Form 6-K/A
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FORM 6-K/A

 


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Report of Foreign Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

For the month of March, 2007

Commission File Number: 001-12102

 


YPF Sociedad Anónima

(Exact name of registrant as specified in its charter)

 


Av. Pte. R.S. Peña 777 – 8th Floor

1354 Buenos Aires, Argentina

(Address of principal executive office)

 


Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

Form 20-F      X        Form 40-F              

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Yes                  No      X    

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

Yes                  No      X    

Indicate by check mark whether by furnishing the information contained in this Form, the Registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:

Yes                  No      X    

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A

 



Table of Contents

YPF Sociedad Anónima

TABLE OF CONTENTS

 

Item     
1    Report of Independent Public Accountants.
2    Financial Statements as of December 31, 2006 and comparative information.1
3   

Statutory Audit Committee’s Report.


1. The registrant is filing this amendment to the Form 6-K for the month of March, 2007, furnished to the Commission on March 15, 2007 (the “Form 6-K”) to correct errors in Item 2 as follows: the Shares of Common Stock, Argentine pesos 10 par value, 1 vote per share of 3,933,127.930 was amended to read 3,933,127,930; and the Ratification of lithographed signatures was removed both from the Index on TX6 and from this amendment on TX60. These errors do not affect the materiality of the previously filed Form 6-K.


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LOGO

SOCIEDAD ANONIMA

Financial Statements as of December 31, 2006 and Comparative Information

Report of Independent Public Accountants

Statutory Audit Committee's Report


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English translation of the report originally issued in Spanish, except for the omission of certain disclosures related to formal legal requirements for reporting in Argentina and the addition of the last paragraph - see Note 12 to the primary financial statements.

Report of Independent Public Accountants

To the Board of Directors of

YPF SOCIEDAD ANONIMA

Av. Pte Roque Saenz Peña 777

Buenos Aires, City

CUIT N° 30-54668997-9

 

1. Identification of financial statements subject to audit

We have audited the balance sheet of YPF SOCIEDAD ANONIMA (an Argentine Corporation) as of December 31, 2006 and the related statements of income, changes in shareholders' equity and cash flows for the year then ended. We have also audited the consolidated balance sheet of YPF SOCIEDAD ANONIMA and its controlled and jointly controlled companies as of December 31, 2006 and the related consolidated statements of income and cash flows for the year then ended, which are presented as supplemental information in Schedule I.

These financial statements are the responsibility of the Company’s Management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

2. Audit scope

We conducted our audit in accordance with generally accepted auditing standards in Argentina. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

3. Audit opinion

In our opinion, the financial statements of YPF SOCIEDAD ANONIMA as of December 31, 2006 referred to in the first paragraph present fairly, in all material respects, the financial position of YPF SOCIEDAD ANONIMA and the consolidated financial position of YPF SOCIEDAD ANONIMA and its controlled and jointly controlled companies as of December 31, 2006 and the related results of operations and cash flows for the year then ended in accordance with generally accepted accounting principles in Argentina.


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In relation to the financial statements as of December 31, 2005 and 2004, which are presented for comparative purposes, we issued our unqualified independent public accountants’ reports dated March 8, 2006 and March 10, 2005, respectively. Those financial statements include the retroactive effect of the application of the new generally accepted accounting principles in Argentina as described in Note 1 to the accompanying primary financial statements, with which we concur.

Certain accounting practices of YPF SOCIEDAD ANONIMA used in preparing the accompanying financial statements conform with accounting principles generally accepted in Argentina, but do not conform with accounting principles generally accepted in the United States of America (see Note 12 to the accompanying primary financial statements).

 

Buenos Aires City, Argentina

March 6, 2007

Deloitte & Co. S.R.L.

Ricardo C. Ruiz

Partner

 

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YPF SOCIEDAD ANONIMA

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2006 AND COMPARATIVE INFORMATION

INDEX

 

          Page
  

Cover

   1
  

Consolidated balance sheet

   2
  

Consolidated statement of income

   3
  

Consolidated statement of cash flows

   4
  

Notes to consolidated financial statements

   5
  

Exhibits to consolidated financial statements

   16
  

Balance sheet

   18
  

Statement of income

   19
  

Statement of changes in shareholders' equity

   20
  

Statement of cash flows

   21
  

Notes to financial statements

   22
  

Exhibits to financial statements

   48


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English translation of the financial statements originally issued in Spanish, except for the inclusion of Note 12 to the primary financial statements in the English translation

YPF SOCIEDAD ANONIMA

Avenida Presidente Roque Sáenz Peña 777 – Ciudad Autómona de Buenos Aires, Argentina

FISCAL YEAR NUMBER 30

BEGINNING ON JANUARY 1, 2006

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2006 AND COMPARATIVE INFORMATION

Principal business of the Company: exploration, development and production of oil and natural gas and other minerals and refining, transportation, marketing and distribution of oil and petroleum products and petroleum derivatives, including petrochemicals and chemicals, generation of electric power from hydrocarbons, as well as rendering telecommunications services.

Date of registration with the Public Commerce Register: June 2, 1977.

Duration of the Company: through June 15, 2093.

Last amendment to the bylaws: April 19, 2005.

Optional Statutory Regime related to Compulsory Tender Offer provided by Decree No. 677/2001 art. 24: not incorporated.

Capital structure as of December 31, 2006

(expressed in Argentine pesos)

 

    

Subscribed, paid-in and
authorized for stock
exchange listing

(Note 4 to primary
financial statements)

– Shares of Common Stock, Argentine pesos 10 par value, 1 vote per share

   3,933,127,930
    

 

  ENRIQUE LOCUTURA RUPEREZ
  Executive Vicepresident

 

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Schedule I

1 of 3

English translation of the financial statements originally issued in Spanish, except for the inclusion of Note 12 to the primary financial statements in the English translation

YPF SOCIEDAD ANONIMA AND CONTROLLED AND JOINTLY CONTROLLED COMPANIES

CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2006 AND COMPARATIVE INFORMATION

(amounts expressed in millions of Argentine pesos - Note 1 to the primary financial statements)

 

     2006    2005    2004

Current Assets

        

Cash

   118    122    492

Investments (Note 2.a)

   971    408    408

Trade receivables (Note 2.b)

   2,242    2,212    2,049

Other receivables (Note 2.c)

   5,033    4,433    3,871

Inventories (Note 2.d)

   1,697    1,315    1,134

Other assets

   1,128    —      380
              

Total current assets

   11,189    8,490    8,334
              

Noncurrent Assets

        

Trade receivables (Note 2.b)

   44    53    72

Other receivables (Note 2.c)

   852    1,223    1,457

Investments (Note 2.a)

   788    495    490

Fixed assets (Note 2.e)

   22,513    21,958    20,554

Intangible assets

   8    5    15
              

Total noncurrent assets

   24,205    23,734    22,588
              

Total assets

   35,394    32,224    30,922
              

Current Liabilities

        

Accounts payable (Note 2.f)

   3,495    2,932    2,025

Loans (Note 2.g)

   915    346    246

Salaries and social security

   207    153    121

Taxes payable

   1,298    1,831    1,999

Net advances from crude oil purchasers

   96    95    264

Reserves

   273    230    130
              

Total current liabilities

   6,284    5,587    4,785
              

Noncurrent Liabilities

        

Accounts payable (Note 2.f)

   2,448    1,915    854

Loans (Note 2.g)

   510    1,107    1,684

Salaries and social security (Note 2.h)

   202    241    275

Taxes payable

   20    17    23

Net advances from crude oil purchasers

   7    101    634

Reserves

   1,578    1,007    898
              

Total noncurrent liabilities

   4,765    4,388    4,368
              

Total liabilities

   11,049    9,975    9,153

Shareholders' Equity

   24,345    22,249    21,769
              

Total liabilities and shareholders' equity

   35,394    32,224    30,922
              

Notes 1 to 4 and the accompanying exhibits A and H to Schedule I and the primary financial statements

of YPF, are an integral part of and should be read in conjunction with these statements.

 

   ENRIQUE LOCUTURA RUPEREZ
   Executive Vicepresident

 

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Schedule I

2 of 3

English translation of the financial statements originally issued in Spanish, except for the inclusion of Note 12 to the primary financial statements in the English translation

YPF SOCIEDAD ANONIMA AND CONTROLLED AND JOINTLY CONTROLLED COMPANIES

CONSOLIDATED STATEMENT OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 2006 AND COMPARATIVE INFORMATION

(amounts expressed in millions of Argentine pesos, except for per share amounts in Argentine pesos - Note 1 to the primary financial statements)

 

     2006     2005     2004  

Net sales (Note 4)

   25,635     22,901     19,931  

Cost of sales

   (15,821 )   (11,258 )   (9,212 )
                  

Gross profit

   9,814     11,643     10,719  

Administrative expenses (Exhibit H)

   (674 )   (552 )   (463 )

Selling expenses (Exhibit H)

   (1,797 )   (1,650 )   (1,403 )

Exploration expenses (Exhibit H)

   (460 )   (280 )   (382 )
                  

Operating income

   6,883     9,161     8,471  

Income on long-term investments (Note 4)

   183     39     154  

Other expense, net (Note 2.i)

   (204 )   (545 )   (981 )

Financial income (expense), net and holding gains:

      

Gains on assets

      

Interests

   338     221     166  

Exchange differences

   5     129     77  

Holding gains on inventories

   394     244     203  

(Losses) Gains on liabilities

      

Interests

   (213 )   (459 )   (221 )

Exchange differences

   (70 )   (33 )   (87 )

Income from sale of long-term investments

   11     15     —    

Impairment of other current assets

   (69 )   —       —    
                  

Net income before income tax

   7,258     8,772     7,782  

Income tax

   (2,801 )   (3,410 )   (3,017 )
                  

Net income from continuing operations

   4,457     5,362     4,765  

Income on discontinued operations (Note 1.c)

   —       —       3  

Income from sale of discontinued operations (Note 1.c)

   —       —       139  
                  

Net income

   4,457     5,362     4,907  
                  

Earnings per share

   11.33     13.63     12.48  
                  

Notes 1 to 4 and the accompanying exhibits A and H to Schedule I and the primary financial statements

of YPF, are an integral part of and should be read in conjunction with these statements.

 

   ENRIQUE LOCUTURA RUPEREZ
   Executive Vicepresident

 

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Schedule I

3 of 3

English translation of the financial statements originally issued in Spanish, except for the inclusion of Note 12 to the primary financial statements in the English translation

YPF SOCIEDAD ANONIMA AND CONTROLLED AND JOINTLY CONTROLLED COMPANIES

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2006 AND COMPARATIVE INFORMATION

(amounts expressed in millions of Argentine pesos - Note 1 to the primary financial statements)

 

     2006     2005     2004  

Cash Flows from Operating Activities

      

Net income

   4,457     5,362     4,907  

Adjustments to reconcile net income to net cash flows provided by operating activities:

      

Income on long-term investments

   (183 )   (39 )   (154 )

Impairment of other current assets

   69     —       —    

Income on discontinued operations

   —       —       (3 )

Income from sale of discontinued operations

   —       —       (139 )

Income from sale of long-term investments

   (11 )   (15 )   —    

Dividends from long-term investments

   43     16     61  

Depreciation of fixed assets

   3,718     2,707     2,470  

Income tax

   2,801     3,410     3,017  

Income tax payments

   (2,855 )   (3,242 )   (4,786 )

Consumption of materials and fixed assets retired, net of allowances

   272     276     417  

Increase in allowances for fixed assets

   192     74     124  

Increase in reserves

   882     326     512  

Changes in assets and liabilities:

      

Trade receivables

   (21 )   (144 )   (256 )

Other receivables

   (255 )   (312 )   2,758  

Inventories

   (382 )   (181 )   (357 )

Accounts payable

   (99 )   1,003     317  

Salaries and social security

   189     (14 )   (69 )

Taxes payable

   (425 )   (372 )   170  

Net advances from crude oil purchasers

   (90 )   (705 )   (258 )

Decrease in reserves

   (268 )   (117 )   (119 )

Interests, exchange differences and others

   (15 )   218     (97 )
                  

Net cash flows provided by operating activities

   8,019 (1)   8,251 (1)   8,515 (1)
                  

Cash Flows from Investing Activities

      

Acquisitions of fixed assets

   (5,002 )   (3,722 )   (2,867 )

Capital distributions from long-term investments

   —       8     15  

Proceeds from sale of long-term investments

   32     454     —    

Proceeds from sale of discontinued operations

   —       —       244  

Investments (non cash and equivalents)

   (139 )   (2 )   24  
                  

Net cash flows used in investing activities

   (5,109 )   (3,262 )   (2,584 )
                  

Cash Flows from Financing Activities

      

Payment of loans

   (666 )   (736 )   (1,260 )

Proceeds from loans

   688     253     280  

Dividends paid

   (2,360 )   (4,878 )   (5,310 )
                  

Net cash flows used in financing activities

   (2,338 )   (5,361 )   (6,290 )
                  

Increase (decrease) in Cash and Equivalents

   572     (372 )   (359 )

Cash and equivalents at the beginning of year

   515     887     1,246  
                  

Cash and equivalents at the end of year

   1,087     515     887  
                  

 

For supplemental information on cash and equivalents, see Note 2.a.

 

(1)

Includes (103), (262) and (189) corresponding to interest payments for the years ended December 31, 2006, 2005 and 2004, respectively.

Notes 1 to 4 and the accompanying exhibits A and H to Schedule I and the primary financial statements

of YPF, are an integral part of and should be read in conjunction with these statements.

 

   ENRIQUE LOCUTURA RUPEREZ
   Executive Vicepresident

 

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Schedule I

English translation of the financial statements originally issued in Spanish, except for the inclusion of Note 12 to the primary financial statements in the English translation

YPF SOCIEDAD ANONIMA AND CONTROLLED AND JOINTLY CONTROLLED COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2006 AND COMPARATIVE INFORMATION

(amounts expressed in millions of Argentine pesos - Note 1 to the primary financial statements, except where otherwise indicated)

1. CONSOLIDATED FINANCIAL STATEMENTS

Under General Resolution No. 368 from the Argentine Securities Commission (“CNV”), YPF Sociedad Anónima (the “Company” or “YPF”) discloses its consolidated financial statements, included in Schedule I, preceding its primary financial statements. Consolidated financial statements are supplemental and should be read in conjunction with the primary financial statements.

a) Consolidation policies:

Following the methodology established by Technical Resolution No. 21 of the Argentine Federation of Professional Councils in Economic Sciences (“F.A.C.P.C.E.”), the Company has consolidated its balance sheets and the related statements of income and cash flows as follows:

 

- Investments and income (loss) related to controlled companies in which YPF has the number of votes necessary to control corporate decisions are substituted for such companies' assets, liabilities, net revenues, cost and expenses, which are aggregated to the Company's balances after the elimination of intercompany profits, transactions, balances and other consolidation adjustments.

 

- Investments and income (loss) related to companies in which YPF holds joint control are consolidated line by line on the basis of the Company's proportionate share in their assets, liabilities, net revenues, cost and expenses, considering intercompany profits, transactions, balances and other consolidation adjustments.

Investments in companies under control and joint control are detailed in Exhibit C to the primary financial statements.

b) Financial statements used for consolidation:

The consolidated financial statements are based upon the last available financial statements of those companies in which YPF holds control or joint control, taking into consideration, if applicable, significant subsequent events and transactions, available management information and transactions between YPF and the related companies which could have produced changes to their shareholders’ equity.

 

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c) Valuation criteria:

In addition to the valuation criteria disclosed in the notes to YPF primary financial statements, the following additional valuation criteria have been applied in the preparation of the consolidated financial statements:

Income on discontinued operations and income from sale of discontinued operations

As mentioned in Note 10 to the primary financial statements, during the year ended December 31, 2004, YPF Holding Inc. and YPF International S.A. sold their interests in Global Companies LLC and affiliates (“Global”) and YPF Indonesia Ltd., respectively. Income from these sales was included in the “Income from sale of discontinued operations” account of the statement of income. As a consequence, Global and YPF Indonesia Ltd. results were disclosed in “Income on discontinued operations” account of the statement of income”.

Fixed assets

Mineral properties on foreign unproved reserves have been valued at cost and translated into pesos as detailed in Note 2.e to the primary financial statements. Capitalized costs related to unproved properties are reviewed periodically by Management to ensure the carrying value does not exceed their estimated recoverable value.

As of December 31, 2006, YPF Holding Inc. has approximately 34 of exploratory drilling costs that have been capitalized for a period greater than one year, representing one project and one well. The project is pending the results of drilling on an adjacent block.

Salaries and Social Security – Pensions and other Postretirement and Postemployment Benefits

YPF Holdings Inc., YPF’ subsidiary with operations in United States of America, has a number of trustee defined-benefits pension plans and postretirement and postemployment benefits.

The funding policy related to trustee noncontributory pension plans is to contribute amounts to the plans sufficient to meet the minimum funding requirements under governmental regulations, plus such additional amounts as Management may determine to be appropriate. The benefits related to the plans were valued at net present value and accrued based on the years of active service of employees. The net liability for defined-benefits plans is disclosed as non-current liabilities in the “Salaries and social security” account and is the amount resulting from the sum of: the present value of the obligations, net of the fair value of the plan assets and net of the unrecognized actuarial losses generated since December 31, 2003. These unrecognized actuarial losses are recognized as expense during the expected average remaining working lives of the employees participating in the plans.

YPF Holdings Inc. also has a noncontributory supplemental retirement plan for executive officers and other selected key employees.

 

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YPF Holding Inc. provides certain health care and life insurance benefits for eligible retired employees, and also certain insurance, and other postemployment benefits for eligible individuals in the case employment is terminated by YPF Holdings Inc. before their normal retirement. YPF Holdings Inc. accrues the estimated cost of retiree benefit payments, other than pensions, during employees’ active service periods. Employees become eligible for these benefits if they meet minimum age and years of service requirements. YPF Holdings Inc. accounts for benefits provided when the minimum service period is met, payment of the benefit is probable and the amount of the benefit can be reasonably estimated. Other postretirement and postemployment benefits are recorded as claims are incurred.

Recognition of revenues and costs of construction activities

Revenues and costs related to construction activities are accounted by the percentage of completion method. When adjustments in contract values or estimated costs are determined, any change from prior estimates is reflected in earnings in the current year. Anticipated losses on contracts in progress are expensed as soon as they become evident.

2. ANALYSIS OF THE MAIN ACCOUNTS OF THE CONSOLIDATED FINANCIAL STATEMENTS

Details regarding the significant accounts included in the accompanying consolidated financial statements are as follows:

CONSOLIDATED BALANCE SHEET ACCOUNTS AS OF DECEMBER 31, 2006 AND COMPARATIVE INFORMATION

Assets

a) Investments:

 

     2006     2005     2004  
   Current     Noncurrent     Current     Noncurrent     Current     Noncurrent  

Short-term investments and government securities

   971 (1)   156 (3)   408 (1)   4     408 (1)   4  

Long-term investments

   —       843 (2)   —       802     —       811  

Allowance for reduction in value of holdings in

long-term investments

   —       (211 )(2)   —       (311 )   —       (325 )
                                    
   971     788     408     495     408     490  
                                    

(1)

Includes 969, 393 and 395 as of December 31, 2006, 2005 and 2004, respectively, with an original maturity of less than three months.

(2)

In addition to the amounts detailed in Exhibit C to the primary financial statements, includes interest in Gas Argentino S.A.

(3)

Restricted cash as of December 31, 2006.

 

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b) Trade receivables:

 

     2006    2005    2004
     Current     Noncurrent    Current     Noncurrent    Current     Noncurrent

Accounts receivable

   2,280     44    2,240     53    1,939     72

Related parties

   391     —      352     —      469     —  
                                
   2,671     44    2,592     53    2,408     72

Allowance for doubtful trade receivables

   (429 )   —      (380 )   —      (359 )   —  
                                
   2,242     44    2,212     53    2,049     72
                                

c) Other receivables

 

     2006     2005     2004  
     Current     Noncurrent     Current     Noncurrent     Current     Noncurrent  

Deferred income tax

   —       510     —       452     —       422  

Tax credits and export rebates

   692     18     529     18     348     24  

Trade

   71     —       34     —       21     —    

Prepaid expenses

   130     73     66     95     52     139  

Concessions charges

   17     88     17     96     19     105  

Related parties

   3,883 (1)   —       3,139 (1)   371     3,110 (1)   617  

Loans to clients

   12     69     11     90     10     87  

From joint ventures and other agreements

   46     —       1     —       6     —    

Trust contribution under Decree No. 1,882/04

   —       —       273     —       66     —    

Miscellaneous

   319     146     484     155     369     133  
                                    
   5,170     904     4,554     1,277     4,001     1,527  

Allowance for other doubtful accounts

   (137 )   —       (121 )   —       (130 )   —    

Allowance for valuation of other receivables to their estimated realizable value

   —       (52 )   —       (54 )   —       (70 )
                                    
   5,033     852     4,433     1,223     3,871     1,457  
                                    

(1) In addition to amounts detailed in Note 3.c to the primary financial statements, include 218 as of December 31, 2006, which accrue interest at 5.37%, 319 and 1,739 as of December 31, 2005 and 2004, respectively, with Repsol International Finance B.V. and 48 as of December 31, 2006, which accrue an interest rate of 5.37% with Repsol Netherlands Finance B.V.

d) Inventories:

 

     2006    2005    2004

Refined products

   1,047    747    617

Crude oil and natural gas

   441    409    355

Products in process

   47    19    13

Raw materials, packaging materials and others

   162    140    149
              
   1,697    1,315    1,134
              

 

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e) Fixed assets:

 

     2006     2005     2004  

Net book value of fixed assets (Exhibit A)

   22,562     22,009     20,617  

Allowance for unproductive exploratory drilling

   (3 )   (3 )   (16 )

Allowance for obsolescence and assets to be disposed of

   (46 )   (48 )   (47 )
                  
   22,513     21,958     20,554  
                  

Liabilities

f) Accounts payable:

 

     2006    2005    2004
   Current    Noncurrent    Current    Noncurrent    Current    Noncurrent

Trade

   2,617    27    2,071    30    1,628    32

Hydrocarbon wells abandonment obligations

   233    2,210    —      1,419    —      648

Related parties

   238    —      279    —      172    —  

From joint ventures and other agreements

   256    —      200    —      136    —  

Environmental liabilities

   93    164    48    200    45    96

Miscellaneous

   58    47    334    266    44    78
                             
   3,495    2,448    2,932    1,915    2,025    854
                             

g) Loans:

 

              2006   2005   2004
   

Interest

rates (1)

    Principal
maturity
  Current   Noncurrent   Current   Noncurrent   Current   Noncurrent

YPF Negotiable Obligations

  7.75 - 10.00 (2)   2007 -2028   559   509   27   1,031   29   1,078

Other bank loans and other creditors(3)

  1.25 -   9.65 %   2007 -2008   356   1   319   76   143   154

Related parties

  —       —     —     —     —     —     2   71

Compañía Mega S.A. Negotiable Obligations

  —       —     —     —     —     —     3   116

Profertil S.A. Syndicated loan

  —       —     —     —     —     —     56   261

Interest rate swaps

  —       —     —     —     —     —     —     4

Subordinated liabilities with shareholders

  —       —     —     —     —     —     13   —  
                           
      915   510   346   1,107   246   1,684
                           

(1)

Annual interest rates as of December 31, 2006.

(2)

Fixed interest rates.

(3)

Includes 176 which accrue fixed interest at annual rates between 1.25% and 5%, 102 which accrue interest at variable rates between 4% and 9.65% and 79 which accrue interest at LIBOR plus 1.60%.

h) Noncurrent salaries and social security

 

     2006     2005     2004  

Net present value of obligations

   480     501     479  

Fair value of assets

   (226 )   (199 )   (188 )

Deferred actuarial losses

   (52 )   (61 )   (16 )
                  

Recognized net liabilities

   202     241     275  
                  

 

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     2006     2005     2004  

Changes in the fair value of the defined-benefit obligations

      

Liabilities at the beginning of the year

   501     479     469  

Translation differences

   5     5     10  

Service cost

   3     3     3  

Interest cost

   28     26     27  

Actuarial losses

   6     42     21  

Benefits paid and terminations

   (63 )   (54 )   (51 )
                  

Liabilities at the end of the year

   480     501     479  
                  
     2006     2005     2004  

Changes in the fair value of the plan assets

      

Fair value of assets at the beginning of the year

   199     188     196  

Translation differences

   2     5     5  

Expected return on assets

   15     15     14  

Actuarials gains (losses)

   8     (6 )   5  

Employer and employees contributions

   50     53     29  

Benefits paid and terminations

   (48 )   (56 )   (61 )
                  

Fair value of assets at the end of the year

   226     199     188  
                  
     Losses (Gains)  
     2006     2005     2004  

Amounts recognized in the Income Statements

      

Service cost

   3     3     3  

Interest cost

   28     26     27  

Expected return on assets

   (15 )   (15 )   (14 )

Actuarial losses recognized in the year

   2     1     —    

Losses on terminations

   4     1     4  
                  

Total recognized as other expenses, net

   22     16     20  
                  
     2006     2005     2004  

Actuarial assumptions

      

Discount rate

   6 %   5.75 %   5.75 %

Expected return on assets

   7 %   8.50 %   8.50 %

Expected increase on salaries

   5.5 %   4.5 - 5.5 %   4.5 - 5.5 %

 

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Consolidated Statement of Income as of December 31, 2006 and Comparative Information

i) Other expense, net:

 

     Income (Expense)  
   2006     2005     2004  

Reserve for pending lawsuits and other claims

   (173 )   (180 )   (541 )

Environmental remediation

   (136 )   (54 )   (264 )

Defined benefits pension plans and other postretirement benefits

   (22 )   (16 )   (20 )

Miscellaneous

   127     (295 )   (156 )
                  
   (204 )   (545 )   (981 )
                  

3. COMMITMENTS AND CONTINGENCIES IN CONTROLLED COMPANIES

Laws and regulations relating to health and environmental quality in the United States affect nearly all of the operations of YPF Holdings Inc. These laws and regulations set various standards regulating certain aspects of health and environmental quality, provide for penalties and other liabilities for the violation of such standards and establish in certain circumstances remedial obligations.

YPF Holdings Inc. believes that its policies and procedures in the area of pollution control, product safety and occupational health are adequate to prevent unreasonable risk of environmental and other damage, and of resulting financial liability, in connection with its business. Some risk of environmental and other damage is, however, inherent in particular operations of YPF Holdings Inc. and, as discussed below, Maxus Energy Corporation (“Maxus”) and Tierra Solutions, Inc. (“Tierra”) have certain potential liabilities associated with operations of Maxus’ former chemical subsidiary. YPF Holdings Inc. cannot predict what environmental legislation or regulations will be enacted in the future or how existing or future laws or regulations will be administered or enforced. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies, could in the future require material expenditures by YPF Holdings Inc. for the installation and operation of systems and equipment for remedial measures, possible dredging requirements and in certain other respects. Also, certain laws allow for recovery of natural resource damages from responsible parties and ordering the implementation of interim remedies to abate an imminent and substantial endangerment to the environment. Potential expenditures for any such actions cannot be reasonably estimated.

As of December 31, 2006, reserves for the environmental contingencies discussed herein totaled approximately 320. Management believes it has adequately reserved for all environmental contingencies, which are probable and can be reasonably estimated as of such time; however, changes in circumstances could result in changes, including additions, to such reserves in the future.

In connection with the sale of Maxus’ former chemical subsidiary, Diamond Shamrock Chemicals Company ("Chemicals") to Occidental Petroleum Corporation (“Occidental”) in 1986, Maxus agreed to indemnify Chemicals and Occidental from and against certain liabilities relating to the business or activities of Chemicals, including certain environmental liabilities relating to certain chemical plants and waste disposal sites used by Chemicals prior to the selling date.

In addition, under the agreement pursuant to which Maxus sold Chemicals to Occidental, Maxus is obligated to indemnify Chemicals and Occidental for 50% of certain environmental cost incurred on projects involving remedial activities relating to chemical plant sites of other property used in the conduct of the business of Chemicals as of the selling date and for any year of time following the selling date which relate to, result from or arise out of conditions, events or circumstances discovered by Chemicals and as to which Chemicals provided written notice prior to

 

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September 4, 1996, irrespective when Chemicals incurs and gives notice of such costs, with Maxus' aggregate exposure for this cost sharing being limited to US$ 75 million. The obligation under this cost sharing arrangement was satisfied in the first quarter of 2006. Tierra agreed to assume essentially all of Maxus obligations to Occidental.

Newark, New Jersey. A consent decree, previously agreed upon by the U.S. Environmental Protection Agency ("EPA"), the New Jersey Department of Environmental Protection and Energy ("DEP") and Occidental, as successor to Chemicals, was entered in 1990 by the United States District Court of New Jersey for Chemicals' former Newark, New Jersey agricultural chemicals plant. The approved remedy has been completed and paid for by Tierra pursuant to the above described indemnification obligation to Occidental. This project is in the operation and maintenance phase. YPF Holdings Inc. has reserved approximately 51 as of December 31, 2006, in connection with such activities.

Passaic River: Studies have indicated that sediments of the Newark Bay watershed, including the Passaic River adjacent to the former Newark plant, are contaminated with hazardous chemicals from many sources. Maxus, on behalf of Occidental, negotiated an agreement with the EPA under which Tierra has conducted further testing and studies to characterize contaminated sediment and biota in a six-mile portion of the Passaic River near the plant site. While some work remains, these studies were substantially completed in 2005. In addition,

 

  The EPA and other agencies are addressing the lower Passaic River in a joint federal, state, local and private sector cooperative effort designated as the Lower Passaic River Restoration Project (“PRRP”). Tierra, along with approximately 64 other entities, participated in an initial remedial investigation and feasibility study (“RIFS”) in connection with the PRRP. The parties and a number of additional parties are discussing the possibility of further work with the EPA and how the costs of any such work will be allocated among them.

 

  In 2003, the DEP issued Directive No. 1 to approximately 66 entities, including Occidental and Maxus and certain of their respective related entities. Directive No. 1 seeks to address natural resource damages allegedly resulting from almost 200 years of historic industrial and commercial development of the lower 17 miles of the Passaic River and a part of its watershed. Directive No. 1 asserts that the named entities are jointly and severally liable for the alleged natural resource damages without regard to fault. The DEP has asserted jurisdiction in this matter even though all or part of the lower Passaic River has been designated as a Superfund site and is a subject of the PRRP. Directive No. 1 calls for the following actions: interim compensatory restoration, injury identification, injury quantification and value determination. Maxus and Tierra responded to Directive No. 1 setting forth good faith defenses. Settlement discussions between the DEP and the named entities have been held; however, no agreement has been reached or is assured.

 

  In December 2005, the DEP sued YPF, YPF Holdings Inc., Tierra, Maxus and several affiliated entities, in addition to Occidental, in connection with dioxin contamination allegedly emanating from Chemicals’ former Newark plant and contaminating the lower 17-mile portion of the Passaic River, Newark Bay, other nearby waterways and surrounding areas. The DEP seeks unspecified and punitive damages and other matters. The defendants have made responsive pleadings and/or filings.

As of December 31, 2006, there is a total of approximately 48 reserved in connection with the foregoing matters related to the Passaic River, and surrounding area. Until these studies are completed and evaluated, YPF Holdings’ Inc. cannot estimate what additional costs, if any, will be required to be incurred. However, it is possible that other works, including interim remedial measures, may be ordered. In addition, at such time as more is known about the aforesaid directives and litigation, additional costs may be required to be incurred or additional reserves may need to be established.

Hudson County, New Jersey. Until 1972, Chemicals operated a chromite ore processing plant at Kearny, New Jersey (“Kearny Plant”). According to the DEP, wastes from these ore processing operations were used as fill material at a number of sites in and near Hudson County. The DEP and Occidental, as successor to Chemicals, signed an administrative consent order with the DEP in 1990 for investigation and remediation work

 

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at certain chromite ore residue sites in Kearny and Secaucus, New Jersey. Tierra, on behalf of Occidental, is presently performing the work and funding Occidental's share of the cost of investigation and remediation of these sites and is providing financial assurance in the amount of US$ 20 million for performance of the work. The ultimate cost of remediation is uncertain.

Additionally, in May 2005, the DEP took two actions in connection with the chrome sites in Hudson and Essex Counties. First, the DEP issued a directive to Maxus, Occidental and two other chromium manufacturers directing them to arrange for the cleanup of chromite ore residue at three sites in Jersey City and the conduct of a study by paying the DEP a total of US$ 20 million. While YPF Holdings Inc. believes that Maxus is improperly named and there is little or no evidence that Chemicals’ chromite ore residue was sent to any of these sites, the DEP claims these companies are jointly and severally liable without regard to fault. Second, the State of New Jersey filed a lawsuit against Occidental and two other entities in state court in Hudson County seeking, among other things, cleanup of various sites where chromite ore residue is allegedly located, recovery of past costs incurred by the State at such sites and, with respect to certain costs at 18 sites, treble damages. The DEP claims that the defendants are jointly and severally liable, without regard to fault, for much of the damages alleged. During mediation, the parties have engaged in discussion regarding possible settlement; however, there is no assurance that these discussions will be successful.

As of December 31, 2006, there is a total of 67 reserved in connection with the foregoing chrome-related matters. Studies levels for chromium in New Jersey have not been finalized, and the DEP is still reviewing the proposed action levels. The cost of addressing these chrome-related matters could increase depending upon the final soil action levels, the DEP’s response to Tierra’s reports and other developments.

Painesville, Ohio. In connection with the operation until 1976 of one chromite ore processing plant ("Chrome Plant"), from Chemicals, the Ohio Environmental Protection Agency (“OEPA”) ordered to conduct a remedial investigation and feasibility study (“RIFS”) at the former Painesville's Plant area. Tierra has agreed to participate in the RIFS as required by the OEPA. YPF Holdings Inc. has reserved a total of 25 as of December 31, 2006 for its estimated share of the cost to perform the RIFS, the remediation work and other operation and maintenance activities at this site. The scope and nature of any further investigation or remediation that may be required cannot be determined at this time; however, as the RIFS progresses, YPF Holdings Inc. will continuously assess the condition of the Painesville's plants works site and make any changes, including additions, to its reserve as may be required.

Third Party Sites. Pursuant to settlement agreements with the Port of Houston Authority and other parties, Tierra and Maxus are participating (on behalf of Chemicals) in the remediation of property adjoining Chemicals’ former Greens Bayou facility where DDT and certain other chemicals were manufactured. As of December 31, 2006, YPF Holdings Inc. has reserved 73 for its estimated share of future remediation activities associated with the Greens Bayou facility.

Additionally, efforts have been initiated in connection with claims for natural resources damages. The amount of natural resources damages and the parties obligations in respect therof are unknown at the present time.

In June 2005, the EPA designated Maxus as PRP at the Milwaukee Solvay Code & Gas Site in Milwaukee, Wisconsin. The basis for this designation is Maxus alleged status as the successor to Pickands Mather & Co. and Milwaukee Solvay Coke Co., companies that the EPA has asserted are former owners or operators of such site. Preliminary work in connection with the RIFS of this site commenced in the second half of 2006. Maxus has reserved 3 as of December 31, 2006 for its estimated share of the costs of the RIFS. Maxus lacks sufficient information to determine additional exposure or costs, if any, it might have in respect of this site.

Maxus has agreed to defend Occidental, as successor to Chemicals, in respect of the Malone Services Company Superfund Site in Galveston County, Texas. This site is a former waste disposal site where Chemicals is alleged to have sent waste products prior to September 1986. It is the subject of enforcement activities by the EPA. Although Occidental is one of many PRPs that have been identified and have agreed to an Administrative Order on Consent, Tierra (which is handling this matter on behalf of Maxus) presently believes the degree of Occidental’s alleged involvement as successor to Chemicals is relatively small.

 

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Chemicals has also been designated as a potentially responsible party ("PRP") with respect to a number of third party sites where hazardous substances from Chemicals' plant operations allegedly were disposed or have come to be located. At several of these, Chemicals has no known exposure. Although PRPs are typically jointly and severally liable for the cost of investigations, cleanups and other response costs, each has the right of contribution from other PRPs and, as a practical matter, cost sharing by PRPs is usually effected by agreement among them. At December 31, 2006, YPF Holdings Inc. has reserved 8 in connection with its estimated share of costs related to these sites.

Legal Proceedings. In 1998, a subsidiary of Occidental filed a lawsuit in state court in Ohio seeking a declaration of the parties’ rights with respect to obligations for certain costs allegedly related to Chemicals’ Ashtabula, Ohio facility, as well as certain other costs. Maxus understands that Occidental’s claims total approximately US$ 6 million. The case is currently set for trial in 2007. In 2002, Occidental sued Maxus and Tierra in state court in Dallas, Texas seeking a declaration that Maxus and Tierra have the obligation under the agreement pursuant to which Maxus sold Chemicals to Occidental to defend and indemnify Occidental from and against certain historical obligations of Chemicals, including claims related to “Agent Orange” and vinyl chloride monomer (VCM), notwithstanding the fact that said agreement contains a 12-year cut-off for defense and indemnity obligations with respect to most litigation. Tierra was dismissed as a party, and the matter was tried in May 2006. Following trial, judgment was entered against Maxus. Maxus has appealed. The cash component of the judgment is approximately 8 plus corresponding interest. The judgment will accrue post judgment interest at the rate of 8% per anum in the event Maxus does not prevail on appeal. In December 2006, the trial court set the amount of Maxus obligation in an amount of approximately 45, which have been entirely reserved.

In May 2003, the U.S. Internal Revenue Service (“IRS”) assessed Maxus (for 1994, 1995 and 1996) and YPF Holdings Inc. (for 1997) an aggregate of approximately US$ 24 million in additional income taxes. Maxus and YPF Holdings Inc. believe that most of these assessments are without substantial merit, and they have protested this assessment. In January 2004, the IRS assessed YPF Holdings Inc. an additional US$ 8 million plus corresponding interest in withholding taxes the IRS contends should have been withheld from an interest payment to YPF International Ltd. in 1997. YPF Holdings Inc. believed this assessment was without substantial merit and challenged same. YPF Holdings Inc. and Maxus have settled this matter. Pursuant to the settlement, YPF Holdings Inc. and Maxus received a total refund of approximately 23 (including interest) in September 2006.

In March 2005, Maxus agreed to defend Occidental, as successor to Chemicals, in respect of an action seeking the contribution of costs incurred in connection with the remediation of the Turtle Bayou waste disposal site in Liberty County, Texas. The plaintiffs alleged that certain wastes attributable to Chemicals found their way to the Turtle Bayou site. YPF Holdings Inc. is considering the potential impact of the court’s determination.

Skidmore Energy Company and others (“Skidmore”) have sued Maxus (U.S.) Exploration Company (“Maxus US”), a subsidiary of YPF Holdings Inc., in state court in Texas. Skidmore claims it was entitled to an assignment of approximately five oil and gas leases in the US Gulf of Mexico. Maxus US denies Skidmore’s claims.

YPF Holdings Inc., including its subsidiaries, is a party to various other lawsuits, the outcome of which are not expected to have a material adverse effect on YPF Holdings Inc.’s financial condition or operations. YPF Holdings Inc. has established reserves for legal contingencies in situations where a loss is probable and can be reasonably estimated.

YPF Holdings Inc. has entered into various operating agreements and capital commitments associated with the exploration and development of its oil and gas properties. Such contractual, financial and/or performance commitments are not material.

 

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4. CONSOLIDATED BUSINESS SEGMENT INFORMATION

The Company organizes its business into four segments which comprise: the exploration and production, including contractual purchases of natural gas and crude oil purchases arising from service contracts and concession obligations, as well as, crude oil intersegment sales, natural gas and its derivatives sales and electric power generation (“Exploration and Production”); the refining, transport and marketing of crude oil to unrelated parties and refined products (“Refining and Marketing”); the petrochemical operations (“Chemical”); and other activities, not falling into these categories, are classified under “Corporate and Other”, which principally includes corporate administration costs and assets, construction activities and environmental remediation activities related to YPF Holdings Inc. preceding operations (Note 3).

Operating income (loss) and assets for each segment have been determined after intersegment adjustments. Sales between business segments are made at internal transfer prices established by YPF, which approximate market prices.

 

     Exploration and
Production (1)
   Refining and
Marketing
   Chemical     Corporate
and Other
    Consolidation
Adjustments
    Total

Year ended December 31, 2006

              

Net sales to unrelated parties

   3,076    17,651    2,401     109     —       23,237

Net sales to related parties

   774    1,624    —       —       —       2,398

Net intersegment sales

   14,033    1,526    647     282     (16,488 )   —  
                                

Net sales

   17,883    20,801    3,048     391     (16,488 )   25,635
                                

Operating income (loss)

   6,564    258    572     (540 )   29     6,883

Income on long-term investments

   167    16    —       —       —       183

Depreciation

   3,263    329    85     41     —       3,718

Acquisitions of fixed assets

   4,886    733    137     176     —       5,932

Assets

   18,987    9,349    1,876     6,049     (867 )   35,394

Year ended December 31, 2005

              

Net sales to unrelated parties

   2,910    15,791    2,062     87     —       20,850

Net sales to related parties

   626    1,425    —       —       —       2,051

Net intersegment sales

   11,659    962    207     243     (13,071 )   —  
                                

Net sales

   15,195    18,178    2,269     330     (13,071 )   22,901
                                

Operating income (loss)

   7,140    1,900    542     (451 )   30     9,161

Income (loss) on long-term investments

   28    12    (1 )   —       —       39

Depreciation

   2,230    367    75     35     —       2,707

Acquisitions of fixed assets

   3,706    541    104     108     —       4,459

Assets

   17,911    8,807    1,658     4,818     (970 )   32,224

Year ended December 31, 2004

              

Net sales to unrelated parties

   2,164    13,144    1,958     140     —       17,406

Net sales to related parties

   752    1,773    —       —       —       2,525

Net intersegment sales

   11,225    891    188     126     (12,430 )   —  
                                

Net sales

   14,141    15,808    2,146     266     (12,430 )   19,931
                                

Operating income (loss)

   7,140    1,324    564     (430 )   (127 )   8,471

Income on long-term investments

   41    11    102     —       —       154

Depreciation

   1,986    371    82     31     —       2,470

Acquisitions of fixed assets

   2,602    434    86     52     —       3,174

Assets

   16,762    8,244    2,143     4,616     (843 )   30,922

(1)

From January 1, 2005, Natural Gas and Electricity segment operations are included in Exploration and Production business segment. The information presented for comparative purposes was restated to give retroactive effect to this criterion.

Export sales for the years ended December 31, 2006, 2005 and 2004 were 8,649, 8,644 and 7.875, respectively. Export sales were mainly to the United States of America, Brazil and Chile.

 

   ENRIQUE LOCUTURA RUPEREZ
   Executive Vicepresident

 

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Schedule I

Exhibit A

English translation of the financial statements originally issued in Spanish, except for the inclusion of Note 12 to the primary financial statements in the English translation

YPF SOCIEDAD ANONIMA AND CONTROLLED AND JOINTLY CONTROLLED COMPANIES

CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2006 AND COMPARATIVE INFORMATION

FIXED ASSETS EVOLUTION

(amounts expressed in millions of Argentine pesos - Note 1 to the primary financial statements)

 

     2006
     Cost

Main account

   Amounts at
beginning of
year
   Translation
net effect (5)
    Increases     Net decreases
and transfers
    Amounts at
end of year

Land and buildings

   2,268    —       1     57     2,326

Mineral property, wells and related equipment

   43,963    1     930     (2,360 )   42,534

Refinery equipment and petrochemical plants

   8,470    —       5     175     8,650

Transportation equipment

   1,808    —       1     41     1,850

Materials and equipment in warehouse

   420    —       966     (775 )   611

Drilling and work in progress

   2,571    (1 )   3,789     (2,790 )   3,569

Exploratory drilling in progress

   188    2     200     (255 )   135

Furniture, fixtures and installations

   500    —       5     51     556

Selling equipment

   1,273    —       —       68     1,341

Other property

   351    —       35     (19 )   367
                           

Total 2006

   61,812    2     5,932 (2)   (5,807 )(1)(6)   61,939
                           

Total 2005

   57,752    2     4,459 (2)   (401 )(1)   61,812
                           

Total 2004

   55,264    3     3,174 (2)   (689 )(1)   57,752
                           

 

     2006     2005     2004  
     Depreciation                   

Main account

   Accumulated
at beginning
of year
   Net decreases
and transfers
    Depreciation
rate
    Increases    Accumulated
at end of
year
   Net book
value
    Net book
value
    Net book
value
 

Land and buildings

   1,003    (2 )   2 %   52    1,053    1,273     1,265     1,298  

Mineral property, wells and related equipment

   30,410    (4,137 )   (4 )   3,223    29,496    13,038 (3)   13,553 (3)   13,155 (3)

Refinery equipment and petrochemical plants

   5,472    —       4 - 10 %   321    5,793    2,857     2,998     3,179  

Transportation equipment

   1,226    (3 )   4 - 5 %   50    1,273    577     582     601  

Materials and equipment in warehouse

   —      —       —       —      —      611     420     330  

Drilling and work in progress

   —      —       —       —      —      3,569     2,571     1,437  

Exploratory drilling in progress

   —      —       —       —      —      135     188     129  

Furniture, fixtures and installations

   451    (1 )   10 %   29    479    77     49     55  

Selling equipment

   959    5     10 %   37    1,001    340     314     371  

Other property

   282    (6 )   10 %   6    282    85     69     62  
                                         

Total 2006

   39,803    (4,144 )(1)(6)     3,718    39,377    22,562      
                                 

Total 2005

   37,135    (39 )(1)     2,707    39,803      22,009    
                                 

Total 2004

   34,790    (125 )(1)     2,470    37,135        20,617  
                                 

(1) Includes 194, 86 and 147 of net book value charged to fixed assets allowances for the years ended December 31, 2006, 2005 and 2004, respectively.
(2) Includes 930, 737 and 307 corresponding to the future cost of hydrocarbon wells abandonment obligations for the years ended December 31, 2006, 2005 and 2004, respectively.
(3) Includes 1,052, 1,255 and 1,387 of mineral property as of December 31, 2006 and 2005 and 2004, respectively.
(4) Depreciation has been calculated according to the unit of production method.
(5) Includes the net effect of the exchange differences arising from the translation of net book values at beginning of the year of fixed assets in foreign companies.
(6) Includes 5,291 of acquisition cost and 4,094 of accumulated depreciation corresponding oil and gas exploration and producing areas to be disposed by sale.

 

   ENRIQUE LOCUTURA RUPEREZ
   Executive Vicepresident

 

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Schedule I

Exhibit H

English translation of the financial statements originally issued in Spanish, except for the inclusion of Note 12 to the primary financial statements in the English translation

YPF SOCIEDAD ANONIMA AND CONTROLLED AND JOINTLY CONTROLLED COMPANIES

CONSOLIDATED STATEMENT OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 2006 AND COMPARATIVE INFORMATION

EXPENSES INCURRED

(amounts expressed in millions of Argentine pesos - Note 1 to the primary financial statements)

 

     2006    2005    2004  
   Production
costs
   Administrative
expenses
   Selling
expenses
   Exploration
expenses
   Total    Total    Total  

Salaries and social security taxes

   649    137    142    43    971    758    571  

Fees and compensation for services

   114    244    28    13    399    270    174  

Other personnel expenses

   215    64    28    27    334    254    213  

Taxes, charges and contributions

   191    17    237    1    446    367    352  

Royalties and easements

   2,095    —      6    —      2,101    1,753    1,632  

Insurance

   102    1    14    5    122    86    86  

Rental of real estate and equipment

   258    3    59    3    323    272    274  

Survey expenses

   —      —      —      124    124    108    102  

Depreciation of fixed assets

   3,598    37    83    —      3,718    2,707    2,470  

Industrial inputs, consumable materials and supplies

   485    8    31    8    532    613    506  

Construction and other service contracts

   566    14    63    21    664    396    502  

Preservation, repair and maintenance

   1,329    16    49    6    1,400    997    794  

Contractual commitments

   519    —      —      —      519    131    299  

Unproductive exploratory drillings

   —      —      —      199    199    70    197  

Transportation, products and charges

   622    —      866    —      1,488    1,376    1,120  

Allowance (reversal) for doubtful trade receivables

   —      —      76    —      76    31    (6 )

Publicity and advertising expenses

   —      76    64    —      140    120    100  

Fuel, gas, energy and miscellaneous

   715    57    51    10    833    613    491  
                                    

Total 2006

   11,458    674    1,797    460    14,389      
                              

Total 2005

   8,440    552    1,650    280       10,922   
                              

Total 2004

   7,629    463    1,403    382          9,877  
                                

 

   ENRIQUE LOCUTURA RUPEREZ
   Executive Vicepresident

 

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Table of Contents

English translation of the financial statements originally issued in Spanish, except for the inclusion of Note 12 in the English translation

YPF SOCIEDAD ANONIMA

BALANCE SHEET AS OF DECEMBER 31, 2006 AND COMPARATIVE INFORMATION

(amounts expressed in millions of Argentine pesos - Note 1)

 

     2006    2005    2004

Current Assets

        

Cash

   88    53    267

Investments (Note 3.a)

   552    176    180

Trade receivables (Note 3.b)

   2,138    2,085    1,942

Other receivables (Note 3.c)

   5,116    3,795    3,076

Inventories (Note 3.d)

   1,522    1,164    1,005

Other assets (Note 2.d)

   1,128    —      380
              

Total current assets

   10,544    7,273    6,850
              

Noncurrent Assets

        

Trade receivables (Note 3.b)

   44    51    71

Other receivables (Note 3.c)

   826    1,085    1,413

Investments (Note 3.a)

   2,634    2,359    2,340

Fixed assets (Note 3.e)

   20,893    20,495    19,078
              

Total noncurrent assets

   24,397    23,990    22,902
              

Total assets

   34,941    31,263    29,752
              

Current Liabilities

        

Accounts payable (Note 3.f)

   3,968    3,038    2,242

Loans (Note 3.g)

   813    297    127

Salaries and social security

   162    119    90

Taxes payable

   1,173    1,675    1,923

Net advances from crude oil purchasers (Note 3.h)

   96    95    264

Reserves (Exhibit E)

   206    164    67
              

Total current liabilities

   6,418    5,388    4,713
              

Noncurrent Liabilities

        

Accounts payable (Note 3.f)

   2,425    1,639    768

Loans (Note 3.g)

   510    1,107    1,232

Taxes payable

   10    13    15

Net advances from crude oil purchasers (Note 3.h)

   7    101    634

Reserves (Exhibit E)

   1,226    766    621
              

Total noncurrent liabilities

   4,178    3,626    3,270
              

Total liabilities

   10,596    9,014    7,983

Shareholders' Equity (per corresponding statements)

   24,345    22,249    21,769
              

Total liabilities and shareholders' equity

   34,941    31,263    29,752
              

Notes 1 to 12 and the accompanying exhibits A, C, E, F, G and H and Schedule I

are an integral part of these statements.

 

   ENRIQUE LOCUTURA RUPEREZ
   Executive Vicepresident

 

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English translation of the financial statements originally issued in Spanish, except for the inclusion of Note 12 in the English translation

YPF SOCIEDAD ANONIMA

STATEMENT OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 2006 AND COMPARATIVE INFORMATION

(amounts expressed in millions of Argentine pesos, except for per share amounts in Argentine pesos - Note 1)

 

     2006     2005     2004  

Net sales (Note 3.i)

   23,717     21,308     18,448  

Cost of sales (Exhibit F)

   (14,935 )   (10,540 )   (8,493 )
                  

Gross profit

   8,782     10,768     9,955  

Administrative expenses (Exhibit H)

   (588 )   (479 )   (398 )

Selling expenses (Exhibit H)

   (1,704 )   (1,576 )   (1,311 )

Exploration expenses (Exhibit H)

   (392 )   (231 )   (246 )
                  

Operating income

   6,098     8,482     8,000  

Income on long-term investments

   519     194     234  

Other expense, net (Note 3.j)

   (26 )   (323 )   (665 )

Financial income (expense), net and holding gains:

      

Gains (Losses) on assets

      

Interests

   297     189     147  

Exchange differences

   (10 )   130     68  

Holding gains on inventories

   394     230     185  

(Losses) Gains on liabilities

      

Interests

   (208 )   (356 )   (130 )

Exchange differences

   (61 )   (47 )   (80 )

Income from sale of long-term investments (Note 10)

   —       15     —    

Impairment of other current assets (Note 2.d)

   (69 )   —       —    
                  

Net income before income tax

   6,934     8,514     7,759  

Income tax (Note 3.k)

   (2,477 )   (3,152 )   (2,852 )
                  

Net income

   4,457     5,362     4,907  
                  

Earnings per share (Note 1)

   11.33     13.63     12.48  
                  

Notes 1 to 12 and the accompanying exhibits A, C, E, F, G and H and Schedule I

are an integral part of these statements.

 

   ENRIQUE LOCUTURA RUPEREZ
   Executive Vicepresident

 

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English translation of the financial statements originally issued in Spanish, except for the inclusion of Note 12 in the English translation

YPF SOCIEDAD ANONIMA

STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2006 AND COMPARATIVE INFORMATION

(amounts expressed in millions of Argentine pesos except for per share amounts in Argentine pesos - Note 1)

 

     Shareholder’s contributions                               
     Subscribed
capital
   Irrevocable
contributions
    Adjustment to
contributions
   Issuance
premiums
   Total     Legal reserve    Deferred
earnings
    Reserve for
future
dividends
    Unappropriated
retained
earnings
    Total
shareholders’
equity
 

Balance as of December 31, 2003

   3,933    13     7,281    640    11,867     1,031    —       133     9,503     22,534  

Cumulative Effect of Changes in Accounting Principles (Note 1.b)

   —      —       —      —      —       —      (125 )   —       (230 )   (355 )
                                                        

Restated balances

   3,933    13     7,281    640    11,867     1,031    (125 )   133     9,273     22,179  

As decided by the Ordinary Shareholders'

meeting of April 21, 2004:

                        

– Reversal of Reserve for future dividends

   —      —       —      —      —       —      —       (133 )   133     —    

– Cash dividends (Ps. 9 per share)

   —      —       —      —      —       —      —       —       (3,540 )   (3,540 )

– Appropriation to Legal reserve

   —      —       —      —      —       255    —       —       (255 )   —    

– Appropriation to Reserve for future dividends

   —      —       —      —      —       —      —       1,770     (1,770 )   —    

As decided by the Board of Directors' meeting of October 27, 2004:

                        

– Cash dividends (Ps. 4.5 per share)

   —      —       —      —      —       —      —       (1,770 )   —       (1,770 )

Conversion of irrevocable contributions into subordinated debt (Note 4)

   —      (13 )   —      —      (13 )   —      —       —       —       (13 )

Net increase (decrease) in deferred earnings (Note 2.k)

   —      —       —      —      —       —      6     —       —       6  

Net income

   —      —       —      —      —       —      —       —       4,907     4,907  
                                                        

Balance as of December 31, 2004

   3,933    —       7,281    640    11,854     1,286    (119 )   —       8,748     21,769  

As decided by the Ordinary and

Extraordinary Shareholders' meeting of

April 19, 2005:

                        

– Cash dividends (Ps. 8 per share)

   —      —       —      —      —       —      —       —       (3,147 )   (3,147 )

– Appropriation to Legal reserve

   —      —       —      —      —       244    —       —       (244 )   —    

– Appropriation to Reserve for future dividends

   —      —       —      —      —       —      —       1,731     (1,731 )   —    

As decided by the Board of Directors' meeting of November 10, 2005:

                        

– Cash dividends (Ps. 4.4 per share)

   —      —       —      —      —       —      —       (1,731 )   —       (1,731 )

Net increase (decrease) in deferred earnings (Note 2.k)

   —      —       —      —      —       —      (4 )   —       —       (4 )

Net income

   —      —       —      —      —       —      —       —       5,362     5,362  
                                                        

Balance as of December 31, 2005

   3,933    —       7,281    640    11,854     1,530    (123 )   —       8,988     22,249  

As decided by the Ordinary Shareholders'

meeting of April 28, 2006:

                        

– Cash dividends (Ps. 6 per share)

   —      —       —      —      —       —      —       —       (2,360 )   (2,360 )

– Appropriation to Legal reserve

   —      —       —      —      —       267    —       —       (267 )   —    

– Appropriation to Reserve for future dividends

   —      —       —      —      —       —      —       2,710     (2,710 )   —    

Net increase (decrease) in deferred

earnings (Note 2.k)

   —      —       —      —      —       —      (1 )   —       —       (1 )

Net income

   —      —       —      —      —       —      —       —       4,457     4,457  
                                                        

Balance as of December 31, 2006

   3,933    —       7,281    640    11,854     1,797    (124 )   2,710     8,108     24,345  
                                                        

Notes 1 to 12 and the accompanying exhibits A, C, E, F, G and H and Schedule I

are an integral part of these statements.

 

   ENRIQUE LOCUTURA RUPEREZ
   Executive Vicepresident

 

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English translation of the financial statements originally issued in Spanish, except for the inclusion of Note 12 in the English translation

YPF SOCIEDAD ANONIMA

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2006 AND COMPARATIVE INFORMATION

(amounts expressed in millions of Argentine pesos - Note 1)

 

     2006     2005     2004  
Cash Flows from Operating Activities       

Net income

   4,457     5,362     4,907  

Adjustments to reconcile net income to net cash flows provided by operating activities:

      

Income on long-term investments

   (519 )   (194 )   (234 )

Impairment of other current assets

   69     —       —    

Income from sales of long term investments

   —       (15 )   —    

Dividends from long-term investments

   434     303     108  

Depreciation of fixed assets

   3,614     2,606     2,365  

Income tax

   2,477     3,152     2,852  

Income tax payments

   (2,628 )   (3,116 )   (4,736 )

Consumption of materials and fixed assets retired, net of allowances

   263     246     194  

Increase in allowances for fixed assets

   192     74     124  

Increase in reserves

   760     321     405  

Changes in assets and liabilities:

      

Trade receivables

   (46 )   (123 )   (246 )

Other receivables

   (929 )   (307 )   2,553  

Inventories

   (358 )   (159 )   (330 )

Accounts payable

   449     660     330  

Salaries and social security

   43     29     14  

Taxes payable

   (411 )   (324 )   226  

Net advances from crude oil purchasers

   (90 )   (705 )   (258 )

Decrease in reserves

   (258 )   (79 )   (119 )

Interests, exchange differences and others

   94     31     74  
                  

Net cash flows provided by operating activities

   7,613 (1)   7,762 (1)   8,229 (1)
                  
Cash Flows from Investing Activities       

Acquisitions of fixed assets

   (4,746 )   (3,606 )   (2,752 )

Capital distributions from long-term investments

   —       8     15  

Capital contributions in long-term investments

   (1 )   —       —    

Proceeds from sales of long-term investments

   —       454     —    

Investments (non cash and equivalents)

   13     (2 )   —    
                  

Net cash flows used in investing activities

   (4,734 )   (3,146 )   (2,737 )
                  
Cash Flows from Financing Activities       

Payment of loans

   (854 )   (180 )   (892 )

Proceeds from loans

   759     222     280  

Dividends paid

   (2,360 )   (4,878 )   (5,310 )
                  

Net cash flows used in financing activities

   (2,455 )   (4,836 )   (5,922 )
                  
Increase (decrease) in Cash and Equivalents    424     (220 )   (430 )

Cash and equivalents at the beginning of year

   214     434     864  
                  

Cash and equivalents at the end of year

   638     214     434  
                  

For supplemental information on cash and equivalents, see Note 3.a.


(1) Includes (100), (168) and (124) corresponding to interest payments for the years ended December 31, 2006, 2005 and 2004, respectively.

Notes 1 to 12 and the accompanying exhibits A, C, E, F, G and H and Schedule I are an integral part of these statements.

 

   ENRIQUE LOCUTURA RUPEREZ
   Executive Vicepresident

 

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English translation of the financial statements originally issued in Spanish, except for the inclusion of Note 12 in the English translation

YPF SOCIEDAD ANONIMA

NOTES TO FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2006 AND COMPARATIVE INFORMATION

(amounts expressed in millions of Argentine pesos, except where otherwise indicated - Note 1)

1. SIGNIFICANT ACCOUNTING POLICIES AND RESTATEMENT OF COMPARATIVE INFORMATION

a) Significant accounting policies

The financial statements of YPF Sociedad Anónima have been prepared in accordance with generally accepted accounting principles in Argentina, considering the regulations of the CNV.

Presentation of financial statements in constant Argentine pesos

The financial statements reflect the effect of changes in the purchasing power of money by the application of the method for restatement in constant Argentine pesos set forth in Technical Resolution No. 6 of the F.A.C.P.C.E. and taking into consideration General Resolution No. 441 of the CNV, which established the discontinuation of the restatement of financial statements in constant Argentine pesos as from March 1, 2003.

Cash and equivalents

In the statements of cash flows, the Company considers cash and all highly liquid investments with an original maturity of less than three months to be cash and equivalents.

Revenue recognition criteria

Revenue is recognized on sales of crude oil, refined products and natural gas, in each case, when title and risks are transferred to the customer.

Joint ventures and other agreements

The Company's interests in oil and gas related joint ventures and other agreements involved in oil and gas exploration and production and electric power generation, have been consolidated line by line on the basis of the Company's proportional share in their assets, liabilities, revenues, costs and expenses (Note 6).

Production concessions and exploration permits

According to Argentine Law No. 24,145 issued in November 1992, YPF's producing fields and undeveloped properties were converted into production concessions and exploration permits under Law No. 17,319. Exploration permits may have a term of up to 17 years and production concessions have a term of 25 years, which may be extended for an additional ten-year term.

 

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Fair value of financial instruments and concentration of credit risk

The carrying value of cash, current investments and trade receivables approximates its fair value due to the short maturity of these instruments. Furthermore, the fair value of loans receivable, which has been estimated based on current interest rates offered to the Company at the end of each year, for investments with the same remaining maturity, approximates its carrying value. As of December 31, 2006, 2005 y 2004 the fair value of loans payable estimated based on market prices or current interest rates at the end of each year amounted to 1,392, 1,497 and 1,469, respectively.

Financial instruments that potentially expose the Company to concentration of credit risk consist primarily of cash, current investments, accounts receivable and other receivables. The Company invests cash excess primarily in high liquid investments in financial institutions both in Argentina and abroad with strong credit rating and providing credit to foreign related parties. In the normal course of business, the Company provides credit based on ongoing credit evaluations to its customers and certain related parties. Additionally, the Company accounts for credit losses based on specific information of its clients. Credit risk on trade receivables is limited, as a result of the Company's large customer base.

Since counterparties to the Company's derivative transactions are major financial institutions with strong credit rating, exposure to credit losses in the event of nonperformance by such counterparties is minimal.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect reported assets, liabilities, revenues and expenses and disclosure of contingencies. Future results could differ from the estimations made by Management.

Earnings per share

Earnings per share have been calculated based on the 393,312,793 shares outstanding during the years ended as of December 31, 2006, 2005 and 2004.

b) Restatement of comparative information

From January 1, 2006, the Company applied new generally accepted accounting principles introduced by Resolution CD No. 93/2005 of the Professional Councils in Economic Sciences of the Autonomous City of Buenos Aires (“C.P.C.E.C.A.B.A.”) issued to unify the accounting principles in the different jurisdictions of Argentina and which involved the issuance of Resolution No. 312/2005 by the F.A.C.P.C.E. These new accounting principles were adopted by the CNV throughout Resolutions No. 485/2005 and No. 487/2006. Additionally, as of December 31, 2006, the Company applied the dispositions established by Technical Resolution No. 23 – “Postemployment benefits and other long-term benefits”, approved by the CNV through Resolution No. 494/2006.

Main changes derived from the application of the mentioned generally accepted accounting principles are as follows:

Exchange differences generated by the translation of interests in foreign entities and measurement of changes in effective cash flow hedges of jointly controlled companies

The exchange difference generated by the translation of interests in foreign companies and the changes in the fair value of effective cash flow hedges of jointly controlled companies, which previous to the adoption of the new generally accepted accounting principles were included in an intermediate account between liabilities and shareholder’s equity, shall be included as a component of the shareholder’s equity in the account “Deferred earnings”.

 

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Deferred income tax

The difference between the book value of fixed assets restated into constant Argentine pesos and their corresponding historical cost used for tax purposes corresponds to a temporary difference to be considered in deferred income tax computations. However, generally accepted accounting principles in Argentina allow the option to disclose the mentioned effect in a note to the financial statements. The Company adopted this latter criterion (Note 3.k).

Defined benefit pension plans and other postretirement and postemployment benefits of foreign company’s employees

The liabilities related to those benefits were valued at net present value and were accrued based on employees service during the post year.

The restatement of comparative financial information does not imply any change to statutory decisions already taken.

As a result of the adoption of the above mentioned new generally accepted accounting principles, previous years information as of the beginning of each year was modified as follows:

 

     Deferred earnings     Unappropiated
retained earnings
 
     Gains (Losses)     Gains (Losses)  
     2006     2005    2004     2006    2005    2004  

Translation of interests in foreign entities

   (4 )   6    (125 )   —      —      —    

Pension Plans and other postemployment benefits of foreign entities

   —       —      —       25    31    (230 )
                                 
   (4 )   6    (125 )   25    31    (230 )
                                 

2. VALUATION CRITERIA

The principal valuation criteria used in the preparation of the financial statements are as follows:

 

a) Cash:

 

  Amounts in Argentine pesos have been stated at face value.

 

  Amounts in foreign currencies have been valued at the relevant exchange rates as of the end of each year. Exchange differences have been credited (charged) to current income. Additional information on assets denominated in foreign currency is disclosed in Exhibit G.

 

b) Current investments, trade and other receivables and payables:

 

  Amounts in Argentine pesos have been stated at face value, which includes accrued interest through the end of each year, if applicable. Mutual funds have been valued at fair value as of the end of each year. When required by generally accepted accounting principles, discounted value does not differ significantly from their face value as of the end of each year.

 

  Amounts in foreign currency have been valued at face value at the relevant exchange rates in effect as of the end of each year, including accrued interest, if applicable. Exchange differences have been credited (charged) to current income. Investments in government securities have been valued at its fair value as of the end of each year. Additional information on assets and liabilities denominated in foreign currency is disclosed in Exhibit G.

  If applicable, allowances have been made to reduce receivables to their estimated realizable value.

 

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c) Inventories:

 

  Refined products, products in process, crude oil and natural gas have been valued at replacement cost as of the end of each year.

 

  Raw materials and packaging materials have been valued at cost, which does not differ significantly from its replacement cost as of the end of each year.

Valuation of inventories does not exceed their estimated realizable value.

 

d) Other assets:

As of December 31, 2006, includes oil and gas exploration and producing fields to be disposed by sale, which have been valued at the lower of their carrying amount and fair value less cost to sell.

As of December 31, 2004 includes the Company’s interest in Petroken Petroquímica Ensenada S.A. (“Petroken”) and in PBBPolisur S.A., which have been valued at the lower of carrying amount and fair value less cost to sell (Note 10).

The sale of these assets did not qualify as discontinued operations as the Company continued to hold other exploration, production and petrochemical activities, as applicable, in Argentina.

 

e) Noncurrent investments:

These include the Company’s investments in companies under control, joint control or significant influence and holdings in other companies. These investments are detailed in Exhibit C and have been valued using the equity method, except for holdings in other companies, which have been valued at its acquisition cost restated as detailed in Note 1.a.

Investments in Gasoducto del Pacífico (Argentina) S.A., Gasoducto del Pacífico (Cayman) Ltd., Oleoducto Trasandino (Argentina) S.A., A&C Pipeline Holding Company and Petróleos Trasandinos YPF S.A., where less than 20% direct or indirect interest is held, are accounted by the equity method since YPF exercises significant influence over these companies in making operation and financial decisions based on its representation on the Boards of Directors and/or the significant transactions between YPF and such companies.

If applicable, allowances have been made to reduce investments to their estimated recoverable value. The main factors for the recognized impairment were the devaluation of the Argentine peso, certain events of debt default and the de-dollarization and freezing of utility rates.

Foreign subsidiaries in which YPF participates have been defined as non-integrated companies as they collect cash and other monetary items, incur expenses and generate income. Corresponding assets and liabilities have been translated into Argentine pesos at the exchange rate prevailing as of the end of each year. Income statements have been translated using the relevant exchange rate at the date of each transaction. Exchange differences arising from the translation process have been included as a component of shareholder’s equity in the account “Deferred earnings”, which will be maintained until the sale or complete or partial reimbursement of capital of the related investment occur.

Holdings in preferred shares have been valued as defined in the respective bylaws.

Investments in companies with negative shareholders’ equity were disclosed in the “Accounts payable” account in the balance sheet provided that the Company has the intention to provide the corresponding financial support.

 

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If necessary, adjustments have been made to conform the accounting principles used by controlled, jointly controlled or under significant influence companies to those of the Company. Main adjustments are related to the application of the general accepted accounting principles in Argentina to foreign related companies’ financial statements and the elimination of the appraisal revaluation of fixed assets from certain investees.

The investments in companies under control, joint control or significant influence, have been valued based upon the last available financial statements of these companies as of the end of each year, taking into consideration, if applicable, significant subsequent events and transactions, available management information and transactions between YPF and the related company which have produced changes on the latter’s shareholders’ equity.

The Company includes supplemental consolidated financial statements as part of the primary financial statements (Schedule I).

As from the effective date of Law No. 25,063, dividends, either in cash or in kind, that the Company receives from investments in other companies and which are in excess of the accumulated taxable income that these companies carry upon distribution shall be subject to a 35% income tax withholding as a sole and final payment. YPF has not recorded any charge for this tax since it has estimated that dividends from earnings recorded by the equity method would not be subject to such tax.

 

f) Fixed assets:

Fixed assets have been valued at acquisition cost restated as detailed in Note 1.a, less related accumulated depreciation. Depreciation rates, representative of the useful life assigned, applicable to each class of asset, are disclosed in Exhibit A. For those assets whose construction requires an extended period of time, financial costs corresponding to third parties’ financing have been capitalized during the assets’ construction period.

Oil and gas producing activities

 

  The Company follows the “successful effort” method of accounting for its oil and gas exploration and production operations. Accordingly, exploratory costs, excluding the costs of exploratory wells, have been charged to expense as incurred. Costs of drilling exploratory wells, including stratigraphic test wells, have been capitalized pending determination as to whether the wells have found proved reserves that justify commercial development. If such reserves were not found, the mentioned costs are charged to expense. Occasionally, an exploratory well may be determined to have found oil and gas reserves, but classification of those reserves as proved cannot be made when drilling is completed. In those cases, the cost of drilling the exploratory well shall continue to be capitalized if the well has found a sufficient quantity of reserves to justify its completion as a producing well and the enterprise is making sufficient progress assessing the reserves and the economic and operating viability of the project. If any of the mentioned conditions is not met, cost of drilling exploratory wells is charged to expense.

 

  Intangible drilling costs applicable to productive wells and to developmental dry holes, as well as tangible equipment costs related to the development of oil and gas reserves, have been capitalized.

 

  The capitalized costs related to producing activities have been depreciated by field on the unit-of-production basis by applying the ratio of produced oil and gas to estimate recoverable proved and developed oil and gas reserves.

 

  The capitalized costs related to acquisitions of properties with proved reserves have been depreciated by field on the unit-of-production basis by applying the ratio of produced oil and gas to proved oil and gas reserves.

 

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  Revisions of crude oil and natural gas proved reserves are considered prospectively in the calculation of depreciation. Revisions in estimates of reserves are performed at least once a year. Additionally, estimates of reserves are audited by independent petroleum engineers as of the end of each year.

 

  On January 26, 2006, YPF announced a downward revision of the proved oil and gas reserves by 509 million barrels of oil equivalent, including 493 million barrels of oil equivalent corresponding to proved developed and undeveloped reserves of YPF and 16 million barrels of oil equivalent corresponding to proved developed and undeveloped reserves of affiliated companies. The Audit and Control Committee of YPF’s parent company, Repsol YPF, S.A. (“Repsol YPF”), undertook an independent review of the facts and circumstances of the reduction in proved reserves with the assistance of an independent counsel, King & Spalding LLP. The Audit Committee of YPF determined to rely on this investigation. On June 15, 2006, the final conclusions of the investigation were presented, recommending the implementation of certain improvements in the reserves estimation process. This downward revision of proved reserves did not have material effects on the unappropriated retained earnings at the beginning of the year.

 

  Costs related to hydrocarbon wells abandonment obligations are capitalized along with the related assets, and are depreciated using the unit-of-production method. As compensation, a liability is recognized for this concept at the estimated value of the discounted payable amounts.

Other fixed assets

 

  The Company’s other fixed assets are depreciated using the straight-line method, with depreciation rates based on the estimated useful life of each class of property.

Maintenance and major repairs to the fixed assets have been charged to expense as incurred.

Renewals and betterments that materially extend the useful life and/or increase the productive capacity of properties are capitalized. As fixed assets are retired, the related cost and accumulated depreciation are eliminated from the balance sheet.

The Company capitalizes the costs incurred in limiting, neutralizing or preventing environmental pollution only in those cases in which at least one of the following conditions is met: (a) the expenditure improves the safety or efficiency of an operating plant (or other productive asset); (b) the expenditure prevents or limits environmental pollution at operating facilities; or (c) the expenditures are incurred to prepare assets for sale and do not raise the assets’ carrying value above their estimated recoverable value.

The carrying value of the fixed asset of each business segment, as defined in Note 4 to the consolidated financial statements, does not exceed their estimated recoverable value.

 

g) Taxes, withholdings and royalties:

Income tax and tax on minimum presumed income

 

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The Company recognizes the income tax applying the liability method, which considers the effect of the temporary differences between the financial and tax basis of assets and liabilities and the tax loss carryforwards and other tax credits, which may be used to offset future taxable income, at the current statutory rate of 35%.

 

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In deferred income tax computations, the difference between the book value of fixed assets restated into constant Argentine pesos and their corresponding historical cost used for tax purposes is a temporary difference to be considered in deferred income tax computations. However, generally accepted accounting principles in Argentina allow the option to disclose the mentioned effect in a note to the financial statements. The Company adopted this latter criterion (Note 3.k).

Additionally, the Company calculates tax on minimum presumed income applying the current 1% tax rate to taxable assets as of the end of each year. This tax complements income tax. The Company’s tax liability will coincide with the higher between the determination of tax on minimum presumed income and the Company’s tax liability related to income tax, calculated applying the current 35% income tax rate to taxable income for the year. However, if the tax on minimum presumed income exceeds income tax during one tax year, such excess may be computed as prepayment of any income tax excess over the tax on minimum presumed income that may be generated in the next ten years.

For the years ended December 31, 2006, 2005 and 2004, the amounts determined as current income tax were higher than tax on minimum presumed income and they were included in the “Income tax” account of the income statements of each year.

Royalties and withholding systems for hydrocarbon exports

A 12% royalty is payable on the estimated value at the wellhead of crude oil production and the natural gas volumes commercialized. The estimated value is calculated based upon the approximate sale price of the crude oil and gas produced, less the costs of transportation and storage. Royalty expense is accounted for as a production cost.

Law No. 25,561 on Public Emergency and Exchange System Reform, issued in January 2002, established new duties for hydrocarbon exports for a five year-period. In January 2007, Law No. 26,217 extended this export withholding system for an additional five year-period and also established specially that this regime is also applicable to exports from “Tierra del Fuego” region. Outstanding rates as of December 31, 2006, are 20% for liquefied petroleum gas, 5% for gasoline, diesel and other refined products and between 25% and 45% for crude oil based on the West Texas Intermediate price. On July 25, 2006, Resolution No. 534/2006 of the Ministry of Economy and Production entered in force, raising the natural gas withholding rate from 20% to 45% and establishing the natural gas import price from Bolivia as the basis for its determination. YPF is negotiating with its export clients the effect of the above mentioned increase and the transfer of a significant part of these incremental costs to them.

Hydrocarbon export withholdings are charged to the “Net sales” account of the statement of income.

 

h) Allowances and reserves:

 

  Allowances: amounts have been provided in order to reduce the valuation of trade receivables, other receivables, noncurrent investments and fixed assets based on analysis of doubtful accounts and on the estimated recoverable value of these assets.

 

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  Reserves for losses: amounts have been provided for various contingencies which are probable and can be reasonably estimated, based on Management’s expectations and in consultation with legal counsels. If required by generally accepted accounting principles, their discounted value at the end of each year does not differ significantly from the recorded face value.

The activity in the allowances and reserves accounts is set forth in Exhibit E.

 

i) Environmental liabilities:

Environmental liabilities are recorded when environmental assessments and/or remediation are probable and can be reasonably estimated. Such estimates are based on either detailed feasibility studies of remediation approach and cost for individual sites or on the Company’s estimate of costs to be incurred based on historical experience and available information based on the stage of assessment and/or remediation of each site. As additional information becomes available regarding each site or as environmental standards change, the Company revises its estimate of costs to be incurred in environmental assessment and/or remediation matters.

 

j) Derivative instruments:

Although YPF does not use derivative instruments to hedge the effects of fluctuations in market prices, as of December 31, 2006, the Company maintains a price swap agreement that hedges the fair value of the crude oil future committed deliveries under the forward crude oil sale agreement mentioned in Note 9.c (“hedged item”). Under this price swap agreement the Company will receive variable selling prices, which will depend upon market prices and will pay fixed prices. As of December 31, 2006, approximately 3 million of barrels of crude oil are hedged under this agreement.

This fair value hedge is carried at fair value and is disclosed in the “Net advances from crude oil purchasers” account in the balance sheet. Changes in fair value are recognized in earnings together with the offsetting loss or gain from changes in the fair value of the hedged item caused by the risk being hedged. As hedge relationship is effective, changes in the fair value of this derivative instrument and of the hedged item do not have effect on net income.

 

k) Shareholders’ equity accounts:

These accounts have been stated in Argentine pesos as detailed in Note 1.a, except for “Subscribed Capital” account, which is stated at its historical value. The adjustment required to state this account in constant Argentine pesos is disclosed in the “Adjustment to Contributions” account.

The account “Deferred earnings” includes the effect generated by the foreign companies’ translation and the changes in the fair value of effective cash flow hedges of jointly controlled companies.

 

l) Statements of income accounts:

The amounts included in the income statement accounts have been recorded by applying the following criteria:

 

  Accounts which accumulate monetary transactions at their face value.

 

  Cost of sales has been calculated by computing units sold in each month at the replacement cost of that month.

 

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  Depreciation of nonmonetary assets, valued at acquisition cost, has been recorded based on the restated cost of such assets as detailed in Note 1.a.

 

  Holding gains (losses) on inventories valued at replacement cost have been included in the “Holding gains on inventories” account.

 

  Income (Loss) on long-term investments in which control, joint control or significant influence is held, has been calculated on the basis of the income (loss) of those companies and was included in the “Income on long-term investments” account.

3. ANALYSIS OF THE MAIN ACCOUNTS OF THE FINANCIAL STATEMENTS

Details regarding significant accounts included in the accompanying financial statements are as follows:

Balance Sheet accounts as of December 31, 2006 and Comparative Information

Assets

a) Investments:

 

      2006     2005     2004  
     Current     Noncurrent     Current     Noncurrent     Current     Noncurrent  

Short-term investments and government securities

   552 (1)(2)   —       176 (1)   —       180 (1)   —    

Long-term investments (Exhibit C)

   —       2,659     —       2,544     —       2,665  

Allowance for reduction in value of holdings in long-term investments (Exhibit E)

   —       (25 )   —       (185 )   —       (325 )
                                    
   552     2,634     176     2,359     180     2,340  
                                    

(1) Include 550, 161 and 167 as of December 31, 2006, 2005 and 2004, respectively, with an original maturity of less than three months.
(2) Accrues interest at annual fixed rates between 4.75% and 10.10%.

b) Trade receivables:

 

      2006    2005    2004
     Current     Noncurrent    Current     Noncurrent    Current     Noncurrent

Accounts receivable

   2,061     44    2,008     51    1,779     71

Related parties (Note 7)

   496     —      447     —      510     —  
                                
   2,557 (1)   44    2,455     51    2,289     71

Allowance for doubtful trade receivables (Exhibit E)

   (419 )   —      (370 )   —      (347 )   —  
                                
   2,138     44    2,085     51    1,942     71
                                

(1) Includes 275 in litigation, 27 one to three months past due, 187 in excess of three months past due, 2.047 due within three months and 21 due after three months.

 

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c) Other receivables:

 

      2006     2005     2004  
     Current     Noncurrent     Current     Noncurrent     Current     Noncurrent  

Deferred income tax (Note 3.k)

   —       500     —       443     —       405  

Tax credits and export rebates

   588     16     496     16     299     17  

Trade

   70     —       31     —       20     —    

Prepaid expenses

   76     64     54     90     42     128  

Concessions charges

   17     88     17     96     19     105  

Related parties (Note 7)

   4,199 (3)   —       2,830     267     2,516     617  

Loans to clients

   12     69     11     90     10     87  

From joint ventures and other agreements

   46     —       1     —       6     —    

Trust contribution under Decree No. 1,882/04

   —       —       273     —       66     —    

Miscellaneous

   224     140     201     137     220     124  
                                    
   5,232 (1)   877 (2)   3,914     1,139     3,198     1,483  

Allowance for other doubtful accounts (Exhibit E)

   (116 )   —       (119 )   —       (122 )   —    

Allowance for valuation of other receivables to their estimated realizable value (Exhibit E)

   —       (51 )   —       (54 )   —       (70 )
                                    
   5,116     826     3,795     1,085     3,076     1,413  
                                    

(1) Includes 50 of less than three months past due, 171 in excess of three months past due and 5,011 due as follows: 3,391 from one to three months, 728 from three to six months, 782 from six to nine months and 110 from nine to twelve months.
(2) Includes 750 due from one to two years, 24 due from two to three years and 103 due after three years.
(3) Includes 979 with Repsol YPF, S.A., which accrues interest at a rate of 3% plus a variable spread, 1,302 with Repsol International Finance B.V. that accrues variable interest at LIBOR plus 0.2%, 1,305 with Repsol YPF Brasil S.A. which accrues variable interest at LIBOR plus 1.5% and 577 with YPF Holdings Inc. that accrues variable interest at LIBOR plus 0.4%.

d) Inventories:

 

     2006    2005    2004

Refined products

   946    660    558

Crude oil and natural gas

   430    394    346

Products in process

   47    18    9

Raw materials and packaging materials

   99    92    92
              
   1,522    1,164    1,005
              

 

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e) Fixed assets:

 

     2006     2005     2004  

Net book value of fixed assets (Exhibit A)

   20,942     20,546     19,141  

Allowance for unproductive exploratory drilling (Exhibit E)

   (3 )   (3 )   (16 )

Allowance for obsolescence and assets to be disposed of (Exhibit E)

   (46 )   (48 )   (47 )
                  
   20,893     20,495     19,078  
                  

Liabilities

f) Accounts payable:

 

     2006     2005     2004
     Current     Noncurrent     Current     Noncurrent     Current    Noncurrent

Trade

   2,425     17     1,792     20     1,417    22

Hydrocarbon wells abandonment obligations

   233 (3)   2,198     —       1,419     —      648

Related parties (Note 7)

   247     —       417     —       330    —  

Investment in controlled company – YPF Holdings Inc.

   705     —       460     —       309    —  

From joint ventures and other agreements

   256     —       200     —       136    —  

Environmental liabilities (Note 9.b)

   93     164     48     200     45    96

Miscellaneous

   9     46     121     —       5    2
                                 
   3,968 (1)   2,425 (2)   3,038     1,639     2,242    768
                                 

(1) Includes 3,665 due within three months, 258 due from three to six months and 45 due after six months.
(2) Includes 581 due from one to two years and 1,844 due after two years.
(3) Corresponds to the hydrocarbon wells abandonment obligations associated with other current assets (Note 2.d).

g) Loans:

 

     Interest
Rates(1)
    Principal
Maturity
   2006   

2005

   2004
        Current    Noncurrent    Current    Noncurrent    Current    Noncurrent

Negotiable Obligations(2)

   7.75 - 10.00 %   2007 - 2028    559    509    27    1,031    29    1,078

Other bank loans and other creditors (3)

   1.25 - 5 %   2007 - 2008    254    1    270    76    85    154

Subordinated liability with shareholders (Note 4)

   —       —      —      —      —      —      13    —  
                                  
        813    510    297    1,107    127    1,232
                                  

(1) Annual interest rates as of December 31, 2006.
(2) Disclosed net of 873, 864 and 784, corresponding to YPF outstanding negotiable obligations repurchased through open market transactions as of December 31, 2006, 2005 and 2004, respectively.
(3) Includes 79 which accrues variable interest at annual rate of LIBO plus 1.60% and 176 that accrues fixed interest at annual rates between 1.25% and 5%.

 

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The maturities of the Company’s current and noncurrent loans, as of December 31, 2006, are as follows:

 

     From 1
to 3 months
   From 3
to 6 months
   From 6
to 9 months
   From 9
to 12 months
   Total

Current loans

   206    35    571    1    813
                        
          From 1
to 2 years
   From 2
to 3 years
  

Over

5 years

   Total

Noncurrent loans

      1    310    199    510
                      

Details regarding the Negotiable Obligations of the Company are as follows:

 

M.T.N. Program

   Issuance    Fixed
Interest
Rates
    Principal
Maturity
   Book Value

(in millions)

              2006    2005    2004
     Year    Principal
Value
              Current    Noncurrent    Current    Noncurrent    Current    Noncurrent

U$S 1.000

   1997    U$ S 300    7.75 %   2007    546    —      14    527    14    518

U$S 1.000

   1998    U$ S 100    10.00 %   2028    3    199    3    197    3    194

U$S 1.000

   1999    U$ S 225    9.13 %   2009    10    310    10    307    12    366
                                        
              559    509    27    1,031    29    1,078
                                        

In connection with the issuance of the Negotiable Obligations, the Company has agreed for itself and its controlled companies to certain covenants, including among others, to pay all liabilities at their maturity and not to create other encumbrances that exceed 15% of total consolidated assets. If the Company does not comply with any covenant, the trustee or the holders of not less than 25% in aggregate principal amount of each outstanding Negotiable Obligations may declare the principal and accrued interest immediately due and payable.

Financial debt contains customary covenants for contracts of this nature, including negative pledge, material adverse change and cross-default clauses. Almost all of YPF’s total outstanding debt is subject to cross-default provisions, which may be triggered if an event of default occurs with respect to the payment of principal or interest on indebtedness equal to or exceeding US$ 20 million.

The Shareholders’ Meeting held on April 19, 2005, approved a Notes Program for an amount up to US$ 700 million. The proceeds of these offerings will be used to refinance liabilities, to invest in working capital and in fixed assets in Argentina and in related companies for the same purposes. Notes could be issued with or without guarantee. Board of Directors was delegated in order to determine terms, conditions and characteristics of each issuance.

h) Net advances from crude oil purchasers:

 

     2006     2005     2004  
     Current     Noncurrent     Current     Noncurrent     Current     Noncurrent  

Advances from crude oil purchasers

   412     152     398     527     644     1,466  

Derivative instruments - Crude oil price swaps

   (316 )   (145 )   (303 )   (426 )   (380 )   (832 )
                                    
   96     7 (1)   95     101     264     634  
                                    

(1) With final maturity from one to two years.

 

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Statement of Income Accounts as of December 31, 2006 and Comparative Information

 

     Income (Expense)  
     2006     2005     2004  

i) Net sales:

      

Sales

   24,964     22,356     19,350  

Turnover tax

   (440 )   (355 )   (286 )

Hydrocarbon export withholdings

   (807 )   (693 )   (616 )
                  
   23,717     21,308     18,448  
                  

j) Other expense, net:

      

Reserve for pending lawsuits and other claims

   (128 )   (180 )   (534 )

Miscellaneous

   102     (143 )   (131 )
                  
   (26 )   (323 )   (665 )
                  

k) Income tax:

      

Current income tax

   (2,534 )   (3,190 )   (3,091 )

Deferred income tax

   57     38     239  
                  
   (2,477 )   (3,152 )   (2,852 )
                  

The reconciliation of pre-tax income at the statutory tax rate, to the income tax as disclosed in the income statements for the years ended December 31, 2006, 2005 and 2004 is as follows:

 

     2006     2005     2004  

Net income before income tax

   6,934     8,514     7,759  

Statutory tax rate

   35 %   35 %   35 %
                  

Statutory tax rate applied to net income before income tax

   (2,427 )   (2,980 )   (2,716 )

Effect of the restatement into constant Argentine pesos

   (383 )   (346 )   (353 )

Income on long-term investments

   182     68     82  

Non taxable foreing source income

   25     14     5  

Tax free income – Law No. 19,640 (Tierra del Fuego)

   81     46     42  

Miscellaneous

   45     46     88  
                  
   (2,477 )   (3,152 )   (2,852 )
                  

 

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The breakdown of the net deferred tax asset as of December 31, 2006, 2005 and 2004, is as follows:

 

     2006     2005     2004  

Deferred tax assets

      

Exchange differences from devaluation of Argentine peso – Law No. 25,561

   —       49     99  

Non deductible allowances and reserves

   707     624     425  

Tax return credit

   42     —       —    

Miscellaneous

   5     135     258  
                  

Total deferred tax assets

   754     808     782  
                  

Deferred tax liabilities

      

Fixed assets

   (238 )   (345 )   (258 )

Miscellaneous

   (16 )   (20 )   (119 )
                  

Total deferred tax liabilities

   (254 )   (365 )   (377 )
                  

Net deferred tax asset

   500     443     405  
                  

As explained in Note 2.g, the difference between the book value of fixed assets restated into constant Argentine pesos and their corresponding historical cost used for tax purposes, at the current tax rate, is a deferred tax liability of 1,603, 1,986 and 2,332 as of December 31, 2006, 2005 and 2004, respectively. Had this deferred tax liability been recorded, the amount charged to income for the year ended December 31, 2006 would have been 383. The Company estimates that the difference will be reversed as follows:

 

     2007    2008    2009
Thereafter
   Total

Deferred income tax

   329    460    814    1,603
                   

4. CAPITAL STOCK

The Company’s subscribed capital, as of December 31, 2006, is 3,933 and is represented by 393,312,793 shares of common stock and divided into four classes of shares (A, B, C and D), with a par value of Argentine pesos 10 and one vote per share. These shares are fully subscribed, paid-in and authorized for stock exchange listing.

As of December 31, 2006, Repsol YPF controls the Company, directly and indirectly, through a 99.04% shareholding. Repsol YPF’s legal address is Paseo de la Castellana 278, 28046 Madrid, Spain.

Repsol YPF’s principal business is the exploration, development and production of crude oil and natural gas, transportation of petroleum products, liquefied petroleum gas and natural gas, petroleum refining, production of a wide range of petrochemicals and marketing of petroleum products, petroleum derivatives, petrochemicals, liquefied petroleum gas and natural gas.

 

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As of December 31, 2006, the Argentine Government holds 1,000 Class A shares. So long as any Class A share remains outstanding, the affirmative vote of such shares is required for: 1) mergers, 2) acquisitions of more than 50% of the Company’s shares in an agreed or hostile bid, 3) transfers of all the Company’s production and exploration rights, 4) the voluntary dissolution of YPF or 5) change of corporate and/or tax address outside the Argentine Republic. Items 3) and 4) will also require prior approval by the Argentine Congress.

According to General Resolution No. 466/2004 from the CNV, the Company converted irrevocable contributions into a subordinated liability disclosed in “Loans” account of the balance sheet as of December 31, 2004. On April 29, 2005, this liability was cancelled with the shareholders in proportion to their stockholdings.

5. RESTRICTED ASSETS AND GUARANTEES GIVEN

As of December 31, 2006, YPF has signed guarantees in relation to the financing activities of Pluspetrol Energy S.A. and Central Dock Sud S.A. in an amount of approximately US$ 31 million and US$ 91 million, respectively. The corresponding loans have final maturity in 2011 and 2013, respectively.

6. PARTICIPATION IN JOINT VENTURES AND OTHER AGREEMENTS

As of December 31, 2006, the exploration and production joint ventures and the main other agreements in which the Company participates are the following:

 

Name and Location

   Ownership
Interest
 

Operator

  

Activity

Acambuco

Salta

   22.50%   Pan American Energy LLC    Exploration and production

Aguada Pichana

Neuquén

   27.27%   Total Austral S.A.    Exploration and production

Aguaragüe

Salta

   30.00%   Tecpetrol S.A.    Exploration and production

Bandurria

Neuquén

   27.27%   YPF S.A.    Exploration

CAM-2/A SUR

Tierra del Fuego

   50.00%   Sipetrol S.A.    Production

CAM-3

National Continental Shelf

   50.00%   Sipetrol S.A.    Exploration

Campamento Central /Cañadón Perdido

Chubut

   50.00%   YPF S.A.    Exploration and production

CCA-1 GAN GAN

Chubut

   50.00%   Wintershall Energía S.A.    Exploration

CGSJ-V/A

Chubut

   50.00%   Wintershall Energía S.A.    Exploration

El Tordillo

Chubut

   12.20%   Tecpetrol S.A.    Exploration and production

Filo Morado

Neuquén

   50.00%   YPF S.A.    Generation of power electricity

La Tapera y Puesto Quiroga

Chubut

   12.20%   Tecpetrol S.A.    Production

Llancanello

Mendoza

   51.00%   YPF S.A.    Exploration and production

 

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Name and Location

   Ownership
Interest
   

Operator

  

Activity

Magallanes

Santa Cruz, Tierra del Fuego and

National Continental Shelf

   50.00 %   Sipetrol S.A.    Production

Palmar Largo

Formosa

   30.00 %   Pluspetrol S.A.    Production

Puesto Hernández

Neuquén and Mendoza

   61.55 %   Petrobras Energía S.A.    Production

Ramos

Salta

   15.00 %(1)   Pluspetrol Energy S.A.    Production

San Roque

Neuquén

   34.11 %   Total Austral S.A.    Exploration and production

Tierra del Fuego

Tierra del Fuego

   30.00 %   Petrolera L.F. Company S.R.L.    Production

Zampal Oeste

Mendoza

   70.00 %   YPF S.A.    Exploration and production

(1) Additionally, YPF has a 27% indirect ownership interest through Pluspetrol Energy S.A.

As of December 31, 2006, the Company has been awarded the bids on its own or with other partners and received exploration permits for acreage in several areas.

The assets and liabilities as of December 31, 2006, 2005 and 2004 and productions cost of the joint ventures and other agreements for the years ended December 31, 2006, 2005 and 2004 included in the financial statements are as follows:

 

     2006    2005    2004

Current assets

   537    75    84

Noncurrent assets

   2,199    2,109    1,912
              

Total assets

   2,736    2,184    1,996
              

Current liabilities

   404    279    197

Noncurrent liabilities

   343    186    137
              

Total liabilities

   747    465    334
              

Production costs

   1,098    894    775
              

Participation in joint ventures and other agreements have been calculated based upon the last available financial statements as of the end of each year, taking into account significant subsequent events and transactions as well as available management information.

 

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7. BALANCES AND TRANSACTIONS WITH RELATED PARTIES

The principal outstanding balances as of December 31, 2006, 2005 and 2004 from transactions with controlled companies, jointly controlled companies, companies under significant influence, the parent company and other related parties under common control are as follows:

 

     2006    2005    2004
     Trade
receivables
   Other
receivables
   Accounts
payable
   Trade
receivables
   Other receivables    Accounts
payable
   Trade
receivables
   Other receivables    Accounts
payable
     Current    Current    Current    Current    Current    Noncurrent    Current    Current    Current    Noncurrent    Current
Controlled companies:                                 

Operadora de Estaciones de Servicios S.A.

   18    8    17    17    —      —      9    16    —      —      10

A-Evangelista S.A.

   —      —      42    —      3    —      58    —      7    —      41

YPF Holdings Inc.

   —      577    6    —      130    —      2    —      —      —      —  

Argentina Private Development Company Limited

   —      —      44    —      —      —      44    —      —      —      44
                                                      
   18    585    109    17    133    —      113    16    7    —      95
                                                      
Jointly controlled companies:                                 

Profertil S.A.

   10    —      4    9    —      —      8    6    1    —      34

Compañía Mega S.A. (“Mega”)

   170    1    —      178    —      —      —      157    2    —      —  

Refinería del Norte S.A. (“Refinor”)

   94    18    13    77    —      —      25    72    —      —      26

Petroken

   —      —      —      —      —      —      —      38    —      —      1
                                                      
   274    19    17    264    —      —      33    273    3    —      61
                                                      
Companies under significant influence:    43    —      33    38    4    —      45    114    1    —      46
                                                      
Parent company and other related parties under common control:                                 

Repsol YPF

   —      979    22    —      1,404    —      83    —      1,305    —      26

Repsol YPF Transporte y Trading S.A.

   72    —      34    29    —      —      30    30    —      —      28

Repsol YPF Gas S.A.

   34    5    2    18    1    —      1    16    21    32    —  

Repsol YPF Gas Chile Ltda.

   —      —      —      —      —      —      —      —      4    323    —  

Repsol YPF Brasil S.A.

   12    1,305    —      15    18    267    19    11    18    262    18

Repsol International Finance B.V.

   —      1,302    —      —      1,252    —      —      —      1,137    —      —  

Repsol YPF E&P de Bolivia S.A.

   —      —      —      —      2    —      69    —      —      —      36

Others

   43    4    30    66    16    —      24    50    20    —      20
                                                      
   161    3,595    88    128    2,693    267    226    107    2,505    617    128
                                                      
   496    4,199    247    447    2,830    267    417    510    2,516    617    330
                                                      

The Company maintains purchase, sale and financing transactions with related parties. The prices and rates of these transactions approximate the amounts charged to unrelated third parties. The principal purchase, sale and financing transactions with these companies for the years ended December 31, 2006, 2005 and 2004, include the following:

 

     2006    2005    2004  
     Sales    Purchases
and
services
   Granted
loans
(debit)
credit
    Interest
gains
(losses)
   Sales    Purchases
and
services
   Granted
loans
(debit)
credit
    Interest
gains
(losses)
   Sales    Purchases
and
services
   Granted
loans
(debit)
credit
   Interest
gains
(losses)
 
Controlled companies:                                  

Operadora de Estaciones de Servicios S.A.

   25    152    —       —      18    131    —       —      15    96    —      —    

A - Evangelista S.A.

   4    284    —       —      2    243    —       —      —      131    —      —    

YPF Holdings Inc.

   —      —      (446 )   22    —      2    (126 )   1    —      —      —      —    
                                                               
   29    436    (446 )   22    20    376    (126 )   1    15    227    —      —    
                                                               
Jointly controlled companies:                                  

Profertil S.A.

   59    105    —       —      65    70    —       —      67    130    35    —    

Mega

   1,014    1    —       —      829    —      —       —      611    —      25    (1 )

Refinor

   400    157    —       —      313    175    —       —      266    140    —      —    

Petroken

   —      —      —       —      87    3    —       —      181    5    —      —    
                                                               
   1,473    263    —       —      1,294    248    —       —      1,125    275    60    (1 )
                                                               
Companies under significant influence:    152    217    —       —      245    262    —       —      564    244    —      —    
                                                               

 

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     2006    2005    2004
   Sales    Purchases
and
services
   Granted
loans
(debit)
credit
    Interest
gains
(losses)
   Sales    Purchases
and
services
   Granted
loans
(debit)
credit
    Interest
gains
(losses)
   Sales    Purchases
and
services
   Granted
loans
(debit)
credit
   Interest
gains
(losses)

Parent company and other related

parties under common control:

                                 

Repsol YPF

   —      7    350     67    —      16    —       56    —      20    185    51

Repsol YPF Transporte y Trading S.A.

   923    654    —       —      546    508    —       —      636    155    —      —  

Repsol YPF Brasil S.A.

   97    —      (1,011 )   69    72    —      —       11    70    5    —      14

Repsol YPF Gas S.A.

   210    5    —       —      192    4    53     5    193    2    17    7

Repsol International Finance B.V.

   —      —      (41 )   47    —      —      (100 )   46    —      —      2,602    31

Repsol YPF E&P de Bolivia S.A.

   1    446    —       —      2    323    —       —      —      160    —      —  

Repsol YPF Chile Ltda.

   —      —      —       —      —      —      306     20    —      —      —      —  

Others

   157    11    —       —      205    1    —       —      185    10    —      18
                                                             
   1,388    1,123    (702 )   183    1,017    852    259     138    1,084    352    2,804    121
                                                             
   3,042    2,039    (1,148 )   205    2,576    1,738    133     139    2,788    1,098    2,864    120
                                                             

8. SOCIAL AND OTHER EMPLOYEE BENEFITS

 

a) Performance Bonus Programs:

These programs cover certain YPF and its controlled companies’ personnel. These bonuses are based on compliance with business unit objectives and performance. They are calculated considering the annual compensation of each employee, certain key factors related to the fulfillment of these objectives and will be paid in cash.

The amount charged to expense related to the Performance Bonus Programs was 38, 32 and 29 for the years ended December 31, 2006, 2005 and 2004, respectively.

 

b) Retirement Plan:

Effective March 1, 1995, the Company established a defined contribution retirement plan that provides benefits for each employee who elects to join the plan. Each plan member will pay an amount between 2% and 9% of his monthly compensation and the Company will pay an amount equal to that contributed by each member.

The plan members will receive the Company’s contributed funds before retirement only in the case of voluntary termination under certain circumstances or dismissal without cause and additionally in the case of death or incapacity. YPF has the right to discontinue this plan at any time, without incurring termination costs.

The total charges recognized under the Retirement Plan amounted to approximately 9, 9 and 5 for the years ended December 31, 2006, 2005 and 2004, respectively.

9. COMMITMENTS AND CONTINGENCIES

 

a) Pending lawsuits and contingencies:

As of December 31, 2006, the Company has recorded the pending lawsuits, claims and contingencies which are probable and can be reasonably estimated. The most significant pending lawsuits and contingencies reserved are described in the following paragraphs.

 

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- Pending lawsuits: In the normal course of its business, the Company has been demanded in numerous labor, civil and commercial actions and lawsuits. Management, in consultation with the external counsels, has reserved an allowance considering its best estimation, based on the information available as of the date of the issuance of these financial statements, including counsel fees and judicial expenses.

 

- Liquefied petroleum gas market: On March 22, 1999, YPF was notified of Resolution No. 189/1999 from the former Department of Industry, Commerce and Mining of Argentina, which imposed a fine on the Company of 109, stated in Argentine pesos as of that date, based on the interpretation that YPF had purportly abused of its dominant position in the bulk liquefied petroleum gas (“LPG”) market due to the existence of different prices between the exports of LPG and the sales to the domestic market from 1993 through 1997. In July 2002, the Argentine Supreme Court confirmed the fine and YPF carried out the claimed payment.

Additionally, Resolution No. 189/1999 provided the beginning of an investigation in order to prove whether the penalized behavior continued from October 1997 to March 1999. On December 19, 2003, the National Antitrust Protection Board (the “Antitrust Board”) imputed the behavior of abuse of dominant position during the previously mentioned period to the Company. On January 20, 2004, the Company answered the notification: (i) opposing the preliminary defense claiming the application of the statutes of limitation and alleging the existence of defects in the imputation procedure (absence of majority in the resolution that decided the imputation and pre-judgment by its signers); (ii) arguing the absence of abuse of dominant position; and (iii) offering the corresponding evidence.

The request of invalidity by defects in the imputation procedure mentioned above was rejected by the Antitrust Board. This resolution of the Antitrust Board was confirmed by the Economic Penal Appellate Court, and it was confirmed, on September 27, 2005, pursuant to the Argentine Supreme Court’s rejection of the complaint made by YPF due to the extraordinary appeal denial.

Additionally, on August 31, 2004, YPF filed an appeal with the Antitrust Board in relation to the resolution that denied the claim of statutes of limitation. The Antitrust Board conceded the appeal and remitted proceedings for its resolution by the Appeal Court. However, in March 2006, YPF was notified that the proceedings were opened for the production of evidence.

Despite the solid arguments expressed by YPF, the mentioned circumstances make evident that, preliminary, the Antitrust Board denies the defenses filed by the Company and that it is reluctant to modify the doctrine provided by the Resolution No. 189/1999 and, furthermore, the Court of Appeals decisions tend to confirm the decisions made by the Antitrust Board.

 

- Tax claims: On January 31, 2003, the Company received a claim from the Federal Administration of Public Revenue (“AFIP”), stating that the sales corresponding to forward oil sale agreements entered into by the Company, should have been subject to an income tax withholding. On March 8, 2004, the AFIP formally communicated to YPF the claim for approximately 45 plus interests and fines. Additionally, on June 24, 2004, YPF received a new formal claim from the AFIP, considering that the services related to these contracts should have been taxed with the value added tax. Consequently, during 2004, YPF presented its defense to the AFIP rejecting the claims and arguing its position. However, on December 28, 2004, the Company was formally communicated of a resolution from the AFIP confirming its original position in both claims. The Company has appealed such resolution in the National Fiscal Court.

 

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In addition, the Company has received several claims from the AFIP and from the provincial and municipal fiscal authorities.

 

- Liabilities and contingencies assumed by the Argentine Government: YPF Privatization Law provided for the assumption by the Argentine Government of certain liabilities of the predecessor as of December 31, 1990. In certain lawsuits related to events or acts that took place before December 31, 1990, YPF has been required to advance the payment established in certain judicial decisions. YPF has the right to be reimbursed for these payments by the Argentine Goverment pursuant to the above-mentioned indemnity. As of December 31, 2006, all claims related to the predecessor presented to the Company have been or are in the process of being formally notified to the Argentine Government.

 

- Natural gas market:

Export sales: Pursuant to Resolution No. 265/2004 of the Secretary of Energy, the Argentine Government created a program of useful curtailment of natural gas exports and their associated transportation service. Such Program was initially implemented by means of Regulation No. 27/2004 of the Under-Secretary of Fuels, which was subsequently substituted by the Program of Rationalization of Gas Exports and Use of Transportation Capacity (the “Program”) approved by Resolution No. 659/2004 of the Secretary of Energy. Additionally, Resolution No. 752/2005 of the Secretary of Energy provided that industrial users and thermal generators (which according to this resolution will have to request volumes of gas directly from the producers) could also acquire the natural gas from the cutbacks on natural gas export through the Permanent Additional Injections mechanism created by this resolution. By means of the Program and/or the Permanent Additional Injection, the Argentine Government, requires natural gas exporting producers to deliver additional volumes to the domestic market in order to satisfy natural gas demand of certain domestic consumers of the Argentine market (“Additional Injection Requirements”). Such additional volumes are not contractually committed by YPF, who is thus forced to affect natural gas exports, which execution has been conditioned. Pursuant to Resolution No. 1,886/2006 of the Secretary of Energy the program was extended until December 31, 2016. As a result of the Program and the mentioned resolutions, in several occasions since 2004, YPF has been forced to reduce, either totally or partially, its natural gas deliveries to some of its export clients, with whom YPF has undertaken long-term firm commitments to deliver natural gas.

The Company has challenged the Program, the Permanent Additional Injection and the Additional Injection Requirements, as arbitrary and illegitimate, and has invoked vis-à-vis the relevant clients that such measures of the Argentine Government constitute a force majeure event (act of authority) that releases the Company from any liability and/or penalty for the failure to deliver the contractual volumes. A large number of clients have rejected the force majeure argument invoked by the Company, demanding the payment of indemnifications and/or penalties for the failure to comply with firm supply commitments, and/or reserving their rights to future claims in such respect.

Electroandina S.A and Empresa Eléctrica del Norte Grande S.A. (“Edelnor”) have rejected the force majeure argument invoked by the Company and have invoiced the penalty stipulated under the “deliver of pay” clause of the contract as of November 2006 for total amount of US$ 41 million. The invoices have been rejected by the Company. Furthermore the above mentioned companies have notified the formal start-up period of negotiations previous to any arbitration demand. In addition, YPF has been notified of an arbitration demand from Innergy Soluciones Energéticas (“Innergy”). The Company has answered the arbitration complaint, and has filed a counterclaim based on the hardship provisions (“teoría de la imprevisión”) of the Argentine Civil Code. As of December 31, 2006 the nomination of the Arbitral Court is still in process. The damages claimed by Innergy amount to US$ 24 million plus interests. Such amount might be increased if Innergy incorporates to the demand penalties related to periods subsequent to June 2006.

 

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Domestic sales: Central Puerto S.A. has claimed YPF for cutbacks in natural gas supply pursuant to their respective contracts. The Company has formally denied such breach, based on the fact that, pending the restructuring of such contracts, is not obliged to confirm nominations of natural gas to those clients during certain periods of the year.

As of December 31, 2006, the Company has reserved costs for penalties associated with the failure to deliver the contractual volumes of natural gas in the export and domestic markets which are probable and can be reasonably estimated. The costs for contractual penalties related to future natural gas cutbacks will be assessed when they occur.

 

- La Plata environmental claims: There are certain claims that require a compensation for individual damages purportedly caused by the operation of the La Plata Refinery and the environmental remediation of the western channel adjacent to the mentioned refinery. During year 2006, the Company submitted a presentation before the Environmental Ministry of the Province of Buenos Aires which put forward for consideration the performance of a study for the characterization of environmental associated risks. As previously mentioned YPF has the right of indemnity for events and claims previous to January 1, 1991, according to Law No. 22,145 and Decree No. 546/1993.

Additionally, YPF’s Management, in consultation with its external counsels, believes that the following contingencies and claims, individually significant, have possible outcome:

 

- Arbitration with Empresa Nacional de Electricidad S.A. (“ENDESA”): In January, 2005, YPF was notified of a request made by ENDESA for an arbitration to resolve a dispute relating to an alleged breach of a contractual clause in an export contract signed in June 2000. The clause was related to the increase of natural gas deliveries and ENDESA has requested payment of damages. Such an increase on the original maximum contracted volumes were subject to, among other things, getting the export permits from the Secretary of Energy before December, 2002. The export permit was not obtained by YPF. The contract term is for 15 years and establishes that a compensation for non-delivery may not exceed US$ 9 million per year but, under certain circumstances, such limit could be increased in US$ 9 million in addition per year. Notwithstanding the forgoing, ENDESA’s claim exceeds this limit and amounts to US$ 354 million, alleging a deceitful conduct on the part of YPF. The Company requested the rejection of this claim.

 

- Availability of foreign currency deriving from exports: Decree Nº 1,589/1989 of the Federal Executive provides that, producers enjoying free availability of crude oil, natural gas and/or liquefied gas under Law No. 17,319 and its supplemented Decrees and producers that may agree so in the future will have free availability of the percentage of foreign currency coming from the exports of crude oil, petroleum derivatives, natural gas and/or liquefied gas of free availability established in biddings and/or renegotiations, or agreed-upon in the respective contracts. In no cases will the maximum freely available percentage be allowed to exceed 70% of each transaction.

During year 2002, several government organizations considered that free availability of foreign currency provided by Decree No. 1,589/1989 was implicitly abolished by Decree No. 1,606/2001.

On December 31, 2002, Decree No. 2,703/2002 was enforced, ratifying such date the 70% limit as the maximum freely available percentage of forign currency deriving from the exports of crude oil and petroleum derivatives, without providing a conclusion in regards to the exports performed during the year 2002, after the issuance of Decree No. 1,606/2001.

 

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In the assumption of an eventual Central Bank’s liquidation request of foreign currency deriving from the exports of hydrocarbons during the period between the issuance of Decree No. 1,606/01 and the enforcement of Decree No. 2,703/2002, YPF has the right to administratively discuss such decision, as well as to request an injunction within the judicial procedure.

 

- Asociación Superficiarios de la Patagonia (“ASSUPA”): On August 21, 2003, ASSUPA sued the companies operating exploitation concessions and exploration permits in the Neuquén Basin, YPF being one of them, claiming the remediation of the general environmental damage purportedly caused in the execution of such activities, and if it is not possible to constitute an environmental restoration fund and the implementation of measures to prevent environmental damages in the future. The plaintiff requested that the National Government, the Federal Environmental Council (“Consejo Federal de Medio Ambiente”), the provinces of Buenos Aires, La Pampa, Neuquén, Río Negro and Mendoza and the Ombudsman of the Nation be summoned. It requested, as a preliminary injunction, that the defendants refrain from carrying out activities affecting the environment. Both the Ombudsman’s summon as well as the requested preliminary injunction were rejected by the Supreme Court of Justice of Argentina. YPF is preparing it’s plea and will require the summon of the National Government, due to it’s obligation to indemnify YPF for events and claims previous to January 1, 1991, according to Law No. 22,145 and Decree 546/1993.

 

- Dock Sud environmental claims: Without being notified, YPF has information regarding that a group of neighbours of Dock Sud, Province of Buenos Aires, have sued 44 companies, among which YPF is included, the National Government, the Province of Buenos Aires, the City of Buenos Aires and 14 municipalities, before the Supreme Court of Justice of Argentina, seeking the remediation and the indemnification of the environmental collective damage produced in the basin of the Matanza and Riachuelo rivers. Additionally, another group of neighbours of the Dock Sud area, would have filed two other environmental lawsuits, not yet notified to YPF, claiming several companies located in that area, among which YPF is included, the Province of Buenos Aires and several municipalities, for the remediation and the indemnification of the environmental collective damage of the Dock Sud area and for the individual damage they claim to have suffered. YPF has the right of indemnity by the Argentine Government for events and claims previous to January 1, 1991, according to Law No. 22,145 and Decree No. 546/1993.

 

- Customs claims: During 2006 Custom Offices from Neuquen and Comodoro Rivadavia notified the Company the beginning of indictments due to alleged formal faults YPF had committed in the export permit forms issued in relation to the crude oil future commitment sales. YPF´s Management, in consultation with its legal counsels, believes these claims are without merit.

Additionally, YPF has received labor, civil and commercial claims and several claims from the AFIP and from several provincial and municipal fiscal authorities, which have not been reserved since Management, based on the evidence available to date and upon the opinion of its external counsels, has considered them to be possible contingencies.

 

b) Environmental liabilities:

YPF is subject to various provincial and national laws and regulations relating to the protection of the environment. These laws and regulations may, among other things, impose liability on companies for the cost of pollution clean-up and environmental damages resultin