the government regarding the quality metrics target for next year like (inaudible) or maybe the level of losses? And if you can give me an update on what is going on with the talks about the regulatory debt with CAMMESA, the ENRE and clients in general?

--------------------------------------------------------------------------------

Lida Wang, Pampa Energía S.A. - IR Officer [21]

--------------------------------------------------------------------------------

Now talking about the government, it's the penalties -- there is some penalties that there weren't contemplated in the tariff review when they were out there and now they're implemented, though the figures are very small, not very significant to Edenor. And given the situation, it's not -- it's something that Edenor is fighting against the regulator and shouldn't be applied because we are penalized for the nonperforming quality but also penalized for non-CapEx divestment. It's like double counting. But so far, the Site E and Site B benchmarks are already set by the regulator in the tariff review. It's something that we cannot move on. Though we still are below in the macro level, we are still -- Energia is delivering below the benchmark, the regulatory benchmark in Site E and Site B. The loss is -- this is something on us. It's not a regulator fee. If we want to curb down the losses, we have to keep working to get it down. It's not an easy job. It's many years of $2 per month bill that didn't incentivize at all Edenor to send a team and cause the people that were still in electricity work. So it's a hard job that we have to do and we are -- Edenor is doing a lot regarding that and exchanging information with other distribution companies like in Brazil to share experiences of how to overcome this problem. But we are confident that we can take the losses down in the near future.

--------------------------------------------------------------------------------

Gustavo Mariani, [22]

--------------------------------------------------------------------------------

And regarding the regulatory asset and liability dispute that we have, we have been hoping for several months to have a resolution. And we are still optimistic that we will have a resolution before year-end, but obviously, we cannot give out any assurance.

--------------------------------------------------------------------------------

Ezekiel Fernandez, [23]

--------------------------------------------------------------------------------

Okay, that's great. My second question is regarding TGS. Do you think that you can increase the volumes in the next year regarding to what we're seeing so far in 2018? And if you can comment that from a point of view of the physical productive capacity of the plant. And also if you see the lower price of gas, if you can get more exports out there of liquids.

--------------------------------------------------------------------------------

Gustavo Mariani, [24]

--------------------------------------------------------------------------------

Regarding increases in the production of liquids in TGS, this year, we had an excellent year. It was close to a record year, and we are very close to -- we are close to maximum capacity. So in terms of volume, unless we do an upgrade in the plant, you shouldn't expect significant increases in the volume. The second part of the question was?

--------------------------------------------------------------------------------

Lida Wang, Pampa Energía S.A. - IR Officer [25]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Gustavo Mariani, [26]

--------------------------------------------------------------------------------

Well, yes. The answer to that is yes. The lower the cost of gas, the better the margins. But also, we are selling to -- tied to the international markets. So margins will fluctuate with that gap.

--------------------------------------------------------------------------------

Ezekiel Fernandez, [27]

--------------------------------------------------------------------------------

That's very clear. And my last question is a follow-up on the Resolution 70, the one about self-billing with -- between generation and gas producers. Do you think that this gives you any opportunity to get PPAs on the private market? Or the change is simply not enough and we should see other developments?

--------------------------------------------------------------------------------

Gustavo Mariani, [28]

--------------------------------------------------------------------------------

Can you repeat the question?

--------------------------------------------------------------------------------

Ezekiel Fernandez, [29]

--------------------------------------------------------------------------------

Yes. If this ability to procure your own fuel with your own gas, does it give you any chance of getting into long-term PPAs with industrial clients?

--------------------------------------------------------------------------------

Gustavo Mariani, [30]

--------------------------------------------------------------------------------

This is a step in the right direction, but we are not there yet. So still doing long-term contracts within an industry is not allowed. So we think that this is the first step of, I believe, the deregulation of the sector. And one important step, we need to allow to do long-term contracts long-term PPAs with the industry.

--------------------------------------------------------------------------------

Lida Wang, Pampa Energía S.A. - IR Officer [31]

--------------------------------------------------------------------------------

For sure, the site selling to ourselves but now it's 75% of our production. We also, in the 25% remaining, and also we do trade-off gas with third-party gas as well. We do spots with distribution companies, large users, other energy [plants], gencos, for example, we've been having small contracts in the past and now they are expired but we are doing a spot back. And also, we can still do spots with CAMMESA, and we chose not to.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

Next question will come from Julián Ríos with Nomura Securities.

--------------------------------------------------------------------------------

Julián Ríos, [33]

--------------------------------------------------------------------------------

I have a couple. Firstly, could you explain how much CapEx was spent during the quarter? And also from your earlier comments on CapEx, I can look at $300 million of CapEx for 2019 in the expansion projects. Can you tell me what the outlook for oil and gas CapEx would be for the next year? And then I'll follow-up with the next question.

--------------------------------------------------------------------------------

Gustavo Mariani, [34]

--------------------------------------------------------------------------------

E&P, we are currently working on the budgeting next year. But we are expecting -- I think it's going to be something between $300 million, $350 million -- around $350 million. Out of which, it will be around $200 million for derisking of $200 million -- or $230 million for derisking of Vaca Muerta or the 2 areas that I mentioned and the difference to maintain flat or slightly increasing production. And regarding CapEx in this third quarter, Lida.

--------------------------------------------------------------------------------

Lida Wang, Pampa Energía S.A. - IR Officer [35]

--------------------------------------------------------------------------------

Yes. This quarter, we're only considering E&P, power generation and -- E&P and power generation and Edenor as well because we completely -- fully consolidated, it's $190 million. It's ARS 6 billion. But if you take out Edenor, it's only the parent company, it's ARS 4 billion. That is a little bit above $100 million. For the year, we -- this was how the case each quarter. But for the year, we're expecting at the parent company to invest around $600 million. That is 250 -- around 250, 260 in power generation -- no, 350 in power generation, 220 in E&P. So a little bit below what we've been doing and we were saying for the year and we're way below the budget. And petrochemicals and refining is very nonsignificant.

--------------------------------------------------------------------------------

Julián Ríos, [36]

--------------------------------------------------------------------------------

That makes it clear. Separately, I wanted to ask you about CAMMESA and Energia Base pricing. Have there been any indications of any change or shift to the resolution that was passed last year, dollarizing Energia Base remuneration tariffs?

--------------------------------------------------------------------------------

Lida Wang, Pampa Energía S.A. - IR Officer [37]

--------------------------------------------------------------------------------

You mean if the resolution regarding Energia Base changed? They didn't change. The only thing that changed is the preferred...

--------------------------------------------------------------------------------

Julián Ríos, [38]

--------------------------------------------------------------------------------

I had -- I realize that it hasn't changed. I'm just wondering whether you view that resolution as something that's likely to be a target of specification or further change.

--------------------------------------------------------------------------------

Gustavo Mariani, [39]

--------------------------------------------------------------------------------

No, I don't expect a specification. Yes, we do expect -- we have been expecting a change and what we are hearing is it's going to be like just for the thermal legacy capacity or less units to have like a marginal system, very similar to the one that prevailed from 2003 until 2013, which was a marginal system but a cap assuming that no liquid fuel is burned. So assuming only consumption of natural gas. And probably, they will cap the efficiency. So it's -- the marginal price one is very inefficient plans are being dispatched, those ones will be taken into account. So it will be like in a nutshell, marginal price system with a cap. That is what we are hearing and working on.

--------------------------------------------------------------------------------

Julián Ríos, [40]

--------------------------------------------------------------------------------

And what -- how much savings do you think the system can generate by eliminating expensive plants that right now are getting compensated for capacity just for being available as opposed to actual dispatch?

--------------------------------------------------------------------------------

Gustavo Mariani, [41]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Lida Wang, Pampa Energía S.A. - IR Officer [42]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Gustavo Mariani, [43]

--------------------------------------------------------------------------------

Obviously, I don't have that figure in my mind, and I think we need to wait for the announcement to do this acquisition.

--------------------------------------------------------------------------------

Julián Ríos, [44]

--------------------------------------------------------------------------------

And when would you expect that change there?

--------------------------------------------------------------------------------

Gustavo Mariani, [45]

--------------------------------------------------------------------------------

Let me say -- sorry, let me add this information that might be helpful for you. What I have in my mind is the cost of CAMMESA is basically 50% in fuel. The other 50% is basically half, so about 1/4 of the total cost is the old...

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Remuneration.

--------------------------------------------------------------------------------

Gustavo Mariani, [47]

--------------------------------------------------------------------------------

Remuneration, and 1/4 are the PPAs. So the saving on the overall system will impact only 1/4 of the cost of CAMMESA. So overall, it won't be significant.

--------------------------------------------------------------------------------

Julián Ríos, [48]

--------------------------------------------------------------------------------

Yes, that's helpful in dimensioning. And just staying with CAMMESA, are they continuing to pay on time? Have there been any further delays?

--------------------------------------------------------------------------------

Gustavo Mariani, [49]

--------------------------------------------------------------------------------

No, no delays. We connected yesterday 100% of the transaction for the month.

--------------------------------------------------------------------------------

Julián Ríos, [50]

--------------------------------------------------------------------------------

Perfect. And then my -- just getting here to the end. Your chairman was deposed in October with relation to the notebook scandal. Has -- my question to you is has the company itself been any -- since then or since the previous results call been target of any investigations? And have there been any changes to your top management as a consequence of this ongoing scandal?

--------------------------------------------------------------------------------

Gustavo Mariani, [51]

--------------------------------------------------------------------------------

No, we haven't. There is no news on any of those 2 fronts that you mentioned.

--------------------------------------------------------------------------------

Julián Ríos, [52]

--------------------------------------------------------------------------------

And then my last question, and this is for sure. Are you -- you disclosed that in these results release that you had purchased up to around $9 million of 2027 bonds. And my question to you is whether you have remained active in purchasing bonds in the secondary market since the end of the quarter.

--------------------------------------------------------------------------------

Gustavo Mariani, [53]

--------------------------------------------------------------------------------

No.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

The next question will be from Jacob Rabinowitz with Callaway Capital.

--------------------------------------------------------------------------------

Jacob Rabinowitz, [55]

--------------------------------------------------------------------------------

I was hoping you could provide some clarity around the range of potential outcomes to changes of Resolution 19 and then the extent to which you've thought about those outcomes, what impact it would have on the business.

--------------------------------------------------------------------------------

Gustavo Mariani, [56]

--------------------------------------------------------------------------------

Again, we are -- there's no official announcement. And all we have is -- it's like rumors. We have been working with the rumors that are circulating around. And I cannot say more than what I have already explained. I think they are working on going back to marginal price system where the most expensive machine dispatch is one that sets the price, but -- because we still have very inefficient equipment that at some moments of the year is being dispatched. And because still the country lacks especially during the winter the capacity to run on natural gas, and we need to burn liquid fuels, which are significantly more expensive. This marginal price will not take into account those 2 situations. So when the marginal price is set by a machine that is burning liquid fuels, that will not be taken into account. And the same, if the machine is very efficient below certain limits, that machine also will not be set in the marginal price. So it's going to be a marginal price system with a cap defined by the regulator. Again, we believe that this change will, for our case, because of the mix of our portfolio, if it goes the way we are thinking it will go, it will have basically no impact on our margins. But obviously, overall, that's one of the reasons why they will be doing this change, it will have a saving for CAMMESA. One thing that I've forgotten to mention is that on top of doing this marginal tax system, I think they will be lowering the capacity remuneration and accordingly [our GP]

--------------------------------------------------------------------------------

Jacob Rabinowitz, [57]

--------------------------------------------------------------------------------

And one follow-up question for you. Is there any political development that you think would prevent the government from making any of the changes we've heard about in the market?

--------------------------------------------------------------------------------

Gustavo Mariani, [58]

--------------------------------------------------------------------------------

None that I can think of.

--------------------------------------------------------------------------------

Operator [59]

--------------------------------------------------------------------------------

The next question is a follow-up from Ezekiel Fernandez with Scotiabank.

--------------------------------------------------------------------------------

Ezekiel Fernandez, [60]

--------------------------------------------------------------------------------

I would like to go back please to Resolution 70 and the sales billing, which is being generated from gas producers. If you could provide -- and maybe you commented this and I missed it, if you could provide in terms of your total output, at least in the short term, what is the percentage that you will -- that you are aiming to procure with your own fuel? And the second question is, if I understand correctly, you will be selling your gas to your own power plant and then get the fuel cost money back from CAMMESA. I wanted to understand what are the terms to get that money back, how many days until you get paid and what effects applies.

--------------------------------------------------------------------------------

Lida Wang, Pampa Energía S.A. - IR Officer [61]

--------------------------------------------------------------------------------

Ezekiel, so this self-procurement is only for legacy machines, okay? The ones that CAMMESA uses now is only for legacy, the ones that they want to do it or they ask for it. This is not changing anything for the power generation companies that are following -- that are delivering electricity on their PPAs. Basically resolution 220, 221 and the upcoming 287. So this is basically for legacies. And legacy machines right now are consuming around 5 million cubic meters per day. That is 75% of our production. And this was in the short term. That's what we are expecting to be. It's very difficult to say what's going to happen either in the next winters. This is in the next few months. This is going to be -- take -- obviously, if all the machines that we have under legacy are dispatching, this 5 million is not enough. But as we said in this call, consumption of gas and electricity are in the Valley and basically now all the machines are being dispatched. So basically, only the efficient ones are -- the most efficient ones are. So that's the 5 million. How does it work? Basically, every twice a month, like the first 2 weeks, the first [centena] and the second 2 weeks, what we do at the genco is to declare our CVP, our variable cost. And then-- CAMMESA, what they do is to rank it. We say, okay. Now our CVP is not -- it's basically the input of gas is made by us. It's no longer the reference price and no longer the CAMMESA gas price. So basically, the CVP is totally set by us and CAMMESA then decides to rank it in the order of dispatch, and we get paid for that. And on top of the capacity payment, okay? So let's say, for example, just to give you a quick example, Genelba. Genelba is the CVP. It could be around -- below $50 per megawatt hour. It's currently what it is. So we get paid that in Genelba combined cycle plus the $7,000 per megawatt per month in capacity payments. We get paid the whole thing as a CAMMESA transaction every 12, 11 months by CAMMESA. So that's how it works.

--------------------------------------------------------------------------------

Ezekiel Fernandez, [62]

--------------------------------------------------------------------------------

Okay. So if I understand -- sorry, go ahead.

--------------------------------------------------------------------------------

Lida Wang, Pampa Energía S.A. - IR Officer [63]

--------------------------------------------------------------------------------

Sorry, I don't know if you have any more questions about that. I don't know if it was clear enough.

--------------------------------------------------------------------------------

Ezekiel Fernandez, [64]

--------------------------------------------------------------------------------

No -- yes. I was just thinking if it's fair to say that you will get money for the fuel back in the same manner as in terms of the lag in the days of payments and the FX applies -- if it's fair to say that it will be similar to the capacity payment.

--------------------------------------------------------------------------------

Lida Wang, Pampa Energía S.A. - IR Officer [65]

--------------------------------------------------------------------------------

Yes, that's right. It's the same transaction. So the client is the same. So now they have to pay us more money for gas or fuel.

--------------------------------------------------------------------------------

Operator [66]

--------------------------------------------------------------------------------

Next question comes from Paul Cowen with [Chrisso]. Ladies and gentlemen, this concludes our question-and-answer session. At this time, I'd like to turn the floor back over to Ms. Wang for any closing remarks.

--------------------------------------------------------------------------------

Lida Wang, Pampa Energía S.A. - IR Officer [67]

--------------------------------------------------------------------------------

Okay. It was a challenging quarter again, but we -- still, the company managed to deliver solid results. We are open for any questions, follow-up you may have. Thank you for joining us, and have a good day.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

Thank you. This concludes today's presentation. You may disconnect your lines at this time, and have a nice day.