FORM
6-K
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
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:
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):
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):
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:
If “Yes”
is marked, indicate below the file number assigned to the
registrant
in
connection with Rule 12g3-2(b): N/A
This Form
6-K is incorporated by reference into the registration statement on Form F-3/A
of YPF Sociedad Anónima filed with the Securities and Exchange Commission on
March 10, 2008 (File No. 333-149313).
YPF
Sociedad Anónima
TABLE OF
CONTENTS
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1
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Update
of Selected Financial and Operating Data
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2
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Update
of Management’s Discussion and Analysis of Financial Condition and Results
of Operations
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3
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Update
of Legal Proceedings
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4
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Other
Recent Developments
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5
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Condensed
Consolidated Financial Statements
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ITEM
1. UPDATE
OF SELECTED FINANCIAL AND OPERATING DATA
The
following tables present our selected financial and operating data. You should
read this information in conjunction with our audited consolidated financial
statements included in our amended Annual Report on Form 20-F/A
for the year ended December 31, 2007, as filed on October 20, 2008 (the “2007
20-F”), our unaudited interim financial statements included as Item 5 in this
report, and their respective notes, as well as the information under “Update of
Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in this report. All financial data included in this report as of
June 30, 2008 and for the six-month periods ended June 30, 2008 and 2007 is
unaudited. Results for the six-month period ended June 30, 2008 are not
necessarily indicative of results to be expected for the full year 2008 or any
other period.
The
financial data as of December 31, 2007, 2006 and 2005 and for the years then
ended is derived from our audited consolidated financial statements included in
our 2007 20-F (the “Audited Consolidated Financial Statements”). The financial
data as of June 30, 2008 and for the six-month periods ended June 30, 2008 and
2007 is derived from our unaudited interim financial statements, which are
included in this report (the “Unaudited Interim Financial Statements”). The
Unaudited Interim Financial Statements reflect all adjustments which, in the
opinion of our management, are necessary to present the financial statements for
such periods on a consistent basis with the Audited Consolidated Financial
Statements. Our Unaudited Interim Financial Statements have been prepared in
accordance with generally accepted accounting principles in Argentina, which we
refer to as Argentine GAAP and which differ in certain significant respects from
generally accepted accounting principles in the United States, which we refer to
as U.S. GAAP. Notes 6,7 and 8 to our Unaudited Interim Financial Statements
provide a description of the significant differences between Argentine GAAP and
U.S. GAAP, as they relate to us, and a reconciliation to U.S. GAAP of net income
for the six-month periods ended June 30, 2008 and 2007 and shareholders’ equity
as of June 30, 2008 and December 31, 2007.
In
this report, except as otherwise specified, references to “$,” “U.S.$” and
“dollars” are to U.S. dollars, and references to “Ps.” and “pesos” are to
Argentine pesos. Solely for the convenience of the reader, peso amounts as of
and for the six-month period ended June 30, 2008 have been translated into U.S.
dollars at the exchange rate quoted by the Central Bank on June 30, 2008 of Ps.3.03 to U.S.$1.00, unless otherwise specified. The
exchange rate quoted by the Central Bank on June 30, 2008 was Ps.3.03 to
U.S.$1.00. The U.S. dollar equivalent information should not be construed to
imply that the peso amounts represent, or could have been or could be converted
into U.S. dollars at such rates or any other rate. See “Item 3. Key
Information—Exchange Rates” in our 2007 20-F.
Certain
figures included in this report have been subject to rounding adjustments.
Accordingly, figures shown as totals may not sum due to rounding.
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As
of and for Six-Month Period Ended June 30,
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(in
millions of U.S.$, except for per share and per ADS data)
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(in
millions of pesos, except for per share and per ADS data)
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Consolidated
Income Statement Data:
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Argentine
GAAP(1)
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Net
sales(2)(3)
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5,427 |
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16,443 |
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13,099 |
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Gross
profit
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1,829 |
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5,542 |
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4,800 |
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Administrative
expenses
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(142 |
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(429 |
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(361 |
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Selling
expenses
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(364 |
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(1,102 |
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(992 |
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Exploration
expenses
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(72 |
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(218 |
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(247 |
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Operating
income
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1,252 |
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3,793 |
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3,200 |
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Income
on long-term investments
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22 |
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67 |
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29 |
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Other
expenses, net
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(80 |
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(241 |
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(18 |
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Interest
expenses
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(62 |
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(189 |
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(145 |
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Other
financial income (expenses) and holding gains (losses),
net
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151 |
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459 |
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319 |
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Reversal
of impairment of other current assets
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- |
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69 |
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Income
before income tax
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1,283 |
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3,889 |
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3,454 |
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Income
tax
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(540 |
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(1,635 |
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(1,310 |
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Net
income
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744 |
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2,254 |
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2,144 |
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Earnings
per share and per ADS(4)
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1.89 |
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5.73 |
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5.45 |
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Dividends
per share and per ADS(4) (in pesos)
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n.a.
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17.26 |
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6.00 |
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Dividends
per share and per ADS(4)(5) (in U.S. dollars)
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n.a.
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5.45 |
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1.93 |
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U.S.
GAAP
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Operating
income
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917 |
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2,777 |
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2,742 |
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Net
income
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496 |
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1,504 |
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1,915 |
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Earnings
per share and per ADS(4) (in pesos)
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1.26 |
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3.82 |
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4.87 |
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Other
Consolidated Financial Data:
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Argentine
GAAP(1)
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Fixed
assets depreciation
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675 |
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2,046 |
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2,012 |
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Cash
used in fixed asset acquisitions
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929 |
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2,816 |
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2,529 |
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Current
liquidity (Current assets divided by current liabilities)
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n.a.
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0.902 |
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1.554 |
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Solvency
(Net worth divided by total liabilities)
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n.a.
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1.410 |
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2.111 |
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Capital
Immobilization (Non-current assets divided by total
assets)
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n.a.
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0.763 |
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0.718 |
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Non-GAAP
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EBITDA(6)
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1,996 |
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6,049 |
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5,451 |
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EBITDA
margin(7)
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37 |
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37 |
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42 |
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(in
millions of U.S.$)
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(in
millions of pesos)
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Consolidated
Balance Sheet Data:
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Argentine
GAAP(1)
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Cash
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35 |
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105 |
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Working
capital
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(312 |
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(944 |
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Total
assets
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12,133 |
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36,764 |
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Total
debt(8)
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1,073 |
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3,252 |
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Shareholders’
equity(9)
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7,099 |
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21,511 |
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U.S.
GAAP
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Total
assets
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12,466 |
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37,771 |
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Shareholders’
equity(9)
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7,605 |
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23,043 |
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(1)
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The
financial statements reflect the effect of changes in the purchasing power
of money by the application of the method for inflation adjustment into
constant Argentine pesos set forth in Technical Resolution No. 6 of the
Argentine Federation of Professional Councils in Economic Sciences
(“F.A.C.P.C.E.”) and taking into consideration General Resolution No. 441
of the National Securities Commission (“CNV”), which established the
discontinuation of the inflation adjustment of financial statements into
constant Argentine pesos as from March 1, 2003. See Note 1 to the
Unaudited Interim Financial
Statements.
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(2)
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Includes
Ps.903 million for the six-month period ended June 30, 2008 and Ps.647
million for the six-month period ended June 30, 2007 corresponding to the
proportional consolidation of the net sales of investees jointly
controlled by us and third parties. See Note 6( b) to the Unaudited
Interim Financial Statements.
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(3)
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Net
sales are net to us after payment of a fuel transfer tax, turnover tax and
customs duties on hydrocarbon exports. Royalties with respect to our
production are accounted for as a cost of production and are not deducted
in determining net sales. See Note 2(f) to the Unaudited Interim Financial
Statements.
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(4)
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Information
has been calculated based on outstanding capital stock of 393,312,793
shares. Each ADS represents one Class D Share. There were no differences
between basic and diluted earnings per share and ADS for any of the years
disclosed.
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(5)
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Amounts
expressed in U.S. dollars are based on the exchange rate as of the date of
payment. For periods in which more than one dividend payment was made, the
amounts expressed in U.S. dollars are based on exchange rates at the date
of each payment.
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(6)
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EBITDA
is calculated by excluding interest gains on assets, interest losses on
liabilities, income tax and depreciation of fixed assets from our net
income. For a reconciliation of EBITDA to net income, see “—EBITDA
reconciliation.”
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(7)
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EBITDA
margin is calculated by dividing EBITDA by our net
sales.
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(8)
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Total
debt under Argentine GAAP includes nominal amounts of long-term debt of
Ps.650 million as of June 30, 2008.
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(9)
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Our
subscribed capital as of June 30, 2008 is represented by 393,312,793
shares of common stock and divided into four classes of shares, with a par
value of Ps.10 and one vote per share. These shares are fully subscribed,
paid-in and authorized for stock exchange
listing.
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EBITDA
reconciliation
EBITDA is
calculated by excluding interest gains on assets, interest losses on
liabilities, income tax and depreciation of fixed assets from our net income.
Our management believes that EBITDA is meaningful for investors
because it
is one of the principal measures used by our management to compare our results
and efficiency with those of other similar companies in the oil and gas
industry, excluding the effect on comparability of variations in depreciation
and amortization resulting from differences in the maturity of their oil and gas
assets. EBITDA is also a measure commonly reported and widely used by analysts,
investors and other interested parties in the oil and gas industry. EBITDA is
not a measure of financial performance under Argentine GAAP or U.S. GAAP and may
not be comparable to similarly titled measures used by other companies. EBITDA
should not be considered an alternative to operating income as an indicator of
our operating performance, or an alternative to cash flows from operating
activities as a measure of our liquidity.
The
following table presents, for each of the periods indicated, our EBITDA
reconciled to our net income under Argentine GAAP.
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For
the Six-Month Period Ended June 30,
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(in
millions of pesos)
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Net
income
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2,254 |
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2,144 |
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Interest
gains on assets
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(75 |
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(160 |
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Interest
losses on liabilities
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189 |
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145 |
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Depreciation
of fixed assets
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2,046 |
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2,012 |
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Income
tax
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1,635 |
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1,310 |
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EBITDA
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6,049 |
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5,451 |
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Production
and other operating data
The
following table presents certain of our production and other operating data as
of or for the six-month periods indicated.
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Average
daily production for the period
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Oil
(mbbl)
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307 |
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335 |
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Gas
(mmcf)
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1,653 |
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1,743 |
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Total
(mboe)
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601 |
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645 |
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Refining
capacity
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Capacity
(mbbl/d)(1)
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320 |
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320 |
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(1)
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Excluding
Refinor, which has a refining capacity of 26 mbbl/d and in which we have a
50% interest.
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ITEM
2. UPDATE OF MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with, and is qualified in its
entirety by reference to, our Unaudited Interim Financial
Statements.
Overview
We are
Argentina’s leading energy company, operating a fully integrated oil and gas
chain with leading market positions across the domestic upstream and downstream
segments. Our upstream operations consist of the exploration, development and
production of crude oil, natural gas and liquefied petroleum gas. Our downstream
operations include the refining, marketing, transportation and distribution of
oil and a wide range of petroleum products, petroleum derivatives,
petrochemicals, liquefied petroleum gas and bio-fuels. Additionally, we are
active in the gas separation and natural gas distribution sectors both directly
and through our investments in several affiliated companies. In the six-month
period ended June 30, 2008, we had consolidated net sales of Ps.16,443 million
(U.S.$5,427 million) and consolidated net income of Ps.2,254 million (U.S.$744
million).
Most of
our predecessors were state-owned companies with operations dating back to the
1920s. In November 1992, the Argentine government enacted the Privatization Law
(Law No. 24,145), which established the procedures for our privatization. In
accordance with the Privatization Law, in July 1993, we completed a worldwide
offering of 160 million Class D shares that had previously been owned by the
Argentine government. As a result of that offering and other transactions, the
Argentine government’s ownership interest in our capital stock was reduced from
100% to approximately 20% by the end of 1993.
Since
1999, we have been controlled by Repsol YPF, an integrated oil and gas company
headquartered in Spain with global operations. Repsol YPF owned approximately
99% of our capital stock from 2000 until February 21, 2008, when Petersen
Energía purchased 58,603,606 of our ADSs, representing 14.9% of our capital
stock, from Repsol YPF for U.S.$2,235 million. In addition, Repsol YPF also
granted options to Enrique Eskenazi, Sebastián Eskenazi, Ezequiel Eskenazi
Storey and Matías Eskenazi Storey, shareholders of Petersen Energía, or to
companies that are, directly or indirectly, wholly-controlled by any of them
(the “Option Beneficiaries”) to purchase up to an additional 10.1% of our
outstanding capital stock within four years. On May 20, 2008, Petersen Energía
Inversora S.A. (“PEISA”) exercised an option to purchase shares representing
0.1% of our capital stock, which will close upon the fulfillment of certain
requirements. Additionally, PEISAlaunched a tender offer to purchase all of the
shares of YPF that were not already owned by them at a price of U.S.$ 49.45 per
share or ADS. Repsol, pursuant to its first option agreement with Petersen
Energía, had stated that it would not tender YPF shares to PEISA. The offer
period commenced on September 11, 2008 and expired on October 20, 2008. A total
of 461,868 shares, representing approximately 0.117% of our total shares
oustanding, have been tendered. The settlement will close upon the fulfillment
of certain requirements. We believe that the Petersen entities’
participation in our capital stock and management will strengthen our Argentine
ties and expertise.
Upstream
Operations
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We
operate more than 70 oil and gas fields in Argentina, accounting for
approximately 42% of the country’s total production of crude oil,
excluding natural gas liquids, and approximately 42% of its total natural
gas production, including natural gas liquids, in 2007, and approximately
40.5% and 41% of total crude oil and natural gas production, respectively,
in the six-month period ended June 30, 2008, according to information
provided by the Secretariat of
Energy.
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We
had proved reserves, as estimated as of December 31, 2007, of
approximately 623 mmbbl of oil and 3,708 bcf of gas, representing
aggregate reserves of 1,283 mmboe.
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In
2007, we produced 120 mmbbl of oil (329 mbbl/d) and 635 bcf of gas
(1,740 mmcf/d) and, in the six-month period ended June 30, 2008, we
produced 56 mmbbl of oil (307 mbbl/d) and 301 bcf of gas
(1,653 mmcf/d). In the second quarter of 2008, as a consequence of a
strike which affected our operations in the South of Argentina, our oil
production decreased by approximately 3.4
mmbbl.
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Downstream
Operations
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·
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We
are Argentina’s leading refiner with operations conducted at three wholly
owned refineries with combined annual refining capacity of approximately
116 mmbbl (319.5 mbbl/d). We also have a 50%
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·
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interest
in Refinor, an entity jointly controlled with and operated by Petrobras
Energía S.A., which has a refining capacity of 26.1
mbbl/d.
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·
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Our
retail distribution network for automotive petroleum products as of June
30, 2008 consisted of 1,663 YPF-branded service stations, which we
estimate represented approximately 31.0% of all service stations in
Argentina.
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·
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We
are one of the leading petrochemical producers in Argentina and in the
Southern Cone of Latin America, with operations conducted through our
Ensenada and Plaza Huincul sites. In addition, Profertil S.A.
(“Profertil”), a company that we jointly control with Agrium Investments
Spain S.L. (“Agrium”), is one of the leading producers of urea in the
Southern Cone.
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Presentation
of Financial Information
We prepare
our Unaudited Interim Financial Statements in accordance with Argentine GAAP,
which differ in certain significant respects from U.S. GAAP. Notes 6, 7 and 8 to
the Unaudited Interim Financial Statements provide a summary of the effect of
these significant differences on net income and shareholders’ equity under
Argentine GAAP and U.S. GAAP.
We fully
consolidate the results of subsidiaries in which we have a sufficient number of
voting shares to control corporate decisions and proportionally consolidate the
results of companies that we control jointly. The financial information
corresponding to Refinor and Profertil, both jointly controlled entities,
includes the last financial information approved by those companies, which in
each case corresponds to a date and period ending three months prior to the date
of our consolidated financial statements; however, such information, if
material, is adjusted according to applicable accounting principles to reflect
these companies’ results as of the date of the issuance of our consolidated
financial statements.
Under
Argentine GAAP, we currently are not required to record the effects of inflation
in our financial statements. However, because Argentina experienced a high rate
of inflation in 2002, with the wholesale price index increasing by approximately
118%, we were required by Decree No. 1269/2002 and CNV Resolution No. 415/2002
to remeasure our financial statements in constant pesos in accordance with
Argentine GAAP. On March 25, 2003, Decree No. 664/2003 rescinded the requirement
that financial statements be prepared in constant currency, effective for
financial periods on or after March 1, 2003. According to the Argentine statistics and census agency
(Instituto Nacional
de Estadísticas y
Censos, or “INDEC”), the wholesale price index
increased 7.9% in 2004, 10.6% in 2005, 7.1% in 2006, 14.4% in 2007, and, based
on preliminary data, 6.3% in the six-month period ended June 30,
2008. As a result, our results of operations
and financial position may not be directly comparable from period to period. We
cannot assure you that in the future we will not be again required to record the
effects of inflation in our financial statements (including those covered by the
financial statements included in this report) in constant pesos. See “—Critical
Accounting Policies—U.S. GAAP Reconciliation” for an explanation of how the
effect of inflation is treated under U.S. GAAP.
Additionally,
certain oil and gas disclosures as of December 31, 2007 are included in the
Audited Consolidated Financial Statements included in our 2007 20-F under the
heading “Supplemental information on oil and gas producing activities
(unaudited).”
Segment
Reporting
We
organize our business into the following four segments: (i) exploration and
production, which includes exploration and production activities, natural gas
and crude oil purchases, sales of natural gas, and to a lesser extent crude oil,
to third parties and intersegment sales of crude oil, natural gas and its
byproducts and to a lesser extent electric power generation (“Exploration and
Production”); (ii) the production, transport, purchase and marketing of refined
products that we sell to third parties and other segments of our business
(“Refining and Marketing”); (iii) the production, transport and marketing of
petrochemical products (“Chemical”); and (iv) other activities not falling into
the previously described categories (“Corporate and Other”), principally
including corporate administration costs and assets, construction activities and
environmental remediation activities related to YPF Holdings Inc.
Sales
between business segments are made at internal transfer prices established by
us, which generally seek to approximate market prices.
Summarized
Income Statement
|
|
|
For
the Six-Month Period Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of pesos)
|
|
|
Net
sales
|
|
|
16,443 |
|
|
|
13,099 |
|
|
Cost
of sales
|
|
|
(10,901 |
) |
|
|
(8,299 |
) |
|
Gross
profit
|
|
|
5,542 |
|
|
|
4,800 |
|
|
Administrative
expenses
|
|
|
(429 |
) |
|
|
(361 |
) |
|
Selling
expenses
|
|
|
(1,102 |
) |
|
|
(992 |
) |
|
Exploration
expenses
|
|
|
(218 |
) |
|
|
(247 |
) |
|
Operating
income
|
|
|
3,793 |
|
|
|
3,200 |
|
|
Income
on long-term investments
|
|
|
67 |
|
|
|
29 |
|
|
Other
expenses, net
|
|
|
(241 |
) |
|
|
(18 |
) |
|
Financial
income, net and holding gains
|
|
|
270 |
|
|
|
174 |
|
|
Income
from sale of long-term investments
|
|
|
— |
|
|
|
— |
|
|
Reversal
(impairment) of other assets
|
|
|
— |
|
|
|
69 |
|
|
Net
income before income
tax
|
|
|
3,889 |
|
|
|
3,454 |
|
|
Income
tax
|
|
|
(1,635 |
) |
|
|
(1,310 |
) |
|
Net
income
|
|
|
2,254 |
|
|
|
2,144 |
|
Factors
Affecting Our Operations
Our
operations are affected by a number of factors, including:
|
·
|
the
volume of crude oil, oil byproducts and natural gas we produce and
sell;
|
|
·
|
domestic
price limitations;
|
|
·
|
export
restrictions and domestic supply
requirements;
|
|
·
|
international
prices of crude oil and oil
products;
|
|
·
|
our
capital expenditures;
|
|
·
|
inflation
and cost increases;
|
|
·
|
domestic
market demand for hydrocarbon
products;
|
|
·
|
taxes,
including export taxes;
|
|
·
|
the
Argentine peso/U.S. dollar exchange
rate;
|
|
·
|
dependence
on the infrastructure and logistics network used to deliver our
products;
|
|
·
|
laws
and regulations affecting our operations;
and
|
Our
margins and, prior to 2008, our consolidated operating profits have recently
trended downwards. This has principally been the result of: production declines
and increased asset depreciation principally due to the increasing maturity of
our oil and gas fields; increases in other operating costs, due in part to
higher domestic demand and local market supply obligations (which required us to
purchase certain hydrocarbon inputs from third parties); inflation and higher
labor costs; and limitations on our ability to offset those increased costs due
to, among other things, domestic limitations on the prices at which we sell gas
and refined products.
Our
operating income in the six-month period ended June 30, 2008 increased 18.5%
compared to the corresponding period in 2007, mainly as a result of increases in
our domestic diesel and gasoline prices, and increased volumes of those products
sold, which more than offset significant increases in the cost of our production
that were driven by upward price pressures in the Argentine economy, a decline
in our production caused by labor strikes in our Southern operations, purchases
of crude oil from third parties in order to maintain our level of refining
activity, the continuing maturity of our fields, and higher export taxes and
declining export volumes driven by requirements to satisfy domestic demand at
prices which are substantially lower than international market prices before
export taxes.
Macroeconomic
conditions
The Argentine economy has experienced
significant volatility in recent decades, characterized by periods of low or
negative growth and high variable levels of inflation. Inflation reached its
peak in the late 1980s and
early 1990s. The annual inflation rate as measured by the consumer price index
was approximately 388% in 1988, 4,924% in 1989 and 1,344% in 1990. Due to
inflationary pressures prior to the 1990s, the Argentine currency was devalued
repeatedly and macroeconomic instability led to
broad fluctuations in the real exchange rate of the Argentine currency relative
to the U.S. dollar. To address these pressures, past Argentine governments
implemented various plans and utilized a number of exchange rate systems.
With the enactment of the Convertibility
Law in 1991, inflation declined progressively and the Argentine economy enjoyed
seven years of growth. In the fourth quarter of 1998, adverse international
financial conditions caused the Argentine economy to enter into a recession and GDP to
decrease, in real terms, by 3.4% in 1999, 0.8% in 2000 and 4.4% in 2001.
By the end of 2001,
Argentina suffered a profound deterioration in
social and economic conditions, accompanied by high political and economic
instability. The
restrictions on the withdrawal of bank deposits, the imposition of exchange
controls, the suspension of the payment of Argentina’s public debt and the abrogation of the
peso’s one-to-one peg to the dollar (with the
consequent depreciation of
the peso against the dollar) caused a decline in economic activity. Real GDP
declined by 10.9% in 2002, annual inflation rose to 41%, the exchange rate
continued to be highly volatile, and the unemployment rate rose to more than
20%. The political and economic instability not only curtailed
commercial and financial activities in Argentina but also severely restricted the
country’s access to international
financing.
Strong economic growth in the
world’s developed economies and favorable raw
material pricing from 2003
through 2008 paved the way for Argentina’s economic recovery. Real GDP grew by
8.7% in 2003, 9.0% in 2004, 9.2% in 2005, 8.5% in 2006 and 8.7% in 2007.
Real GDP continued to grow
in the first half of 2008, though at a slower rate. According to the Central
Bank of Argentina estimates, real GDP is expected to grow
by 6.5% in 2008.
Public finances both at national and
provincial levels recorded a consolidated primary surplus of approximately 5.5%
of GDP in 2004,
4.5% in 2005, 3.5% in 2006
and 3.2% in
2007.
The annual wholesale price index,
according to the INDEC, increased by 2% in 2003, 7.9% in 2004, 10.6% in 2005,
7.1% in 2006, 14.4% in 2007 and, based on preliminary data, 6.3% in the
six-month period ended June 30, 2008. According to a recent report published by the International
Monetary Fund (“IMF”), however, most private sector analysts
believe that actual inflation is considerably higher than reflected in official
data. The government’s main strategy to fight increasing
inflation has been the establishment of agreed price controls
with private companies.
With its economic recovery well under
way, in 2005, Argentina successfully completed the restructuring of a
substantial portion of its bond indebtedness and cancelled all of its debt with
the IMF. The country is
working to renegotiate the remaining portion of its external public debt and to
resolve the claims brought before international courts by foreign companies
affected during the crisis. The Argentine government recently
announced that it would repay U.S.$6,700 million in “Paris Club”
debt.
Global
macroeconomic conditions have a direct effect on economic conditions in
Argentina and, in particular, on Argentine domestic energy consumption trends.
Global economic growth remained solid during the first half of 2007, but the
downside risks and uncertainty surrounding growth prospects have recently
increased. Latin America continued to expand vigorously, driven by strong
commodity prices and growing domestic demand. However, there are some signs that
the improved fundamentals may erode if certain regulatory policies are not
strengthened. Fiscal and external surpluses are forecast to weaken in many
countries, and inflation has been rising, exacerbated by rising international
food prices, as output has come closer to potential.
After
several years of consistent growth, at the end of 2007 and in the first half of
2008 the global economy has demonstrated preliminary signs of deceleration.
Demand deceleration in many developed economies, as well as increasing inflation
levels worldwide and financial problems in certain sectors of developed
countries’ economies,
including
the United States, has resulted in the downward revisions of global economic
growth forecasts. During the first half of 2008, liquidity has become tighter in
financial markets despite the efforts by the world’s principal monetary
authorities, including the United States Federal Reserve, to facilitate
liquidity and support certain struggling financial institutions to maintain
systemic confidence. According to recent outlooks published by the IMF, global
growth is expected to suffer a significant deceleration in the second
half of 2008, with a gradual recovery commencing in
2009.
Until
August 2008, the U.S. dollar had continued to depreciate against the euro and a
broad range of other currencies, including those of emerging market countries.
The exchange market pressures in emerging economies have generally been
reflected in exchange rate appreciation, rapid accumulation of international
reserves and strong domestic credit growth.
Worldwide
oil prices continued to increase during 2007 and the first half of 2008,
reaching a high over U.S.$145 per barrel (WTI) in July 2008, driven by strong
demand, the decrease in the United States’ reserves, the decrease in the value
of the U.S. dollar, and social and political conflicts in producing areas. Some
analysts believe that speculative factors stemming from the increased investment
in commodities as a shelter against the financial crisis may also have affected
recent commodity price increases. WTI prices have decreased to U.S. $ 66.36 per
barrel by October 22, 2008, driven in part by decreasing demand from certain
developing countries as well as decreased consumption in certain developed
countries.
In
Argentina, higher WTI market prices (and the higher prices of refined products)
have resulted in the highest increase in petroleum import prices in the last
decade, according to information published by the Argentine Central Bank.
Argentine domestic fuel prices have increased in the six-month period ended June
30, 2008, compared to the same period in 2007, but have not kept pace with the
increases in international market prices for petroleum products due to
regulatory constraints. See “—Differences between Argentine and international
prices for hydrocarbon products.”
The recent
increases in international petroleum product prices, which have not yet been
fully reflected in Argentine prices for petroleum products, may create
additional inflationary pressures, as the inflationary effect of such price
increases on other consumer sectors has yet to be fully felt. Furthermore,
countries that are net importers of hydrocarbon fuels, such as Argentina, could
also suffer slower economic growth and deteriorating internal and external
fiscal accounts as a result of the increased costs of subsidies and decreased
tax collections.
During the
first half of 2008, conflicts in certain sectors of the Argentine economy,
including blockades by agricultural producers in response to an export tax
increase and strikes by oil workers, have affected the development and
productivity of these and related sectors. Even though economic growth continued
in the first half of 2008, it showed signs of weakening, mainly in the second
quarter of 2008, as a result of decreasing consumption, according to the
Argentine Central Bank.
Total
exports from Argentina increased by 20% year over year (“YoY”) to U.S.$55,933
million in 2007, mainly driven by an increase in exports of agricultural
products, while imports increased by 31% in the same period due to higher growth
in consumption and investment. The trade surplus decreased by 9.4%, falling from
U.S.$12,306 million in 2006 to U.S.$11,154 million in 2007. According to
preliminary INDEC data, in the first half of 2008, the Argentine trade balance
continued to post a surplus, though that trade surplus was approximately 6%
lower than in the first half of 2007. This downward trend was due mainly to
increases in the volume and prices of imported assets, particularly capital
assets, fuels and lubricants and passenger vehicles. Argentine exports grew at a
slower pace in the first half of 2008 than during the same period of 2007 mainly
on account of slower growth in the export of agricultural products resulting
mainly from trade disruption caused by the blockades by agricultural producers
mentioned above.
According
to INDEC, the unemployment rate corresponding to the first quarter of 2008
showed that 8.4% of the active population was unemployed, 0.9 percentage points
higher than the 7.5% rate in the fourth quarter of 2007. Average real wages of
the economy increased by 13% (YoY) between December 2006 and December 2007,
according to INDEC’s inflation rate based on the consumer price index (8.5%).
During the first half of 2008, salary pressures in the Argentine economy have
resulted in wage hikes of approximately 20% (YoY) in nominal terms in several
sectors, according to the Argentine Central Bank.
The
Argentine Central Bank continued its policy of accumulating international
reserves and maintaining a competitive exchange rate during 2007. Central Bank
reserves were at U.S.$46 billion at the end of the year, and the peso/dollar
buying exchange rate increased to Ps.3.15 per dollar, a 2.9% (YoY) nominal
depreciation. The real exchange rate of the Argentine peso against a basket of
currencies, measured using INDEC’s inflation rate based on the consumer price
index, showed a 10% real depreciation throughout the year. As of June 30, 2008,
Argentine Central Bank reserves reached U.S.$47.5 billion. The exchange rate of
the Argentine peso against the U.S dollar declined from Ps.3.15/ U.S.$1.00 as of
December 31, 2007 to Ps.3.03 /U.S.$1.00 as of June 30, 2008.
Government
fiscal revenues increased by 33% (YoY in nominal terms) in 2007 and
extraordinary revenues of Ps.7,814 million were generated as a result of pension
reform, but an even higher rise in public expenditures (46%) led to a reduction
in the national primary fiscal surplus from 3.5% of GDP in 2006 to 3.2% of GDP,
in 2007. According to the Argentine Central Bank, fiscal revenues continued to
increase in the first half of 2008 (38% YoY in nominal terms) driven mainly by
increased value added tax (“VAT”), export taxes (which were 93% higher YoY,
driven both by the increase in international commodity prices and the applicable
export rates) and social security collections. In real terms, tax collections
decelerated while primary government expenditures continued to increase at a
fast pace, albeit slower than in 2007. According to the Argentine Central Bank,
fiscal revenues and spending are expected to continue to grow in 2008, with the
national primary fiscal surplus expected to exceed the national budget forecasts
of 3.15% of GDP for the year.
In
relation to public debt, two issues remain pending: (i) a portion of the
defaulted debt that was not included in the 2005 debt swap (the so-called “Paris
Club”), which the Argentine government recently announced it would repay, and
(ii) certain government bondholders have not accepted the government’s debt
restructuring proposal. Standard & Poor’s (S&P) recently
downgraded Argentina's credit rating one notch to “B” while Moody's recently
downgraded its credit watch of Argentina from “positive” to
“stable.”
According
to earlier estimates of the Argentine Central Bank, the Argentine economy was
expected to grow at a faster pace in the second half of 2008 compared to the
first half of 2008, though at a slower pace than that of recent years, driven by
a recovery in exports and higher household spending once expectations and
financial conditions become stable. However, we cannot predict the evolution of
future macroeconomic events, especially in light of the recent turmoil in
international financial markets, or the effect that they are likely to have on
our business, financial condition and results of operations. See “Item 3. Key
Information—Risks Relating to Argentina” in our 2007 20-F.
Energy
consumption in Argentina has increased significantly since 2003, driven in part
by price limitations that have kept Argentine energy prices substantially below
international prices. Continued growth in demand and a particularly harsh winter
in 2007 have recently led to fuel shortages and power outages, prompting the
Argentine government to take additional measures to assure domestic supply. At
the same time, growth in the production of certain hydrocarbon products has
slowed, and in the case of crude oil production has recently declined, due to
Argentina’s maturing oil and gas fields. As a result of this increasing demand
and actions taken by the Argentine regulatory authorities to prioritize domestic
supply, exported volumes of hydrocarbon products, especially natural gas,
declined steadily over this period. At the same time, Argentina has increased
hydrocarbon imports.
The table
below shows Argentina’s total sales, production, exports and imports of crude
oil, natural gas, diesel and gasoline products for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude
Oil in Argentina
|
|
|
|
|
|
|
|
|
|
|
Production
(mmbbl)
|
|
|
234.7 |
|
|
|
240.7 |
|
|
|
243.0 |
|
|
Exports
(mmbbl)
|
|
|
20.8 |
|
|
|
32.0 |
|
|
|
54.6 |
|
|
Imports
(mmbbl)
|
|
|
0.3 |
|
|
|
0.6 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas in Argentina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
(mmcm)(1)
|
|
|
38,532.0 |
|
|
|
36,362.0 |
|
|
|
34,685.0 |
|
|
Production
(mmcm)
|
|
|
51,007.0 |
|
|
|
51,779.0 |
|
|
|
51,573.0 |
|
|
Exports
(mmcm)
|
|
|
1,245.0 |
|
|
|
2,487.0 |
|
|
|
6,600.1 |
|
|
Imports
(mmcm)
|
|
|
1,239.5 |
|
|
|
1,428.5 |
|
|
|
1,610.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel
in Argentina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
(mcm)(2)
|
|
|
14,754.9 |
|
|
|
13,903.4 |
|
|
|
13,074.4 |
|
|
Production
(mcm)
|
|
|
12,915.6 |
|
|
|
12,570.3 |
|
|
|
11,673.4 |
|
|
Exports
(mcm)
|
|
|
46.6 |
|
|
|
108.8 |
|
|
|
276.4 |
|
|
Imports
(mcm)
|
|
|
847.1 |
|
|
|
446.9 |
|
|
|
678.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline
in Argentina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
(mcm)(2)
|
|
|
5,285.6 |
|
|
|
4,608.4 |
|
|
|
4,028.6 |
|
|
Production
(mcm)
|
|
|
5,965.2 |
|
|
|
5,889.3 |
|
|
|
6,043.1 |
|
|
Exports
(mcm)
|
|
|
1,400.9 |
|
|
|
1,732.0 |
|
|
|
2,955.2 |
|
|
Imports
(mcm)
|
|
|
23.0 |
|
|
|
33.2 |
|
|
|
14.1 |
|
|
(1)
|
Includes
total domestic market deliveries.
|
|
(2)
|
Includes
domestic market sales.
|
|
|
Sources:
Argentine Secretariat of Energy and Ente Nacional Regulador del Gas
(ENARGAS)
|
Policy
and regulatory developments in Argentina
The
Argentine oil and gas industry is currently subject to: (i) certain governmental
policies and regulations that have resulted in: domestic prices that are
substantially lower than prevailing international market prices; (ii) export
restrictions; (iii) domestic supply requirements that oblige us from time to
time to divert supplies from the export or industrial markets in order to meet
domestic consumer demand; and (iv) increasingly higher export duties on the
volumes of hydrocarbons allowed to be exported. These governmental pricing
limitations, export controls and tax policies have been implemented in an effort
to satisfy increasing domestic market demand at prices below international
market prices. As discussed in “Item 3. Key Information—Risk Factors” of our
2007 20-F and elsewhere in this report, actions by the Argentine government have
had and will continue to have a significant effect on Argentine companies,
including us.
Policy and
regulatory developments relating to the oil and gas industry in Argentina
include, among others:
|
·
|
Price limitations. In
order to support economic growth, the Argentine government has sought to
limit increases in hydrocarbons prices through a number of policies and
measures. As a result, Argentina’s domestic hydrocarbon prices have not
increased at the pace of international and regional prices, as described
in “—Differences between Argentine and international prices for
hydrocarbon products.”
|
|
·
|
Export restrictions.
Since 2004, the Argentine government has prioritized domestic demand and
adopted policies and regulations restricting the export of certain
hydrocarbon products. These restrictions have impacted our export sales as
described in “—Declining export
volumes.”
|
|
·
|
Export duties. Since
the economic crisis in 2002, the Argentine government has imposed export
taxes on certain hydrocarbon products. These taxes have increased
substantially in the following years as international prices have surged.
For a description of the most recent export duties on hydrocarbon exports,
see “—International oil and gas prices and Argentine export
taxes.”
|
|
·
|
Domestic supply
requirements. The Argentine government has at times issued
regulatory orders requiring producers to inject natural gas in excess of
contractual commitments and supply other hydrocarbon products to the
domestic market. As a result, we have had to limit our exports.
In
|
|
|
addition,
we have imported diesel in order to satisfy domestic demand, which has
increased our operating costs, as described in “—Increasing cost of
sales.”
|
|
·
|
Energy Substitution
Program. The Argentine Secretariat of Energy, by Resolution SE No.
459/07 of July 12, 2007, created the “Energy Substitution Program” (Programa de Energía
Total), which is designed to mitigate shortages of natural gas and
electricity by encouraging industrial users to substitute natural gas and
electricity during the Argentine winter with imported diesel, fuel oil and
LPG subsidized by the government. Resolution No. 121/08 of the Department
of Federal Planning, Public Investment and Services extended the Energy
Substitution Program until December 31, 2008, and Rule No. 30/08 of the
Sub-Secretary of Coordination and Control, issued on April 1, 2008,
approved the general plans for implementation of the Energy Substitution
Program. See “Item 4. Information on the Company—Regulatory Framework and
Relationship with the Argentine Government—Market Regulation—Refined
Products” in our 2007 20-F. Under this program, we and other companies
import diesel, fuel oil and LPG that we then sell to industrial users in
Argentina at the prevailing domestic natural gas prices, with the
difference refunded to us by the Argentine government. As a result, this
program has the effect of increasing our net sales and volumes sold, but
is operating income-neutral since we do not earn any margin on products
sold under this program.
|
|
·
|
Gas Plus. The Argentine
Secretariat of Energy, by Resolution SE No. 24/08 of March 13, 2008,
created the “Gas Plus” program to encourage the production of natural gas
from newly discovered reserves, new fields and tight gas, among other
sources. Natural gas produced under the Gas Plus program will not be
subject to the prices set forth in the Agreement 2007-2011 regarding the
supply of natural gas to the domestic market during the period 2007
through 2011. See “Item 4. Information on the Company—Regulatory Framework
and Relationship with the Argentine Government—Market Regulation—Natural
Gas” in our 2007 20-F.
|
Declining
export volumes
The
exported volumes of many of our hydrocarbon products have declined significantly
in recent years, driven mainly by increasing domestic demand and export
restrictions, as well as by declines in production. This shift from exports to
domestic sales has impacted our results of operations as the prices for
hydrocarbons in the domestic market have, due to price limitations, generally
not kept pace with international and regional prices.
The table
below presents, for the periods indicated, the exported volumes of certain of
our principal hydrocarbon products.
|
|
|
Six-Month
Period Ended
June
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
(mcm)
|
|
|
257 |
|
|
|
231 |
|
|
|
425 |
|
|
|
874 |
|
|
|
1,776 |
|
|
Natural
gas (mmcm)
|
|
|
285 |
|
|
|
1,126 |
|
|
|
1,358 |
|
|
|
3,090 |
|
|
|
3,071 |
|
|
Diesel
(mcm)
|
|
|
91 |
|
|
|
75 |
|
|
|
133 |
|
|
|
149 |
|
|
|
327 |
|
|
Gasoline
(mcm)
|
|
|
508 |
|
|
|
696 |
|
|
|
1,272 |
|
|
|
1,695 |
|
|
|
2,385 |
|
|
Fuel
oil (mtn)
|
|
|
558 |
|
|
|
633 |
|
|
|
1,187 |
|
|
|
903 |
|
|
|
696 |
|
|
Petrochemicals
(mtn)
|
|
|
247 |
|
|
|
351 |
|
|
|
689 |
|
|
|
700 |
|
|
|
749 |
|
Due to the
decreased export product volumes indicated above and increasing export duties,
the portion of our net sales accounted for by exports decreased steadily between
2005 and 2008. Exports accounted for 25.3%, 31.8%, 28.9%, 33.7% and
37.7% of our consolidated net sales in the six-month periods ended June 30, 2008
and 2007, and in 2007, 2006 and 2005, respectively.
The
Argentine government’s current policy is not to allow any exports of natural gas
other than to the residential sector in certain other countries. In addition,
the Argentine government requires companies intending to export crude oil,
diesel and LPG to obtain prior authorization from the Secretariat of Energy by
demonstrating that local demand for those products has been satisfied. Since
2005, because domestic diesel production has generally not been sufficient to
satisfy Argentine consumption needs, exports of diesel have been substantially
restricted.
Differences
between Argentine and international prices for hydrocarbon products
Domestic
prices for our products have fallen significantly below international prices as
a result of regulatory policies that have resulted in limitations on our ability
to increase domestic prices sufficiently to keep pace with international market
prices. The following table sets forth the average prices at which we sold our
principal products in the domestic market (net of taxes passed through to
consumers, such as value added and fuel transfer taxes) for the periods
indicated:
|
|
|
For
the Six-Month Period Ended June 30,
|
|
|
|
|
|
|
|
|
|
Peso
|
|
|
$ |
U.S. |
(1) |
|
Natural
gas(2)(3)
|
|
|
231 |
|
|
|
74 |
|
|
Diesel(4)
|
|
|
1,182 |
|
|
|
379 |
|
|
Gasoline
products(5)
|
|
|
1,124 |
|
|
|
361 |
|
|
(1)
|
Amounts
translated from Argentine pesos at the average exchange rate for the
period.
|
|
(2)
|
Per
thousand cubic meters.
|
|
(3)
|
Reflects
the average of residential prices (which are generally lower than prices
to other segments) and industrial
prices.
|
|
(4)
|
Per
cubic meter. Does not include sales by Refinor, in which we have a 50%
interest and which is proportionally consolidated in our consolidated
financial statements.
|
|
(5)
|
Per
cubic meter. Does not include sales by Refinor, in which we have a 50%
interest, and which is proportionally consolidated in our consolidated
financial statements. The average price shown for each period is the
volume-weighted average price of the various grades of gasoline products
sold by us in the domestic market during such
period.
|
The
disparity between the prices at which hydrocarbon products are sold in Argentina
and the prevailing international prices for such products has been mainly due to
limitations on our ability to pass increases in international prices of crude
oil and hydrocarbon fuels and adverse exchange rate movements through to
domestic prices or to increase local prices of natural gas (in particular for
residential customers), gasoline and diesel. In a framework of increasing
international prices, and notwithstanding our leading market position, domestic
liquid fuel prices remain well below the level consistent with international
prices.
For
example, in June 2008, diesel import prices were approximately U.S.$1,110/cubic
meter, while the average domestic sales prices were approximately U.S.$428/cubic
meter before government subsidies. In addition, the price at which Bolivia
exports natural gas to Argentina (which is purchased by ENARSA) was
approximately U.S.$6/mmBtu in the fourth quarter of 2007 (approximately
U.S.$7.8/mmBtu in the second quarter of 2008), while the price at which we purchase natural gas from ENARSA
was approximately U.S.$1.84/mmBtu and our average sales price in the six-month period ended June 30, 2008
for such gas in
Argentina was approximately U.S.$2.00/mmBtu.
In
addition, pursuant to Resolution 599/2007 of the Secretariat of Energy dated
June 14, 2007 (see “Item 4. Information on the Company—Regulatory Framework and
Relationship with the Argentine Government—Market Regulation—Natural gas” in our
2007 20-F), the Argentine government and gas producers, including us, entered
into an agreement for the supply of certain volumes of gas to each segment of
the domestic market during the period 2007 through 2011. Under this agreement,
we have supplied a total volume of 2,674 million cubic meters of gas from August
through December 2007 (representing 34% of our total gas volume sales for the
same period) to domestic residential and small commercial consumers at a price
of approximately Ps.0.50/mmBtu for that period.
Relative
maturity of our oil and gas assets
Argentina’s
oil and gas fields are mature and, as a result, our reserves and production are
declining as reserves are depleted. Because we mainly have concessions for
mature oil and gas fields that are undergoing natural production declines, it is
difficult to replace our proved reserves from other categories of reserves. In
2007, our estimated proved oil reserves and oil production declined by 8.38% and
4.76%, respectively, over the preceding year, while our estimated proved gas
reserves and gas production declined by 7.65% and 2.46%, respectively, over the
same period. As a result, in an effort to maintain our high refinery utilization
rates and because of regulatory requirements to supply certain hydrocarbon
products to the domestic market, we purchased crude oil and natural gas from
third parties. In 2007 and 2006, our crude production, substantially all of
which was destined to our refineries, represented approximately 83% and 90%,
respectively, of the total crude oil processed by our refineries. In the
six-month period ended June 30, 2008, it represented 77%, a 6% decline from the
full year 2007, due mainly to a strike that affected our operations in the South
of Argentina and caused our production to decrease by approximately 3.4 mmbbl.
As adjusted for the lost production
resulting
from the strike, we believe our crude oil production would have represented
approximately 82% of the crude processed by our refineries. In 2007 and 2006,
our natural gas production represented approximately 99% and 93%, respectively,
of our total natural gas deliveries, while in the six-month period ended June
30, 2008, almost 100% of such deliveries were satisfied by our production. We
expect our oil and gas proved reserves and production rates to continue their
decline. See “Item 4. Information on the Company—Exploration and Development
Activities—Reserves” in our 2007 20-F for more information on our proved
reserves.
Increasing
cost of sales
Our cost
of sales accounted for 66.3% and 63.4% of our consolidated net sales in the
six-month periods ended June 30, 2008 and 2007, respectively, and 65.3%, 61.7%
and 49.2% of our consolidated net sales in 2007, 2006 and 2005, respectively.
Our cost of sales increased significantly between 2005 and the first half of
2008, mainly as a result of: increased purchases of crude oil from third
parties, driven by our efforts to maintain our high refinery utilization rates
in light of our declining production; increased purchases of natural gas and
diesel from third parties to fulfill our domestic supply requirements and avoid
penalties under certain delivery contracts; higher labor costs; higher costs
related to the renegotiation of certain service contracts; and inflation. Due to
prevailing Argentine price limitations, we were unable to pass many of these
cost increases to our customers in the form of higher hydrocarbon product
prices.
Critical
Accounting Policies
U.S.
GAAP reconciliation
The
difference between our net income under Argentine GAAP and our net income under
U.S. GAAP for the six-month periods ended June 30, 2008 and 2007 is primarily
due to the remeasurement into functional currency and translation into reporting
currency, the elimination of the inflation adjustment into Argentine constant
pesos, the effects of the reorganization of entities under common control, the
impairment of long-lived assets, capitalization of financial expenses,
accounting for assets retirement obligations, proportional consolidation of
investments in jointly controlled companies, and the consolidation of variable
interest entities.
Under
Argentine GAAP, financial statements are presented in constant Argentine pesos
(“reporting currency”). Foreign currency transactions are recorded in Argentine
pesos by applying to the foreign currency amount the exchange rate between the
reporting and the foreign currency at the date of the transaction. Exchange rate
differences arising on monetary items in foreign currency are recognized in the
income statement of the period.
Under U.S.
GAAP, a definition of the functional currency is required which may differ from
the reporting currency. Management has determined, for us and certain of our
subsidiaries and investees, the U.S. dollar to be the functional currency in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52.
Therefore, we have re-measured into U.S. dollars our Unaudited Interim Financial
Statements as of June 30, 2008 and 2007, in each case prepared in accordance
with Argentine GAAP by applying the procedures specified in SFAS No. 52. The
objective of the re-measurement process is to produce the same results that
would have been reported if the accounting records had been kept in the
functional currency. Accordingly, monetary assets and liabilities are
re-measured at the balance sheet date (current) exchange rate. Amounts carried
at prices in past transactions are re-measured at the exchange rates in effect
when the transactions occurred. Revenues and expenses are re-measured on a
monthly basis at the average rates of exchange in effect during the period,
except for consumption of non-monetary assets, which are re-measured at the
rates of exchange in effect when the respective assets were acquired.
Translation gains and losses on monetary assets and liabilities arising from the
re-measurement are included in the determination of net income (loss) in the
period such gains and losses arise. For certain of our subsidiaries and
investees, we have determined the Argentine peso as the functional currency.
Translation adjustments resulting from the process of translating the financial
statements of the mentioned subsidiaries into U.S. dollars are not included in
determining net income and are reported in other comprehensive income (“OCI”),
as a component of shareholders’ equity.
The
amounts obtained from the re-measurement process referred to above are
translated into Argentine pesos under the provisions of SFAS No. 52. Assets and
liabilities are translated at the current selling exchange rate of Ps.3.03 to
U.S.$1.00, as of June 30, 2008. Revenues, expenses, gains and losses reported in
the income statement are translated at the exchange rate existing at the time of
each transaction or, if appropriate, at the weighted average of the exchange
rates during the period. Translation effects of exchange rate changes are
included as a cumulative translation adjustment in shareholders’ equity. For the
six-month periods ended June 30, 2008 and 2007, the re-measurement into
functional currency and the translation into reporting currency decreased net
income determined according to Argentine GAAP by Ps.1,091 million and Ps.641
million, respectively.
Under
Argentine GAAP, we have proportionally consolidated, net of intercompany
transactions, assets, liabilities, net sales, cost and expenses of investees in
which joint control is held. Under U.S. GAAP these investees are accounted for
by the equity method. The proportional consolidation mentioned above generated
an increase of Ps.530 million in total assets and total liabilities as of June
30, 2008, and an increase of Ps.903 million and Ps.647 million in net sales and
Ps.498 million and Ps.331 million in operating income for the six-month periods
ended June 30, 2008 and 2007, respectively.
Under
Argentine GAAP, in order to perform the recoverability test, long-lived assets
are grouped with other assets at business segment level, and they would be
impaired if the discounted cash flows, considered at business segment level,
were less than its carrying value. With respect to assets that were held pending
sale or disposal, our policy was to record these assets on an individual basis
at amounts that did not exceed net realizable value.
Under U.S.
GAAP, for proved oil and gas properties, we perform the impairment test on an
individual field basis. Other long-lived assets are aggregated, so that the
discrete cash flows produced by each group of assets may be separately analyzed.
Each asset is tested following the guidelines of SFAS No. 144, “Accounting for
the Impairment of Long—Lived Assets,” by comparing the net book value of such an
asset with the expected undiscounted cash flow. Impairment losses are measured
as the amount by which the carrying amount of the assets exceeds the fair value
of the assets. When market values are not available, we estimate them using the
expected future cash flows discounted at a rate commensurate with the risks
associated with the recovery of the assets. There were no impairment charges
under U.S. GAAP for the six-month periods ended June 30, 2008 and 2007. The
adjusted book value after impairment under U.S. GAAP results in lower
depreciation of Ps. 74 million and Ps. 85 million for the six-month periods
ended June 30, 2008 and 2007, respectively. Additionally, the reconciliation
adjustment of Ps.16 million for the six-month period ended June 30, 2007
includes a loss of Ps.69 million for the elimination of the reversal of an
impairment charge made under Argentine GAAP, which is not allowed under U.S.
GAAP.
Under U.S. GAAP, only interest expense
on qualifying assets must be capitalized, regardless of the asset’s construction
period. Under Argentine GAAP, for those assets that necessarily take a
substantial period of time to get ready for its intended use, borrowing costs
(including interest and exchange differences) should be capitalized.
Accordingly, borrowing costs for those assets whose construction period exceeds
one year have been capitalized, provided that such capitalization does not
exceed the amount of financial expense recorded in that period or
year.
Under U.S. GAAP, SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the retirement of
tangible long-lived assets
and the associated asset retirement cost. The standard applies to the legal obligation associated with the
retirement of long-lived assets that results from the acquisition, construction,
development and normal use of the asset. Accounting for Assets Retirement
Obligations, requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred, if a reasonable
estimate of fair value can be made. The asset retirement obligations liability
is built up in cash flow layers, with each layer being discounted using the
discount rate as of the date that the layer was created. Remeasurement of the
entire obligation using current discount rates is not permitted. Each cash flow
layer is added to the carrying amount of the associated asset. This additional
carrying amount is then depreciated over the life of the asset. The liability is
increased due to the passage of time based on the time value of money
(“accretion expense”) until the obligation is settled. Argentine GAAP is similar
to SFAS No. 143, except for a change in the discount rate is treated as a change
in estimates, so the entire liability must be recalculated using the current
discount rate, being the change added or reduced from the related
asset.
Under U.S. GAAP, results on
reorganization of entities under common control are eliminated and related
accounts receivables are considered as a capital (dividend) transaction. Under
Argentine GAAP, results on reorganization of entities under common control and
account receivables are recognized in the statement of income and the balance
sheet, respectively.
FIN No. 46R, Consolidation of Variable
Interest Entities, (“FIN 46R”) clarifies the application of Accounting Research
Bulletin No. 51 to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The interpretations explain
how to identify variable interest entities and how an enterprise assesses its
interests in a variable interest entity to decide whether to consolidate that
entity. These interpretations require existing unconsolidated variable interest
entities to be consolidated by their primary beneficiaries if the entities do
not effectively disperse risks among parties involved. Under Argentine GAAP,
consolidation is based on having the votes necessary to
control corporate decisions (Note 1 to the Unaudited Interim Financial
Statements).
Through May 2008, we had operations with one
variable interest entity
(“VIE”), which was created
in order to structure our future deliveries of oil (“FOS transaction”). Additionally,
through September 2005, we
had operations
with a VIE related to another FOS
transaction, which was settled in advance. For a further description refer to
“—Transactions with unconsolidated variable interest entities”
below.
YPF Holdings has a non-contributory defined-benefit pension
plan and postretirement and postemployment benefits. Under U.S. GAAP, the
Company fully recognized the underfunded status of defined-benefit pension and
postretirement plans as a liability in the financial statements reducing the
Company’s shareholders’ equity through the accumulated OCI account. Under
Argentine GAAP,
unrecognized actuarial
losses are not considered in the amount of the net liability. For a more
detailed discussion of the most significant differences between Argentine GAAP
and U.S. GAAP, please refer
to Note 6(f) to the
Unaudited
Interim Financial
Statements.
Principal
Income Statement Line Items
The
following is a brief description of the principal line items of our income
statement.
Net
sales
Net sales
include primarily our consolidated sales of unrefined and refined fuel and
chemical products net of the payment of applicable fuel transfer taxes, turnover
taxes and custom duties on exports. Royalties with respect to our production are
accounted for as a cost of production and are not deducted in determining net
sales.
Cost
of sales
The
following table presents, for each of the periods indicated, a breakdown of our
consolidated cost of sales by category:
|
|
|
For
the Six-Month Period
Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of pesos)
|
|
|
Inventories
at beginning of year
|
|
|
2,573 |
|
|
|
1,697 |
|
|
Purchases
for the period
|
|
|
3,924 |
|
|
|
2,568 |
|
|
Production
costs(1)
|
|
|
7,135 |
|
|
|
6,072 |
|
|
Holding
gains on inventories
|
|
|
123 |
|
|
|
119 |
|
|
Inventories
at end of period
|
|
|
(2,854 |
) |
|
|
(2,157 |
) |
|
Cost
of sales
|
|
|
10,901 |
|
|
|
8,299 |
|
|
(1)
|
The
table below presents, for each of the periods indicated, a breakdown of
our consolidated production costs by
category:
|
|
|
|
For
the Six-Month Period
Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of pesos)
|
|
|
Salaries
and social security taxes
|
|
|
485 |
|
|
|
395 |
|
|
Fees
and compensation for services
|
|
|
98 |
|
|
|
67 |
|
|
Other
personnel expenses
|
|
|
158 |
|
|
|
124 |
|
|
Taxes,
charges and contributions
|
|
|
139 |
|
|
|
111 |
|
|
Royalties
and easements
|
|
|
1,138 |
|
|
|
981 |
|
|
Insurance
|
|
|
55 |
|
|
|
48 |
|
|
Rental
of real estate and equipment
|
|
|
189 |
|
|
|
154 |
|
|
Depreciation
of fixed assets
|
|
|
1,970 |
|
|
|
1,939 |
|
|
Industrial
inputs, consumable material and supplies
|
|
|
279 |
|
|
|
302 |
|
|
Operation
services and other service contracts
|
|
|
526 |
|
|
|
279 |
|
|
Preservation,
repair and maintenance
|
|
|
917 |
|
|
|
766 |
|
|
Contractual
commitments
|
|
|
156 |
|
|
|
232 |
|
|
Transportation,
products and charges
|
|
|
448 |
|
|
|
369 |
|
|
Fuel,
gas, energy and miscellaneous
|
|
|
577 |
|
|
|
305 |
|
|
Total
|
|
|
7,135 |
|
|
|
6,072 |
|
Other
expenses, net
Other
expenses principally include reserves for pending lawsuits and other claims,
provisions for environmental remediation and provisions for defined benefit
pension plans and other post-retirement benefits.
Finance
income/(expense), net and holding gains
Finance
income/(expense), net and holding gains consist of the net of gains and losses
on interest paid and interest earned, currency exchange differences and the
periodic revaluation of inventories.
Taxes
The
statutory corporate income tax rate in Argentina was 35% during each of the
periods presented in this report. Our effective tax rates for the periods
discussed in this report exceed the Argentine corporate income tax rate mainly
due to the non-deductibility of the amortization of the effect of inflation
indexation on fixed assets, offset in part by income on non-consolidated
long-term investments (which is included in our consolidated financial
statements net of corporate income tax as payable by investees) and tax-free
income from the sale of hydrocarbons produced in Tierra del Fuego. See Note 2(f)
to the Unaudited Interim Financial Statements.
Results
of Operations
Consolidated
results of operations for the six-month periods ended June 30, 2008 and
2007
The
following table sets forth certain financial information as a percentage of net
sales for the periods indicated.
|
|
|
Six-Month
Period Ended
June
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(percentage
of net sales)
|
|
|
|
Net
sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Cost
of sales
|
|
|
(66.3 |
) |
|
|
(63.4 |
) |
|
Gross
profit
|
|
|
33.7 |
|
|
|
36.6 |
|
|
Administrative
expenses
|
|
|
(2.6 |
) |
|
|
(2.8 |
) |
|
Selling
expenses
|
|
|
(6.7 |
) |
|
|
(7.6 |
) |
|
Exploration
expenses
|
|
|
(1.3 |
) |
|
|
(1.8 |
) |
|
Operating
income
|
|
|
23.1 |
|
|
|
24.4 |
|
The tables
below present, for the periods indicated, volume and price data with respect to
our consolidated sales of our principal products in the domestic and export
markets, respectively. The data presented below does not include sales by
Compañía Mega S.A. (“Mega”), Refinor or Profertil, jointly-controlled companies
in which we have 38%, 50% and 50% interests, respectively, and which are
proportionally consolidated in our consolidated financial statements. Mega,
Refinor and Profertil contributed, after consolidation adjustments, 1.37%, 1.38%
and 2.75%, respectively, of our consolidated net sales for the six-month period
ended June 30, 2008 and 1.63%, 1.49% and 1.82%, respectively, of our
consolidated net sales for the six-month period ended June 30,
2007.
|
|
Six-Month
Period Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
Average
price per unit(1)
|
|
|
|
Average
price per unit(1)
|
|
|
|
|
|
(in
pesos)
|
|
|
|
(in
pesos)
|
|
|
Natural
gas
|
7,939
mmcm
|
|
231/mcm
|
|
8,194
mmcm
|
|
160/mcm
|
|
|
Diesel
|
4,032
mcm
|
|
|
1,182/m3 |
|
3,936
mcm
|
|
|
925/m3 |
|
|
Gasoline
|
1,414
mcm
|
|
|
1,124/m3 |
|
1,262
mcm
|
|
|
911/m3 |
|
|
Fuel
oil (2)
|
510
mtn
|
|
1,373/ton
|
|
206
mtn
|
|
891/ton
|
|
|
Petrochemicals
|
336
mtn
|
|
2,094/ton
|
|
320
mtn
|
|
1,408/ton
|
|
|
(1)
|
Average
prices shown are net of applicable domestic fuel transfer taxes payable by
consumers.
|
|
(2)
|
For
the period ended June 30, 2008, includes sales under the Energy
Substitution Program amounting to 104
mtn.
|
|
|
Six-Month
Period Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
Average
price per unit(1)
|
|
|
|
Average
price per unit(1)
|
|
|
|
|
|
(in
pesos)
|
|
|
|
(in
pesos)
|
|
|
Natural
gas (2)
|
285
mmcm
|
|
731/mcm
|
|
1,126
mmcm
|
|
350/mcm
|
|
|
Diesel
|
91
mcm
|
|
|
2,789/m3 |
|
75
mcm
|
|
|
1,650/m3 |
|
|
Gasoline
|
508
mcm
|
|
|
2,473/m3 |
|
696
mcm
|
|
|
1,645/m3 |
|
|
Fuel
oil
|
558
mtn
|
|
1,720/ton
|
|
633
mtn
|
|
1,014/ton
|
|
|
Petrochemicals
|
247
mtn
|
|
2,645/ton
|
|
351
mtn
|
|
2,148/ton
|
|
|
(1)
|
Average
prices shown are gross of applicable export withholding taxes payable by
us, and, as a result, may not be indicative of amounts recorded by us as
net sales. See “—Factors Affecting Our Operations—International oil and
gas prices and Argentine export taxes” for more information on the export
tax withholding rates applicable to our principal
products.
|
|
(2)
|
Average
price is based on natural gas actually delivered and does not include
fixed charges collected pursuant to certain delivery
contracts.
|
Net
sales
Net sales
in the six-month period ended June 30, 2008 were Ps.16,443 million, representing
an 25.5% increase compared to Ps.13,099 million in the six-month period ended
June 30, 2007. This
increase was primarily attributable to increases in domestic prices for diesel
and gasoline as well as in sales volumes of those products in the domestic
market. As a
result, our domestic sales increased 37.6% to Ps.12,288 million in the six-month
period ended June 30, 2008 from Ps.8,927 million in the same period in
2007. Export sales,
despite an increase in international prices of substantially all of our exported
products, declined by 0.4% to Ps.4,155 million in the six-month period ended
June 30, 2008 from Ps.4,172 million in the same period in 2007, driven mainly by
the increase in the export tax withholding rates applicable to petrochemical and
refined products. Our export sales in both
periods were made mainly to the United States, Brazil and Chile.
For
further information on our net sales for the periods discussed above, see
“—Results of operations by business segment for the six-month periods ended June
30, 2008 and 2007.”
Cost
of sales
Cost of
sales in the six-month period ended June 30, 2008 was Ps.10,901 million compared
to Ps.8,299 million in the six-month period ended June 30, 2007, representing a
31.3% increase, which was mainly attributable to the increase in the
total volume of crude oil purchases from third parties, which was necessary to
offset our lower crude oil production and maintain the pace of our refinery
operations in order to meet the growing domestic demand of refined products.
Cost of sales as a percentage of net sales increased to 66.3% in the 2008
period, compared to 63.4% in the same period in 2007. Increased volumes of crude
oil purchases adversely affect our margins because we lose the margin earned on
our internal exploration and production activities. In addition, we experienced
general increases in costs, mainly in preservation, repair and maintenance, and
operation services and other service contracts, driven mainly by upward price
and wage pressure, and transportation, products and charges, driven mainly by
the increase in our domestic sales. Salaries and social security also increased
more than 20%, at pace with general price increases in the broader
economy.
Selling
expenses
Our
selling expenses were Ps.1,102 million in the six-month period ended June 30,
2008 compared to Ps.992 million in the six-month period ended June 30, 2007,
representing an increase of 11.1%, mainly attributable to the increase in the
amount we paid in tax on debits and credits on bank accounts, due to the higher
amounts involved in these transactions in the first half of 2008. The cost of
transportation to our distribution network also increased, in this case driven
mainly by our higher domestic sales.
Operating
income
Operating
income in the six-month period ended June 30, 2008 was Ps.3,793 million compared
to Ps.3,200 million in the six-month period ended June 30, 2007, representing an
increase of 18.5%. Operating income increased primarily due to the previously
mentioned increases in domestic prices, partially offset by our higher cost of
sales.
Our
operating margins (operating income divided by net sales) were 23.1% and 24.4%
in the six-month periods ended June 30, 2008 and 2007,
respectively.
Other
expenses, net
Other
expenses, net increased to Ps.241 million in the six-month period ended June 30,
2008 from Ps.18 million in the six-month period ended June 30, 2007, mainly as a
result of increased reserves for lawsuits, due mainly to our reassessment of
certain environmental obligations based on new information that became available
during the six-month period ended June 30, 2008. See Note 3(h) to our Unaudited
Interim Financial Statements.
Financial
income (expense), net and holding gains
In the
six-month period ended June 30, 2008, financial income (expense), net and
holding gains, increased to Ps.270 million from Ps.174 million in the six-month
period ended June 30, 2007. This increase is attributable to positive exchange
differences resulting from the depreciation of the U.S. dollar against the
Argentine peso, as our outstanding debt is denominated in U.S. dollars, as well
as higher holding gains on inventories from stock revaluation. These financial
income, net and holding gains were partially offset by a decrease in interest
income, and an increase in interest expenses.
Taxes
Income tax
expense in the six-month period ended June 30, 2008 increased 24.8% to Ps.1,635
million from Ps.1,310 million in the six-month period ended June 30, 2007. The
effective income tax rates for the six-month period ended June 30, 2008 and the
six-month period ended June 30, 2008 were 42% and 38%, respectively, compared to
the statutory income tax rate of 35%. The higher effective income tax rate is
mainly attributable to higher losses recognized by YPF Holdings and the 100%
impairment of the deferred tax assets generated as a result of such losses due
to our recovery assesments.
Net
income
Net income
for the six-month period ended June 30, 2008 was Ps.2,254 million, compared to
Ps.2,144 million in the same period in 2007, an increase of 5.1%. This increase
is mainly attributable to our 18.5% increase in operating income, which was
partially offset by the increase in other expenses, net, and higher income
tax.
Results
of operations by business segment for the six-month periods ended June 30, 2008
and 2007
The
following table sets forth net sales and operating income for each of our lines
of business for the six-month periods ended June 30, 2008 and 2007:
|
|
|
For
the Six-month Periods Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of pesos)
|
|
|
Net
sales(1)
|
|
|
|
|
|
|
|
Exploration
and production(2)
|
|
|
|
|
|
|
|
To
unrelated parties
|
|
|
2,198 |
|
|
|
1,607 |
|
|
To
related parties
|
|
|
523 |
|
|
|
331 |
|
|
Intersegment
sales and fees(3)
|
|
|
5,715 |
|
|
|
6,057 |
|
|
Total
exploration and production
|
|
|
8,436 |
|
|
|
7,995 |
|
|
Refining
and marketing(4)
|
|
|
|
|
|
|
|
|
|
To
unrelated parties
|
|
|
11,279 |
|
|
|
8,885 |
|
|
To
related parties
|
|
|
973 |
|
|
|
1,007 |
|
|
Intersegment
sales and fees
|
|
|
571 |
|
|
|
880 |
|
|
Total
refining and marketing
|
|
|
12,823 |
|
|
|
10,772 |
|
|
Chemical
|
|
|
|
|
|
|
|
|
|
To
unrelated parties
|
|
|
1,349 |
|
|
|
1,213 |
|
|
Intersegment
sales and fees
|
|
|
542 |
|
|
|
418 |
|
|
Total
Chemical
|
|
|
1,891 |
|
|
|
1,631 |
|
|
Corporate
and other
|
|
|
|
|
|
|
|
|
|
To
unrelated parties
|
|
|
121 |
|
|
|
56 |
|
|
Intersegment
sales and fees
|
|
|
203 |
|
|
|
169 |
|
|
Total
Corporate and others
|
|
|
324 |
|
|
|
225 |
|
|
Less
intersegment sales and fees
|
|
|
(7,031 |
) |
|
|
(7,524 |
) |
|
Total
net sales(5)
|
|
|
16,443 |
|
|
|
13,099 |
|
|
Operating
income (Loss)
|
|
|
|
|
|
|
|
|
| |
|
|
For
the Six-month Periods Ended June 30,
|
|
| |
|
|
2008
|
|
|
|
2007
|
|
| |
|
|
(in
millions of pesos)
|
|
|
Exploration
and production
|
|
|
2,010 |
|
|
|
2,155 |
|
|
Refining
and marketing
|
|
|
1,525 |
|
|
|
1,087 |
|
|
Chemical
|
|
|
658 |
|
|
|
321 |
|
|
Corporate
and other
|
|
|
(328 |
) |
|
|
(301 |
) |
|
Consolidation
adjustments
|
|
|
(72 |
) |
|
|
(62 |
) |
|
Total
operating income
|
|
|
3,793 |
|
|
|
3,200 |
|
|
(1)
|
Net
sales are net to us after payment of a fuel transfer tax, turnover tax and
customs duties on exports. Royalties with respect to our production are
accounted for as a cost of production and are not deducted in determining
net sales.
|
|
(2)
|
Includes
exploration and production operations in Argentina and the United
States.
|
|
(3)
|
Intersegment
sales of crude oil to Refining and Marketing are recorded at transfer
prices that reflect our estimate of Argentine market
prices.
|
|
(4)
|
Includes
LPG activities.
|
|
(5)
|
Total
net sales include export sales of Ps.4,155 million and Ps.4,172 million
for the six-month periods ended June 30, 2008, and 2007,
respectively.
|
Exploration and production
Exploration
and Production net sales in the six-month period ended June 30, 2008 were Ps.
8,436, representing a 5.5% increase from Ps. 7,995 million in the six-month
period ended June 30, 2007. The volume of crude oil sales decreased by 9.9% in
the six-month period ended June 30, 2008, mainly due to a strike which affected
our operations in the South of Argentina. The increase in average international
crude oil prices (of approximately 80% between periods) was not significantly
reflected in local market prices, due to the imposition in November 2007 of
higher export tax rates, pursuant to Resolution No. 349/07. Export volumes of
natural gas declined approximately 75% in the 2008 period compared to the same
period in 2007, due to the priority we are required to give to fulfilling
domestic demand. This decrease in exports was more than offset by a 42% increase
in the average price of natural gas sold in the domestic market, driven mainly
by a partial recovery in prices for the non-residential segments of the
market.
Exploration
and Production operating income declined 6.7% to Ps. 2,010 million in the
six-month period ended June 30, 2008 from Ps. 2,155 million in the six-month
period ended June 30, 2007 due to operating expenses increases outpacing the
5.5% increase in Exploration and Production net sales. Operating expenses
increased 10.0%, primarily due to the effect of cost increases in the wider
economy, increases in oil and gas royalties, considering the higher oil and gas
prices required to be used as a basis for calculation, as well as in the annual surface fee that
is based on acreage of each block and which are payable to the provinces
in which the hydrocarbon fields are located or, in the case of offshore and
certain other fields, to the Argentine federal government, and which increased
almost eightfold in the six-month period ended June 30, 2008 compared to the
same period in the prior year.
Average
oil production during the six-month period ended June 30, 2008 decreased 8.3% to
307 thousand barrels per day from 335 thousand barrels per day in the same
period in 2007. Natural gas production in the six-month period ended June 30,
2008 decreased 5.0% to 1,653 million cubic feet per day from 1,743 million cubic
feet per day in the same period in 2007. These declines were the consequences of
a strike which affected our operations in the South of Argentina and the natural
decline in the production curve resulting from the continuing overall maturity
of our fields.
Refining
and marketing
Net sales
in the six-month period ended June 30, 2008 were Ps.12,823 million, 19.0% higher
than the Ps.10,772 million in net sales recorded in the six-month period ended
June 30, 2007. This increase was mainly attributable to increases in the volumes
sold in the domestic market and in the average domestic prices of diesel and
gasoline. Domestic
diesel volumes and average prices increased by approximately 2% and 28%,
respectively, while domestic gasoline volumes and average prices increased
approximately 12% and 22%, respectively. The increases were offset in part by
the priority given to the fulfillment of domestic gasoline demand, which
resulted in a 27% decrease in the volume of gasoline exported, the segment’s
principal export product sold in the international market, where prices (net of
export taxes) were on average slightly higher than in Argentina during the
six-month period ended June 30, 2008, despite the higher export taxes assessed
by the Argentine government, which eroded our margins from export sales compared
to the first half of 2007.
Operating
profit increased by 40.3% to Ps.1,525 million in the six-month period ended June
30, 2008 from Ps.1,087 million in the same period in 2007. This increase was due
to improved margins resulting from the above-mentioned increases in net sales
driven by higher prices for diesel and gasoline in Argentina described above and
partially offset by an increase in the cost of crude oil purchased from third
parties. Additionally, an 18.5% increase in refining costs, primarily in
maintenance, energy and industrial inputs, was driven partly by maintenance
works which took place in our La Plata and Luján de Cuyo Refineries, and partly
by inflation. Refining cost per barrel, which we calculate as the segment’s cost
of sales for the period less crude oil purchase costs and depreciation of fixed
assets, divided by the number of barrels produced during the period, was
Ps.11.78 in the six-month period ended June 30, 2008 compared to Ps.9.79 in the
six-month period ended June 30, 2007.
Refinery
output in the six-month period ended June 30, 2008, including 50% of Refinor’s
output (we own 50% of Refinor), reached 334 thousand barrels per day,
representing a utilization rate of almost 100% of the existing processing
capacity.
Chemical
Net sales
in the six-month period ended June 30, 2008 increased by 15.9% to Ps.1,891
million from Ps.1,631 million in the six-month period ended June 30, 2007, while
operating income in the six-month period ended June 30, 2008 increased 105.0% to
Ps. 658 million from Ps. 321 million in the six-month period ended June 30,
2007. These increases were attributable mainly to higher operating income of
Profertil, in which we have a 50% interest, attributable to increases in the
sales of urea and other fertilizers, as well as an increase in the average
prices of these products. Additionally, the increase in the operating income of
our petrochemical operations was driven by an increase in prices for most of the
segment’s products, especially methanol and fertilizers, and was only partially
offset by higher production costs and the effects of the higher export taxes
pursuant to Resolution No. 394/07.
Liquidity
and Capital Resources
Financial
condition
Total debt
outstanding, net of cash, as of June 30, 2008was U.S.$1,039 million (Ps.3,147
million) consisting of short-term debt (including the current portion of
long-term debt) of U.S.$824 million (Ps.2,497 million) and long-term debt of
U.S.$215 million (Ps.650 million). As of June 30, 2008, most of our debt was
denominated in U.S. dollars (see Notes 3(g) to the Unaudited Interim Financial
Statements.) The use of derivatives is detailed in “—Quantitative and
Qualitative Disclosure about Market Risk.”
Since
September 2001, we have repurchased certain of our publicly-traded bonds in open
market transactions on an arms-length basis. As of June 30, 2008, we had
repurchased approximately U.S.$159 million of our outstanding bonds. We may from
time to time make additional purchases of, or affect other transactions relating
to, our publicly-traded bonds if in our own judgment the market conditions are
attractive.
The
following tables set forth our consolidated cash flow information for the
periods indicated.
| |
|
For
the Six-Month Period Ended June 30,
|
|
|
|
|
|
|
|
|
|
| |
|
(in
millions of pesos)
|
|
|
|
|
|
Net
cash flows provided by operating activities
|
|
|
7,059 |
|
|
|
4,051 |
|
|
Net
cash flows used in investing activities
|
|
|
(2,815 |
) |
|
|
(2,539 |
) |
|
Net
cash flows used in financing activities
|
|
|
(4,468 |
) |
|
|
(2,214 |
) |
|
Net
increase/(decrease) in cash and equivalents
|
|
|
(224 |
) |
|
|
(702 |
) |
|
Cash
and equivalents at the beginning of period
|
|
|
847 |
|
|
|
1,087 |
|
|
Cash
and equivalents at the end of period
|
|
|
623 |
|
|
|
385 |
|
Net
proceeds from outstanding loans were Ps.2,321 million. Net cash flow provided by
operating activities was Ps.7,059 million in the six-month period ended June 30,
2008, compared to Ps.4,051 million in the six-month period ended June 30, 2007,
mainly as a result of an 18.5% increase in operating income and the collection
of loans granted by us to related parties.
The
principal uses of cash in investing and financing activities in the six-month
period ended June 30, 2008 included Ps.2,816 million in fixed asset acquisitions
relating mainly to drilling activities in our Exploration and Production
business unit, and Ps.6,789 million in dividend payments.
Our
current financing policy is to use cash flows provided by operating activities
and debt to fund both our investing and operating activities.
In
addition, Repsol YPF and Petersen Energía have agreed in the shareholders’
agreement entered into by them in connection with the Petersen Transaction to
effect the adoption of a dividend policy under which we would distribute 90% of
our net income as dividends, starting with our net income for 2007. They have
also agreed to vote in favor of requiring us to distribute a dividend of
U.S.$850 million in addition to the amount resulting from the distribution of
our net income mentioned in the preceding sentence, with payments in 2008 and
2009. We distributed dividends in the amounts of Ps.4,232 million and Ps.2,557
million in February and May 2008, respectively. See “Item 8.
Financial Information—Dividends Policy” and “Item 7. Major Shareholders and
Related Party Transactions—Shareholders’ Agreement” in our 2007
20-F.
The
shareholder’s meeting held on January 8, 2008 approved a notes program for an
amount up to U.S.$1 billion, which was also approved by the CNV in September
2008. The proceeds of any offerings under this program must be used exclusively
to invest in fixed assets and working capital in Argentina.
The
following table sets forth our commitments for the periods indicated below with
regard to the principal amount of our debt as of June 30, 2008, plus accrued but
unpaid interest through June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of pesos)
|
|
Debt
|
3,252
|
2,602
|
151
|
303
|
-
|
-
|
196
|
Transactions
with unconsolidated variable interest entities
Since
1996, we have entered into three forward oil sale agreements, which we refer to
as the FOS transactions in this report. These agreements were entered into in
order to obtain cash to fund operations in advance of the actual sale and
delivery of oil. Under these transactions, we were advanced U.S.$381 million in
1996, U.S.$300 million in 1998 and U.S.$383 million in 2001, against future
deliveries of oil. Our obligations under the FOS transactions were recorded as
liabilities in the consolidated balance sheet and were taken to income as the
physical deliveries were made over the term of the contracts. As of June 30,
2008, the obligations under the respective contracts have been fully complied
with and there remain no further obligations to deliver crude oil under the
above agreements.
As
described in “Update of Legal Proceedings” in this report, on March 8, 2004, the
Argentine tax authorities formally communicated to us their view that the FOS
transactions should have been treated as financial transactions carried out in
Argentina and, as such, should have been subject to the relevant tax
withholdings. We have presented our defense rejecting the claim and are
currently arguing our position.
Covenants
in our indebtedness
Our
financial debt generally contains customary covenants for contracts of this
nature, including negative pledge, material adverse change and cross-default
clauses, as well as customary acceleration provisions.
With
respect to financial debt totaling Ps. 3,252 million (U.S.$1,073 million),
including accrued interest (long- and short-term debt, including overdrafts) as
of June 30, 2008, we have agreed, among other things and subject to certain
exceptions, not to establish liens or charges on our assets. In the event of a
payment default, the creditors may declare due and immediately payable the
principal and accrued interest on amounts owed to them. Upon an event of default
with respect to other matters, in the case of outstanding negotiable obligations
amounting to Ps.515 million (U.S.$170 million) (included in the figure above),
the trustee may declare due and immediately payable the principal and accrued
interest on amounts owed if required by the holders of at least 25% of the total
principal of the outstanding obligations.
Almost all
of our total outstanding financial debt is subject to cross-default provisions.
These provisions generally may be triggered if an event of default occurs with
respect to the payment of principal amount or interest on debts equal
to or
exceeding U.S.$20 million. As a result of these cross-default provisions, a
default on our part or the part of any of our consolidated subsidiaries covered
by such provisions could result in a substantial portion of our debt being
declared in default or accelerated. None of our debt or the debt of our
consolidated subsidiaries is currently in default.
Credit
rating
As of June
30, 2008, FITCH Argentina Calificadora de Riesgo S.A. ’s International Rating
for our foreign currency denominated debt was BB+, and for our domestic currency
denominated debt was BBB-. FITCH’s National Rating is AAA for our Negotiable
Obligation Programs. FITCH has a stable outlook on all of our
ratings.
Standard
& Poor’s International Ratings LLC, Sucursal Argentina maintains its rating
for our foreign currency denominated debt at BB, and for our domestic currency
denominated debt at BB+. Their National Rating is AAA for our Negotiable
Obligation Programs. Standard & Poor’s has a stable outlook on all of our
ratings. A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization.
We do not
have any ratings downgrade triggers that would accelerate the maturity dates of
our debt or trigger any other contractual obligation on our part. However, a
downgrade in our credit rating could have a material adverse effect on the cost
of renewing existing credit facilities, or obtaining access to new ones in the
future. In the past, our main sources of liquidity have been our cash flows from
operations, bank financings, issuances of debt securities and the proceeds from
our divestment plan. Any future downgrades will not preclude us from using any
of our existing credit lines.
Guarantees
provided
As of June
30, 2008, we had signed guarantees in relation to the financing activities of
Pluspetrol Energy S.A., Central Dock Sud S.A. and Inversora Dock Sud S.A. which
outstanding amounts were approximately U.S.$21 million, U.S.$23 million and Ps.5
million, respectively. The corresponding loans mature in 2011, 2013 and 2009,
respectively.
Capital
investments and expenditures
The table
below sets forth our capital expenditures and investments by activity for the
six-month periods ended June 30, 2008 and 2007.
|
|
|
Six-Month
Period Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of pesos)
|
|
|
(%)
|
|
|
(in
millions of pesos)
|
|
|
(%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures and Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exploration
and Production
|
|
|
2,387 |
|
|
|
82 |
|
|
|
2,224 |
|
|
|
82 |
|
|
Refining
and Marketing
|
|
|
327 |
|
|
|
11 |
|
|
|
321 |
|
|
|
12 |
|
|
Chemical
|
|
|
64 |
|
|
|
2 |
|
|
|
58 |
|
|
|
2 |
|
|
Corporate
and other
|
|
|
147 |
|
|
|
5 |
|
|
|
100 |
|
|
|
4 |
|
|
Total
|
|
|
2,925 |
|
|
|
100 |
% |
|
|
2,703 |
|
|
|
100 |
% |
Off-Balance
Sheet Arrangements
We have
entered into certain off-balance sheet arrangements, as described
in “—Guarantees provided” above.
Qualitative
and Quantitative Disclosure About Market Risk
The
following quantitative and qualitative information is provided about financial
instruments to which we are a party as of June 30, 2008, and from which we may
incur future gains or losses from changes in market, interest rates or foreign
exchange rates. We do not enter into derivative or other financial instruments
for trading purposes.
This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors including those set forth in “Item 3. Key Information—Risk Factors” in
our 2007 20-F.
Foreign
currency exposure
We
generally follow a policy of not hedging our debt obligations in U.S. dollars
due to the fact that, in 1991, the Argentine government instituted a set of
economic reforms known as the “Convertibility Plan,” the centerpiece of which
was a fixed one-to-one rate of exchange between the Argentine peso and the U.S.
dollar. Although in view of the Argentine economic crisis the Argentine
authorities implemented a number of monetary and exchange control measures,
including the abolishment of the Convertibility Law, we have still not hedged
our U.S. dollar debt obligations to date. In addition, our costs
and receipts denominated in currencies other than the Argentine peso, including
the U.S. dollar, often do not match. As a result, we are currently exposed to
risks associated with changes in foreign currency exchange rates. See “Item 3.
Key Information—Risks Relating to Argentina—We may be exposed to fluctuations in
foreign exchange rates” in our 2007 20-F.
The table
below provides information about our assets and liabilities denominated in
currency other than pesos (principally U.S. dollars) that may be sensitive to
changes in foreign exchange rates, as of June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More
than 5 years and undetermined
|
|
|
|
|
|
|
|
(in
millions of U.S. dollars)
|
|
|
Assets
|
|
|
1,191 |
|
|
|
— |
|
|
|
168 |
|
|
|
57 |
|
|
|
1,416 |
|
|
Accounts
payable
|
|
|
1,074 |
|
|
|
253 |
|
|
|
205 |
|
|
|
417 |
|
|
|
1,950 |
|
|
Debt
|
|
|
678 |
|
|
|
151 |
|
|
|
— |
|
|
|
64 |
|
|
|
893 |
|
|
Other
Liabilities
|
|
|
101 |
|
|
|
10 |
|
|
|
10 |
|
|
|
443 |
(1) |
|
|
564 |
|
|
(1)
|
Includes
U.S.$420 million corresponding to reserves with undetermined
maturity.
|
Interest
rate exposure
Our
objective in borrowing under fixed rate debt is to satisfy capital requirements
that minimize our exposure to interest rate fluctuations. To realize our
objectives, we have borrowed under fixed rate debt instruments, based on the
availability of capital and prevailing market conditions.
The table
below provides information about our assets and liabilities as of June 30, 2008
that may be sensitive to changes in interest rates.
| |
|
Expected
Maturity Date
|
|
| |
|
Less
than 1 year
|
|
|
1
– 2 years
|
|
|
2
– 3 years
|
|
|
3
– 4 years
|
|
|
4
– 5 years
|
|
|
More
than 5 years
|
|
|
Total
|
|
|
Fair
Value
|
|
| |
|
(in
millions of pesos)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
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|
|
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|
Fixed
rate
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Receivables (Related parties)
|
|
|
428 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
428 |
|
|
|
428 |
|
|
Interest
rate
|
|
|
2.70%
- 7.28% |
|
|
|
|
|
|
|
|
|
|
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|
Liabilities
|
|
|
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Fixed
rate
|
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|
YPF’s
Negotiable Obligations
|
|
|
306 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
196 |
|
|
|
502 |
|
|
|
539 |
|
|
Interest
rate
|
|
|
9.13% |
|
|
|
|
|
|
|
|
|
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|
10 |
% |
|
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|
|
|
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|
Related
Parties
|
|
|
60 |
|
|
|
151 |
|
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|
303 |
|
|
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|
|
514 |
|
|
|
514 |
|
|
Interest
rate
|
|
|
4.9%-
15.5% |
|
|
|
4.9%-
15.5% |
|
|
|
4.9%-
15.5% |
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Other
Short-term debt
|
|
|
2,201 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,201 |
|
|
|
2,201 |
|
|
Interest
rate
|
|
|
3.37%
- 22% |
|
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ITEM
3. UPDATE OF LEGAL PROCEEDINGS
Argentina
The
Privatization Law provides that the Argentine State shall be responsible, and
shall hold us harmless, for any liabilities, obligations or other commitments
existing as of December 31, 1990 that were not acknowledged as such in the
financial statements of Yacimientos Petrolíferos Fiscales Sociedad del Estado as
of that date arising out of any transactions or events that had occurred as of
that date, provided that any such liability, obligation or other commitment is
established or verified by a final decision of a competent judicial authority.
In certain lawsuits related to events or acts that took place before December
31, 1990, we have been required to advance the payment of amounts established in
certain judicial decisions, and have subsequently been reimbursed or are
currently in the process of requesting reimbursement from the Argentine
government of all material amounts in such cases. We are required to keep the
Argentine government apprised of any claim against us arising from the
obligations assumed by the Argentine government. We believe we have the right to
be reimbursed for all such payments by the Argentine government pursuant to the
above-mentioned indemnity, which payments in any event have to date not been
material. This indemnity also covers fees and expenses of lawyers and technical
consultants subject, in the case of our lawyers and consultants, to the
requirement that such fees and expenses not be contingent upon the amounts in
dispute.
Reserved,
probable contingencies
In the
ordinary course of our business, we are a party to various actions, including
approximately 2,027 labor lawsuits as of June 30, 2008, for which provisions of
Ps.47 million have been made.
A reserve
totaling Ps.1,865 million as of June 28, 2008 has been established to provide
for contingencies which are probable and can be reasonably estimated. In the
opinion of our management, in consultation with our external counsel, the amount
reserved reflects the best estimation, based on the information available as of
the date of this report, of the probable outcome of the mentioned contingencies.
The most significant legal proceedings and claims reserved are described in the
following paragraphs.
CNDC anti-competitive activity
disputes. On March 22, 1999, we were notified of Resolution No. 189/99
from the former Department of Industry, Commerce and Mining of Argentina, which
imposed a fine on us of Ps.109 million, stated Argentine pesos as of that date,
based on the interpretation that we had purportedly abused our dominant position
in the bulk 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 we made the
claimed payment. Additionally, Resolution No. 189/99 provided for the
commencement of an investigation in order to prove whether the penalized
behavior continued from October 1997 to March 1999. On December 19, 2003, the
CNDC completed its investigation and charged us with abuse of dominant market
position during this period. On January 20, 2004, we answered the notification
by (i) claiming the application of the statutes of limitations and alleging the
existence of defects in the imputation procedure (absence of majority in the
resolution that decided the imputation and prejudgment by its signers); (ii)
arguing the absence of abuse of dominant position; and (iii) offering the
corresponding evidence.
Given that
the Argentine Supreme Court has previously established under Law No. 22,262 that
the statute of limitations for administrative infractions is two years, we
believe that our defense based on the statute of limitations is
solid. Since the imputed conduct occurred before
September 29, 1999, which is the effective date of the new law, we believe that
the law applicable to the proceeding is Law No. 22,262 instead of the new
Antitrust Protection Law (No. 25,156). We filed appeals with the National
Economic Criminal Court: (i) on July 29, 2003, in view of the rejection by the
CNDC of the motion to overturn the resolution that ordered the opening of the
preliminary investigations without deciding in advance on the statute of
limitations defense claimed by us; and (ii) on February 4, 2004, in view of the
rejection by the CNDC of the motion to overturn the resolution that ordered the
charge because of a lack of majority and prejudgment. On April 13, 2004, the
National Court of Appeals in Criminal Economic Matters sustained the appeal
filed by us on the grounds of lack of majority of the CNDC in passing the
objected resolution. On August 31, 2004, we appealed the resolution passed by
the CNDC that rejected our statute of limitations defense. The CNDC accepted the
appeal and referred the proceedings to Chamber II of the National Court of
Appeals in Federal Civil and Commercial Matters, which subsequently referred the
proceeding to Room B of the National Court of Appeals in Criminal Economic
Matters. On March 3, 2006, the CNDC decided on the evidence that we shall
produce during this proceeding. During August and September 2007,
hearings involving the testimony of witnesses proposed by us took place.
Despite the arguments expressed by us, the above-mentioned circumstances
make evident that, preliminarily, the CNDC rejects the defenses filed by us and
that the CNDC is reluctant to modify the doctrine provided by Resolution No.
189/99. On
August 12,
2008, Room B of the National Court of Appeals in Criminal Economic Matters
rejected our statute of limitations argument. We have appealed this
decision.
Alleged defaults under natural gas
supply contracts – Innergy, et al. Since 2004, the Secretariat of Energy
and the Undersecretariat of Fuels, through Rule No. 27/04, Resolutions No.
265/04, 659/04, 752/05, 1329/06 and 599/07, have on various occasions instructed
us to supply certain quantities of natural gas to the Argentine domestic market,
in each case notwithstanding the lack of a contractual commitment on our part to
do so. In addition, the Argentine government has, at various times since 2004,
imposed direct volume limitations on natural gas exports in different ways. As a
result of these measures, from 2004 to the present, we have been forced in many
instances to partially or fully suspend natural gas export deliveries that are
contemplated by our contracts with export customers.
We
appealed these measures, but, pending favorable final resolution of such
appeals, we have been obliged to comply in order to avoid greater losses to us
and our export customers that could be occasioned by the revocation of our
export permits or other penalties. We informed our natural gas export customers
of our position that these governmental measures constitute an event of force majeure that releases
us from any contractual or extra-contractual liability deriving from the failure
to deliver the agreed upon volumes of gas. Some of our customers have rejected
our position and three of them have sought damages and/or penalties for breach
of supply commitments under a contractual “deliver or pay” clause, which claims
have been rejected by us.
Innergy
Soluciones Energéticas S.A. (“Innergy”) has filed an arbitral claim against us
based on its “deliver or pay” clause, seeking U.S.$87.7 million in damages as of
August 2007, plus interest (as calculated by Innergy on September 17, 2007).
This amount increases as Innergy invoices “deliver or pay” amounts to us on a
monthly basis, beginning in September 2007, for partially missed deliveries. In
addition to our claim of force
majeure, we have counterclaimed against Innergy for contract termination
based upon the “statutory hardship” exemption set forth in Article 1198 of the
Argentine Civil Code, in light of recent substantial increases in Argentine
export duties on natural gas that make our cost of delivering natural gas to
Innergy significantly higher than the price to be paid to us by Innergy for such
deliveries. Having previously suspended the arbitration to allow for settlement
discussions, on August 29, 2008 the parties extended the suspension for an
additional 60 days.
We are
also currently in pre-arbitral settlement discussions with the other two clients
that have sought damages from us under the “deliver-or-pay” clause,
Electroandina S.A. and Empresa Eléctrica del Norte Grande S.A. These companies
have claimed damages through November 2006 in a total amount of approximately
U.S.$41 million and, from December 2006 through September 2007, for an
additional total amount of U.S.$52 million. We have opposed such
claims.
Additionally,
on June 25, 2008, AES Uruguaiana Emprendimientos S.A claimed damages in a total
amount of U.S.$28.1 million for missed deliveries of natural gas volumes during
the period September 16, 2007 through June 25, 2008. On July 16, 2008, AES
Uruguaiana Emprendimientos S.A. also claimed damages in a total amount of
U.S.$2.7 million for missed deliveries of natural gas volumes during the period
January 18, 2006 through December 1, 2006. We have contested both of these
claims.
Alleged defaults under natural gas
supply contracts – Central Puerto. Central Puerto S.A. (“Central Puerto”)
has made claims against us for cutbacks in natural gas supply pursuant to its
contracts. We have formally denied such breach, based on the fact that, pending
the restructuring of such contracts, we are not obligated to confirm nominations
of natural gas during certain periods of the year. On March 15, 2007, Central
Puerto notified us of the commencement of pre-arbitral negotiations in relation
to the agreements for the supply of its plants located in Buenos Aires and Loma
de La Lata, province of Neuquén. On May 29, 2007, we and Central Puerto entered
into a Termination and Dispute Resolution Agreement regarding the principles of
agreement for the supply of Central Puerto’s plant located in Loma de La Lata.
On June 6, 2007, Central Puerto notified us of its decision to submit the
controversy regarding the agreement for the supply of natural gas to its plants
located in Buenos Aires (the “Buenos Aires Gas Supply Agreement”) to arbitration
under the rules of the International Chamber of Commerce. On June 21, 2007, we
appointed our arbitrator and notified Central Puerto of our decision to submit
to arbitration the controversy regarding the amounts due by Central Puerto under
the Buenos Aires Gas Supply Agreement. On July 23, 2007, Central Puerto filed an
arbitral claim for: (i) our specific performance of the Buenos Aires Gas Supply
Agreement by continuing to deliver volumes of natural gas of up to 3,400,000
m3/day, the applicable maximum daily requirement under the contract, to Central
Puerto’s plants located in Buenos Aires; (ii) our payment of “deliver or pay”
amounts for failure to deliver natural gas (totaling 1,920 mmcm through December
3, 2007), without specifying the amount claimed; and (iii) acknowledgement of
Central Puerto’s right to make-up natural gas volumes. On September 24, 2007, we
answered Central Puerto’s claim and filed counterclaims asking the tribunal for:
(i) a declaration of the termination of the contract; or (ii) as a subsidiary
claim in case the tribunal rejects the request for termination of the contract,
the restructuring of the contract under the Civil Law principles of “Teoría de la Imprevisión”
(hardship provision) and “Sacrificio Compartido”
(both-parties-
effort)
and (iii) payment by Central Puerto of “take or pay” amounts owed by
Central Puerto for certain amounts produced but not taken between 2002 and
2004. On December 3,
2007, Central Puerto submitted a presentation requesting that the tribunal
reject all of our claims. On February 11, 2008, a hearing took place among the
members of the arbitral tribunal and the parties at which a document setting
forth procedures for the arbitration was agreed upon and signed by the parties.
In that document, Central Puerto indicated that it could not quantify its
damages until its experts had completed their work. We estimated our damages to
be approximately U.S.$11 million plus interest, adjusted for inflation (pursuant
to the Stabilization Reference Coefficient or CER), though we also indicated
that this amount could change based on the results of work being performed by
our experts. On April 29, 2008, the tribunal issued an order setting a schedule
for the next phase of the arbitration. On October 1, 2008, the parties produced
their evidence before the
tribunal. On October 16, 2008, the parties agreed to suspend
procedures for 30 days.
La Plata refinery
environmental disputes.
On June 29, 1999, a group of three neighbors of the
La Plata
Refinery filed claims for
the remediation of alleged environmental damages in the peripheral water
channels of the refinery, investments related to contamination and compensation
for alleged health and property damages as a consequence of environmental
pollution caused by YPF prior to and after privatization. We notified the
executive branch of the Argentine government that there is a chance that the
tribunal may find us responsible for the damages. In such event, due to the
indemnity provided by Law No. 24,145 and in accordance with that law, we shall
be allowed to request reimbursement of the expenses for liabilities existing on
or prior to January 1,
1991 (before privatization)
from the Argentine government.
On
December 27, 2002, a group of 264 claimants who resided near the La Plata
Refinery requested compensation for alleged quality of life deterioration and
environmental damages purportedly caused by the operation of the La Plata
Refinery. The amount claimed is approximately Ps.57 million. We filed a writ
answering the complaint. There are three similar additional claims raised by
three groups of 120, 343, and 126 neighbors, respectively. The first group has
made a claim for compensation of Ps.15.5 million, the second group has made a
claim for compensation of Ps.41.7 million and the third one has made a claim of
Ps. 14.1 million, in addition to a request for environmental cleanup. As of June
30, 2008, we had established a reserve of Ps.24 million with respect to these
personal or property claims.
On
December 17, 1999, a group of 37 claimants who resided near La Plata Refinery,
demanded the specific performance by us of different works, installation of
equipment, technology and execution of work necessary to stop any environmental
damage, as well as compensation for health damages alleged to be the consequence
of gaseous emissions produced by the refinery, currently under
monitoring.
We have
been informally notified that the Secretariat of Environmental Policy of the
Province of Buenos Aires has brought criminal proceedings against us on the
grounds of the purported worsening of the water quality problems in the Western
Channel adjacent to La Plata Refinery, potential health damages (on account of
the existence of volatile particles and/or hydrocarbon suspension),
non-fulfillment of a remediation schedule of canals, and the existence of
allegedly clandestine disposal sites. On September 25, 2008, the Federal Court
in Criminal matters decided not to make any formal accusations and dismissed the
proceedings.
AFIP tax claims. On January
31, 2003, we received a claim from the Federal Administration of Public Revenue
(Administración Federal de
Ingresos Públicos, or “AFIP”), stating that the forward oil sale
agreements entered into by us (see “Updated Management’s Discussion and Analysis
of Financial Condition and Results of Operations—Liquidity and Capital
Resources—Transactions with unconsolidated variable interest entities”) should
have been subject to an income tax withholding. On March 8, 2004, the AFIP
formally communicated to us the claim for approximately Ps.45 million plus
interest and fines. Additionally, on June 24, 2004, we received a new formal
claim from the AFIP, asserting that the services related to these contracts
should have been taxed with the Value Added Tax. Management believes, based upon
the opinion of its external counsel, that the claim is without merit since those
advances were received under crude oil export commitments. Consequently, during
2004, we presented our defense to the AFIP, rejecting the claims and arguing our
position. However, on December 28, 2004, we received formal communication of a
resolution from the AFIP confirming its original position in both claims for the
period 1997 to 2001. We have appealed such resolution in the National Fiscal
Court. In 2006, we conditionally paid the amounts corresponding to periods that
followed those included in the claim by the AFIP (2002 and subsequent periods)
and filed reimbursement summary proceedings so as to avoid facing interest
payments or a fine. On March 14, 2008 the
AFIP notified us of the rejection of the reimbursement previously mentioned.
That decision has been appealed to the National Fiscal Court.
In
addition, we have received several other claims from the AFIP and from the
provincial and municipal fiscal authorities, which are not individually
significant.
Sale of Electricidad Argentina S.A.
and Empresa Distribuidora y Comercializadora Norte S.A. to EDF. In July
2002, EDF Internacional S.A. (“EDF”), initiated an international arbitration
proceeding under the Arbitration
Regulations
of the International Chamber of Commerce against us, among others, seeking
payment from us of U.S.$69 million which was afterward increased to U.S.$103.2
million. EDF claims that under a Stock Purchase Agreement dated March 30, 2001
among Endesa Internacional S.A. and Astra Compañía Argentina de Petróleo S.A.
(which was subsequently merged into YPF), as sellers, and EDF, as purchaser,
with respect to shares of Electricidad Argentina S.A. and Empresa Distribuidora
y Comercializadora Norte S.A. (“Edenor”), EDF is entitled to an adjustment in
the purchase price it paid due to changes in the exchange rate of the Argentine
peso that EDF asserts to have occurred prior to December 31, 2001. Our position
is that the change in the exchange rate did not occur prior to January 2002,
and, therefore, EDF is not entitled to the purchase price adjustment. We have
filed a counterclaim against EDF in the amount of U.S.$13.85 million as a
purchase price adjustment. We believe that EDF’s claim is without merit. The
arbitral award dated October 22, 2007 accepted the claim against us awarding
damages against us in the amount of U.S.$40 million and also accepted our
counterclaim against EDF in the amount of U.S.$11.1 million. Consequently, the
amount payable by us should the award become final is U.S.$28.9 million plus
costs and interest. We have challenged the award by filing an extraordinary
appeal before the Federal Supreme Court and an appeal before the Federal
Appellate Court on Commercial Matters. In April 2008 the Federal Appellate Court
on Commercial Matters suspended the effects of the arbitral award pending its
appeal.
Furthermore,
EDF is seeking the enforcement of the arbitral award before a court in Delaware,
in the United States. We responded to the complaint by seeking its dismissal on
the basis that the arbitral award has been suspended by an Argentine court and,
consequently, the Delaware complaint is not permitted under Article 5 of the
United Nations Convention on the Recognition and Enforcement of Foreign Arbitral
Awards. EDF is also seeking the enforcement of the arbitral award before a court
in Paris, France. We will respond to the complaint by seeking its dismissal
based on similar arguments.
Quilmes claims. Citizens
claiming to be residents living near Quilmes, in the province of Buenos Aires,
have filed a lawsuit in which they have requested the remediation of
environmental damages and the payment of Ps.47 million plus interest as
compensation for alleged personal damages. The plaintiffs base their claim
mainly on a fuel leak that occurred in 1988 in a poliduct running from La Plata
to Dock Sud that was operated by Yacimientos Petrolíferos Fiscales Sociedad del
Estado. The leaked fuel became perceptible in November 2002, resulting in
remediation that is now being performed by us in the affected area, supervised
by the environmental authority of the province of Buenos Aires. We have
requested an extension of the time to answer the complaint to allow us time to
evaluate certain documents submitted to the court by the plaintiffs. We have
also notified the Argentine government that we will implead it at the time we
answer the complaint in order to request that it indemnify us against any
liability and hold us harmless in connection with this lawsuit, as provided by
Law. No. 24,145. The Argentine government, through an administrative
decision, has denied any responsibility to indemnify us for this matter, and we
have sued the Argentine government to obtain a judicial award declaring this
administrative decision null and void. There are other 25 judicial claims that
have been brought against us based on similar allegations, amounting to
approximately Ps. 3.5 million. In these cases, we believe that the Argentine
government will contest its obligation to indemnify and hold us harmless by
claiming that the alleged damages were not caused by the 1988 leak.
Additionally, we are aware of the existence of other actions brought against us
that have not yet been served and which are based on similar
allegations.
Non-reserved,
possible contingencies
In
addition to the probable contingencies described in the preceding paragraphs, we
have received several labor, civil, commercial and environmental claims which
had not been reserved since management, based on the evidence available to date
and upon the opinion of our external counsel, have considered them to be
possible contingencies. The most significant of such contingencies are described
below.
Capital control-related
proceedings. On December 9, 2002, we filed a declaratory judgment action
(Acción Declarativa de
Certeza) before an Argentine federal court requesting clarification as to
the uncertainty generated by opinions and statements of several organizations
providing official advice that the right of the hydrocarbon industry to freely
dispose of up to 70% of foreign currency proceeds from exports of hydrocarbons
products and byproducts, as provided by Executive Decree No. 1,589/89, had been
implicitly abolished by the new exchange regime established by Executive Decree
No. 1,606/01. On December 9, 2002, a federal judge issued an injunction ordering
the Argentine government, the Central Bank and the Ministry of the Economy to
refrain from interfering with our access to and use of 70% of the foreign
exchange proceeds from our hydrocarbon exports. Following the enactment of
Decree No. 2,703/02 in December 2002, we expanded the scope of the declaratory
judgment action before the federal court to clear any doubts and uncertainty
arising after the enactment of this decree. See “Item 4—Information on the
Company—Regulatory Framework and Relationship with the Argentine
Government—Repatriation of Foreign Currency” in our 2007 20-F. On December 1,
2003, the National Administrative Court of Appeals decided that the issuance of
Decree No. 2,703 in 2002, which allows companies in the oil and gas sector to
keep abroad up to 70% of the export proceeds, rendered the injunction
unnecessary. Nevertheless, the Court of Appeals’ decision was silent with
respect to the
availability
of the exemption to convert proceeds from export operations carried out by oil
and gas companies into domestic currency prior to the issuance of Decree 2,703.
On December 15, 2003, we filed a motion for clarification asking the court to
clarify whether the exemption was available to oil and gas companies during the
period between the issuance of Decree No. 1,606/01 and the issuance of Decree
No. 2,703/02. On February 6, 2004, the Court of Appeals dismissed our motion for
clarification, indicating that the regulations included in Decree No. 2,703/02
were sufficiently clear, and confirmed the lifting of the injunction that
prohibited the Central Bank and the Ministry of Economy from interfering with
our access to foreign exchange proceeds, as described above. On February 19,
2004, we filed an extraordinary appeal before the Supreme Court against the
dismissal of the motion for clarification by the Court of Appeals and requested
the restatement of the injunction against the Central Bank and the Ministry of
Economy. The Federal Court of Appeals dismissed the extraordinary appeal. Taking
into account the fact that there is a new special system in place allowing for
the free disposal of up to 70% of the foreign currency proceeds from the exports
of crude oil and its derivatives, it was deemed advisable to abandon the suit as
a procedural strategy. If the Central Bank were to reassert and prevail before
the courts in the argument that the exemption allowing oil and gas companies to
keep up to 70% of export proceeds abroad during the period between the issuance
of Decree No. 1,606/01 and the issuance of Decree No. 2,703/02 was not
available, we could be subject to material penalties.
On October
12, 2007, we were notified of the initiation of an administrative summary
proceeding for alleged late repatriation of foreign currency proceeds, and the
failure to repatriate the remaining 70%, in connection with some hydrocarbon
export transactions made in 2002 (during the period between the issuance of
Decree No. 1,606/01 and the issuance of Decree No. 2,703/02). In this
administrative summary proceeding, charges were brought against us in the amount
of U.S.$1.6 million, and it has been advised that the conduct of a bank that
handled other of our export transactions made in 2002 be investigated, which
could give rise to the initiation of further proceedings. Administrative summary
proceedings have already been brought against the bank. Nevertheless, a final
and unchallenged judicial judgment recently issued by a First Instance Court in
Criminal Economic Matters in a similar administrative summary proceeding against
a different company for alleged violation of the criminal exchange law (lack of
repatriation of 70% of foreign currency proceeds) regarding export transactions
made in 2002 resolved the matter in favor of that company based on well-founded
arguments that were not challenged by the prosecutor. In addition, the Office of
the General Prosecutor of Argentina recently issued an opinion in similar
administrative summary proceedings involving another oil company stating that no
criminal law violations existed in that case due to the lack of willful
misconduct and the existence of differing regulations that created uncertainty
as to the scope of certain obligations, and stating that the proceeding should
be dismissed.
CNDC investigation. On
November 17, 2003, CNDC requested explanations, within the framework of an
official investigation pursuant to Art. 29 of the Antitrust Act, from a group of
almost 30 natural gas production companies, including us, with respect to the
following items: (i) the inclusion of clauses purportedly restraining trade in
natural gas purchase/sale contracts and (ii) gas imports from Bolivia, in
particular (a) expired contracts signed by YPF, when it was state-owned, and
YPFB (the Bolivian state-owned oil company), under which YPF allegedly sold
Bolivian gas in Argentina at prices below the purchase price; and (b) the
unsuccessful attempts in 2001 by Duke and Distribuidora de Gas del Centro to
import gas into Argentina from Bolivia. On January 12, 2004, we submitted
explanations in accordance with Art. 29 of the Antitrust Act, contending that no
antitrust violations had been committed and that there had been no price
discrimination between natural gas sales in the Argentine market and the export
market. On January 20, 2006, we received a notification of resolution dated
December 2, 2005, whereby the CNDC (i) rejected the “non bis in idem” petition
filed by us, on the grounds that ENARGAS was not empowered to resolve the issue
when ENARGAS Resolution No. 1,289 was enacted; and (ii) ordered that the
preliminary opening of the proceedings be undertaken pursuant to the provisions
of Section 30 of Act 25,156. On January 15, 2007, CNDC charged us and eight
other producers with violations of Act 25,156. We have contested the complaint
on the basis that no violation of the Act took place and that the charges are
barred by the applicable statute of limitations, and have presented evidence in
support of our position. On June
22, 2007, without
acknowledging any conduct in violation of the Antitrust Act, we filed with the
CNDC a commitment according to Article 36 of the Antitrust Act requesting that
the CNDC approve the commitment, suspend the investigation and dismiss the
proceedings. We are still awaiting a formal response.
The CNDC
has commenced proceedings to investigate us for using a clause in bulk LPG
supply contracts that it believes prevents buyers from reselling the product to
third parties and therefore restricts competition in a manner detrimental to the
general economic interest. We have asserted that the contracts do not contain a
prohibition against resale to third parties and have offered evidence in support
of our position. On April 12, 2007, we presented to the CNDC, without
acknowledging any conduct in violation of the Antitrust Act, a commitment
consistent with Article 36 of the Antitrust Act not to include such clauses in
future bulk LPG supply contracts, among other things, and requested that the CNDC terminate
the proceedings. We are still awaiting a formal response.
Noroeste basin reserves
review. The effectiveness after certain specific dates of natural gas
export authorizations (related to production in the Noroeste basin) granted to
us pursuant to Resolution SE Nos. 165/99, 576/99, 629/99 and
168/00,
issued by the Secretariat of Energy, is subject to an analysis by the
Secretariat of Energy to determine whether sufficient additional natural gas
reserves have been discovered or developed by us in the Noroeste basin. The
result of this ongoing review is uncertain and may have an adverse impact upon
the execution of the export gas sales agreements related to such export
authorizations, and may imply significant costs and liabilities for us. We have
submitted to the Secretariat of Energy documentation in order to allow for the
continuation of the authorized exports in accordance with Resolutions SE No.
629/1999, 565/1999, and 576/1999 (the “Export Permits”) from the Noroeste basin.
These Export Permits relate to the long-term natural gas export contracts with
Gas Atacama Generación, Edelnor and Electroandina (collectively, the “Clients”),
involving volumes of 900,000 m3/day,
600,000 m3/day and
1,750,000 m3/day,
respectively. We have not yet received a response from the Secretariat of
Energy. However, on March 29, 2007, an internal memorandum of the technical
sector of the Secretariat of Energy addressed this file and concluded, without
resolving the question that we have not included the necessary reserves to
continue with the Export Permits. The file is currently awaiting decision from
the Secretariat of Energy. If the Secretariat of Energy were to determine that
the reserves are not sufficient to continue to comply with our export
commitments and other commitments, it could declare the expiration or suspension
of one or more of the Export Permits, which would have a direct impact on the
export contracts, to the injury of the Clients. In the case in which it were
determined that we did not act as a prudent and diligent operator and/or did not
have sufficient reserves, we could be responsible for the damages that this
situation causes to the Clients.
Alleged defaults under natural gas
contracts – Mega. Mega has claimed compensation from us for failure to
deliver natural gas under the contract between us and Mega. We invoked that
natural gas deliveries to Mega pursuant to the contract were affected by the
Argentine government’s interference. Likewise, we believe that we would not be
liable for such natural gas delivery deficiencies pursuant to the doctrines of
“force majeure” and
“contract impracticability.”
New Jersey claims. On
December 13, 2005, the New Jersey Department of Environmental Protection and the
New Jersey Spill Compensation Fund filed a claim with a New Jersey court against
Occidental Chemical Corporation, Tierra, Maxus, Repsol YPF, YPF, YPF Holdings
and CLH Holdings. The plaintiffs are claiming for the remediation of
environmental damages, punitive damages and other damages including the costs
and fees associated with this proceeding, based on alleged violations of the
Spill Compensation and Control Act, the Water Pollution Control Act and common
law claims relating to a facility allegedly operated by the defendants and
located in Newark, New Jersey that allegedly impacted the Passaic River and
Newark Bay. NJDEP filed its Second Amended Complaint in April, 2008; YPF’s
motion to dismiss for lack of personal jurisdiction was denied in September
2008. YPF appealed this decision. Notwithstanding, the Court denied the
plaintiffs’ motion to bar third party practice and allowed defendants to file
third-party complaints. See “—YPF Holdings.”
Patagonian Association of
Land-Owners claims. On August 21, 2003, the Patagonian Association of
Land-Owners (“ASSUPA”) sued the companies operating production concessions and
exploration permits in the Neuquina basin, including us, claiming for the
remediation of the general environmental damage purportedly caused in the
execution of such activities or the establishment of an environmental
restoration fund, and the implementation of measures to prevent environmental
damages in the future. The total amount claimed against all companies is more
than U.S.$547.6 million. The plaintiff requested that the Argentine government
(Secretariat of Energy), the Federal Environmental Council (Consejo Federal de Medio
Ambiente), the provinces of Buenos Aires, La Pampa, Neuquén, Río Negro
and Mendoza and the National Ombudsman be summoned. It requested, as a
preliminary injunction, that the defendants refrain from carrying out activities
affecting the environment. Both the Ombudsman’s summons as well as the requested
preliminary injunction were rejected by the Supreme Court of Argentina. Once the
complaint was notified, we and the other defendants filed a motion to dismiss
for failure of the plaintiff to state a claim upon which relief may be granted.
The court granted the motion, and the plaintiff had to file a supplementary
complaint. We requested that the claim be rejected because the defects of the
complaint indicated by the Supreme Court of Argentina have not been corrected,
but such request was denied. However, we have also requested its rejection for
other reasons, and impleaded the Argentine government, due to its obligation to
indemnify us against any liability and hold us harmless for events and claims
arising prior to January 1, 1991, according to Law No. 24,145 and Decree
546/1993. Our request is currently pending.
Dock Sud claim. We have been
sued in the following environmental lawsuits that have been filed by residents
living near Dock Sud, province of Buenos Aires: (i) “Mendoza, Beatriz against
National State et al.”, a lawsuit before the Supreme Court of Argentina, in
which the Argentine government, the province of Buenos Aires, the City of Buenos
Aires, 14 municipalities and 44 companies (including us) were sued. The
plaintiffs have requested unspecified compensation for collective environmental
damage of Matanza and Riachuelo river basins and for physical and property
damage, which they claim to have suffered. The Supreme Court of Argentina
declared itself legally competent to settle only the conflict related to the
collective environmental damages, including prevention of future pollution,
remediation of environmental damages already caused and monetary compensation
for irreparable environmental damages, and has requested that the defendants
submit specific reports. In particular, it has requested that the Argentine
government,
the province of Buenos Aires, the City of Buenos Aires and Cofema submit a plan
with environmental objectives. We answered the complaint and requested the
impleading of the Argentine government, based on its obligation to indemnify us
against any liability and hold us harmless for events and claims previous to
January 1, 1991, according to Law No. 24,145 and Decree No. 546/1993. In July
2008, the Supreme Court of Argentina decided that the Basin Authority (Law
26,168) will be in charge of performing a remediation plan as well as of taking
preventive measures in the area. The National State as well as the Province and
City of Buenos Aires will be responsible for the performance of these measures.
It also declared the exclusive competence of the First Instance Federal Court in
Quilmes to hear any claims or disputes arising out of the remediation plan or
the preventive measures and determined that any future action seeking the
environmental remediation of the basin will be dismissed (litis pendentia).
Additionally, the Supreme Court of Argentina declared that it will determine
whether and how much liability is to be borne by the parties involved; (ii)
“Cicero, María Cristina against Antivari S.A.C.I. et al. for damages” in which
the plaintiffs, who are residents of Villa Inflamable, Dock Sud, also demand the
environmental remediation of Dock Sud and Ps.33 million in compensation for
physical and property damages against many companies that have operations there,
including us. We answered the complaint by requesting its rejection and asked
the citation of the Argentine government, due to its obligation to indemnify us
against any liability and hold us harmless for events and claims previous to
January 1, 1991, according to Law No. 24,145 and Decree No.
546/1993.
La Plata Refinery environmental
claims. On June 6, 2007, we were served with a new complaint in which
nine residents of the vicinity of the La Plata Refinery request (i) the
cessation of contamination and other harms they claim are attributable to the
refinery and (ii) the cleanup of the adjacent canals, Río Santiago and Río de la
Plata (water, soils and aquifers, including within the refinery), or, if cleanup
is impossible, compensation for environmental and personal damages. The
plaintiffs have also requested physical and property damages of Ps.51.4 million,
or an amount to be determined from evidence produced in discovery. We believe
that most damages that are alleged by the plaintiff, if proven, may be
attributable to events that occurred prior to YPF’ s privatization and would
therefore be the responsibility of the Argentine government in accordance with
the Privatization Law of YPF. Notwithstanding the aforesaid, there is the
possibility a judgment could order us to meet the expenses of remedying these
liabilities, in which case we could ask the Argentine government to reimburse
the remediation expenses for liabilities existing prior to January 1, 1991
pursuant to Law 24,145. In addition, we believe that this claim partially
overlaps with the request made by a group of neighbors of the La Plata Refinery
on June 29, 1999, mentioned in preceding paragraphs. Accordingly, we consider
that the cases will need to be partially consolidated to the extent that the
claims overlap. We answered the complaint by requesting its rejection and asked
for the citation of the Argentine government, due to its obligation to indemnify
us against any liability and hold us harmless for events and claims previous to
January 1, 1991, according to Law No. 24,145 and Decree No. 546/1993. The
contamination that may exist could derive from countless sources, including from
dumping of refuse over many years by other industrial facilities and by
ships.
Additionally,
we are aware of an action in which we have not yet been served, in which the
plaintiff requests the cessation of contamination and the cleanup of the canals
adjacent to the La Plata Refinery, in Río Santiago, and other sectors near the
coast (removal of mud, drainage of wetlands, restoration of biodiversity, among
other things), and, if such sanitation is not practicable, compensation of
Ps.500 million or an amount to be determined from evidence produced in
discovery. We believe that this claim partially overlaps with the requests made
by a group of neighbors of the La Plata Refinery on June 29, 1999 and with the
complaint served on June 6, 2007, mentioned in preceding paragraphs.
Accordingly, we consider that if we are served in this proceeding or any other
proceeding related to the same subject matters, the cases will need to be
consolidated to the extent that the claims overlap. With respect to claims that
would not be included in the previous proceedings, for the time being we are
unable to estimate the prospects of such claims. Additionally, we believe that
most damages that would be alleged by the plaintiff, if proven, may be
attributable to events that occurred prior to YPF’s privatization and could
therefore be the responsibility of the Argentine government in accordance with
the Privatization Law concerning YPF.
Concessions on Hydrocarbon bearing
zones – Provincial claims: We have been notified of Resolution 433/08
“MP’’ issued by the Ministry of Production, Hydrocarbon Department of the Rio
Negro Province concerning compliance with certain obligations by exploitation
concessionaires in the hydrocarbon bearing zones of Barranca de los Loros, Bajo
del Piche, El Medanito y Los Caldenes, all located in Rio
Negro Province. This resolution asserts that we, among others, in our capacity
as a concessionaire, are liable for failing to meet certain concession and
environmental obligations. If found liable, we could be at risk of termination
of these concession contracts. In light of the above, and consistent with
provisions of the Hydrocarbons Law, we were requested to submit a
response.
The
Hydrocarbons Law grants the concessionaire and /or licensee the right, prior to
termination based upon contractual provisions, to cure a contractual breach
within a certain period of time after receiving notice thereof. Accordingly, on
May 29, 2008, we filed a request for nullification of Resolution 433/08 “MP”,
since this resolution failed to grant us this right. Additionally, on June 13,
2008, we submitted a response denying the charges against us.
Non-reserved,
remote contingencies
Our
management, in consultation with our external counsel, believes that the
following contingencies, while individually significant, are
remote:
Congressional request for
investigation to CNDC. On November 7, 2003, certain former members of the
Argentine Congress, Arturo Lafalla, Ricardo Falu and others, filed with the CNDC
a complaint against us for abuse of a dominant position in the bulk LPG market
during 2002 and part of 2003. The alleged conduct consisted of selling bulk LPG
in the domestic market at prices higher than the export price, thereby
restricting the availability of bulk LPG in the domestic market. On December 15,
2003, the CNDC decided to forward the complaint to us, and requested
explanations under Art. 29 of the Antitrust Act. On January 21, 2004, we
submitted explanations in accordance with Art. 29 of the Antitrust Act,
contending that no antitrust violations had been committed. At this point, the
CNDC may accept our explanations or begin a criminal investigation. We contend
that we did not restrict LPG supply in the domestic market during the relevant
period, that during this period all domestic demand for LPG could have been
supplied by our competitors and that therefore our market share could not be
deemed a dominant position. As of the date of this registration statement, CNDC
has not taken any further action.
Pursuant
to the provisions of Resolution No. 189/99, referred to above, certain third
parties have claimed compensation for alleged damages suffered by them as a
consequence of our sanctioned conduct. We have denied these claims and presented
our defenses.
Neuquén royalty disputes. On
February 20, 2006, the province of Neuquén published in the Official Gazette
Decrees No. 225/06 and 226/06 (the “Decrees”). The Decrees provide that
royalties for domestic sales of hydrocarbons produced within the province of
Neuquén must be calculated using international market prices as a reference,
thus increasing the amounts of the royalties to be paid by us. The calculation
of hydrocarbon royalties, in accordance with Section 75 (12) of the Argentine
Constitution, is ruled by federal legislation, and the Decrees, in our opinion,
contradict the preemption principle of the Argentine Constitution. We filed a
declaratory judgment action (Acción Declarativa de
Certeza) with the Argentine Supreme Court with the aim of obtaining the
nullification of the Decrees and the issuance of an interim measure banning the
province of Neuquén from filing any royalty claim on the ground of the
provisions contained within the Decrees. On October 31, 2006, the Argentine
Supreme Court issued an injunction ordering the province of Neuquén to refrain
from applying the Decrees to us. On November 29, 2007, the province of Neuquén
issued Decree No. 2200/07, revoking the Decrees, and subsequently petitioned the
Argentine Supreme Court to withdraw its injunction against the Decrees as moot.
We have filed a written request for the continuation of the injunction as well
as the official revocation of the Decrees. Neuquén has not expressly withdrawn
its request and the matter is currently pending before the Argentine Supreme
Court.
On August
31, 2004, the province of Neuquén filed with the Federal Court of the province
of Neuquén (the “Federal Court”) a claim against Atalaya Energy and 19 oil and
gas companies, including us, claiming compliance with Section 6 Law No. 25,561
for the calculation of royalties regarding hydrocarbons produced within the
province of Neuquén. Section 6 Law No. 25,561 provides that in no event will
export withholdings reduce the wellhead prices for the calculation and payment
of hydrocarbon royalties. According to the province of Neuquén’s reading of
Section 6 Law No. 25,561, the oil and gas companies producing hydrocarbons in
the province of Neuquén should not make any deduction based on export
withholdings for the calculation of royalties corresponding to hydrocarbons sold
in the domestic market. The Federal Court issued an interim measure ordering the
oil and gas companies to calculate and pay royalties on the basis of
international prices. We filed an appeal against such interim measure. On
October 5, 2005, the Federal Court granted our appeal. Additionally, the Federal
Court clarified that Section 6 Law No. 25,561 shall be applied only to the
calculation of royalties regarding exported hydrocarbons. The province of
Neuquén appealed this decision to the National Court of Appeals, which declared
that it lacked jurisdiction and referred the case to the Argentine Supreme
Court. In 2006, the Argentine Supreme Court also declared that it lacked
jurisdiction, and returned the case file to the Federal Court. We also requested
the Argentine Supreme Court to order the Federal Court to restrain from
continuing proceedings. The Argentine Supreme Court denied such request and we
filed a writ requesting the reversal of such decision. On May 14, 2007, the
judge issued an opinion declaring that the Federal Court lacked jurisdiction to
hear our royalties dispute case and the case was transferred to the
administrative courts of the province of Neuquén. On May 17, 2007, we presented
our appeal on the basis that the judge failed to consider recent jurisprudential
records of the Federal Court (the case of the Neuquén Decrees) that acknowledged
that royalties disputes posed a valid federal question. On June 29, 2007, the
judge rejected our motion in limine but subsequently accepted our motion of
appeal. We have filed a request with the Federal Court requesting jurisdiction
over the royalties litigation, in light of the above-mentioned recent
jurisprudence.
Other export tax disputes.
During 2006 and 2007, the Customs General Administrations in Neuquén, Comodoro
Rivadavia and Puerto Deseado informed us that certain summary proceedings had
been brought against us based on
alleged
formal misstatements on forward oil deliveries (future commitments of crude oil
deliveries) in the loading permits submitted before these agencies. Although our
management, based on the opinion of legal counsel, believes the claim has no
legal basis, the potential fines imposed could be substantial.
Mendoza royalties dispute.
Following demands by the province of Mendoza that the international market price
be applied to internal market transactions based on an interpretation of Section
6 of Law No. 25,561 (similar to the above-mentioned claim made by Neuquén), we
commenced an administrative proceeding. Our request is currently
pending.
Neuquén concession investment
dispute. On November 22, 2007, we received Note No. 172/07 of the
Secretariat of Energy and Mining of the Province of Neuquén (SEEyM), alleging
material shortfalls in our investments pursuant to the Extension Agreement for
the Loma de la Lata – Sierra Barrosa Concession, executed on December 5, 2000
(the “Extension Agreement”). The Note provided that: (i) “YPF shall immediately
explain the reasons for the detected underinvestment, subject to immediate
forfeiture of the concession extension”; (ii) “this serious incident makes it
necessary to delay any negotiations with this company for the purpose of any
concession extensions”; (iii) the proceedings will be remitted to the Provincial
Legislature so that the legislators may weigh this “incident” at the time of
reviewing any extension to the contracts; and (iv) legal rights were reserved
for the institution of legal actions “to comprehensively redress the damage
caused.”
The
Extension Agreement sets out three phases for investment by us: (i) a first
phase from July 1, 2000 to December 31, 2005, during which the committed
investment amounted to U.S.$3,500 million; (ii) a second period, from January 1,
2006 to December 31, 2011, contemplating a committed investment of U.S.$2,500
million; and (iii) a final period from January 1, 2012 to December 31, 2017,
during which we agreed to invest the amount of U.S.$2,000 million. The aggregate
amount of the committed investment is U.S.$8,000 million, and under the
Extension Agreement any non-substantial difference in a phase can be performed
and made up for in the next phase.
In
addition to the SEEyM’s failure to observe Section 80 of the Hydrocarbons Law,
which requires a controlling authority to warn permission holders and concession
operators and to allow them to cure violations, we believe that:
(i) we have
made the investments agreed to under the Extension Agreement for the first of
the three periods (ended on December 31, 2005), which is the subject of Note No
172/07, whether calculated in U.S. dollars or in pesos (though we believe they
should be calculated in pesos);
(ii) during
almost two years since the end of the first period, we have made investments in
the province of Neuquén of approximately U.S.$1,830 million (for a cumulative
amount of U.S.$5,350 million since 2000), which greatly exceeds the difference
alleged by the province in Note No. 172/07 and demonstrates the completion of
our performance of the requisite investments for the first period (U.S.$2,500
million related to the years 2006-2011); and
(iii) the
investment obligations are convertible into pesos at a one-to-one ratio by
effect of the emergency regulations enacted in 2002 (including Section 1 of
Decree 214/04) and in light of economic reality, as the size and scope of the
investments that could be made at the time the Extension Agreement was entered
into differs drastically from the amount possible after devaluation in 2002. Our
arguments in this regard are considered without prejudice to asserting the
“unforeseen conditions” doctrine under Argentine law due to the significant
change in circumstances, as the right to assert the doctrine was not waived in
the Extension Agreement.
We have
challenged Note No. 172/07 through administrative and judicial
proceedings By means of Resolution No. 178/08 the Province of
Neuquén’s Natural Resources State Secretariat rejected our filing against Note
No. 172/07 only with respect to the jurisdiction of the Province of Neuquén to
review the Extension Agreement. However, it recognized that the investments made
for the years 2006 and 2007 compensated for any shortfalls during the first
period (which were declared to be not material) and certified that YPF S.A.
complied with its duties for the first period 2000-2005.
Additional
information
On January
21, 2005, we were notified of a request made by Empresa Nacional de Electricidad
S.A. (“ENDESA”) for arbitration to resolve a dispute relating to an alleged
breach of a contractual clause in an export contract signed in June 2000. The
clause relates to increased natural gas deliveries and ENDESA has requested
payment of a contractual penalty resulting from our alleged failure to deliver
the required amounts. The contract term is 15 years. ENDESA’s claim amounted to
U.S.$353.8 million, while asserting that there had been willful misconduct on
our part. Thereafter, the parties entered into (i) an agreement for the
amendment of the gas supply agreement in order to adapt it to the export
restrictions imposed by the Argentine government (the “Amendment”) and (ii) an
agreement for the termination of the
arbitration
(the “Termination Agreement”), both subject to the Secretariat of Energy’s
approval. On August 31, 2007, we were notified of the Secretariat of Energy’s
approval. Thereafter, the parties informed the tribunal of the termination of
the arbitration by mutual agreement. We have paid ENDESA U.S.$8 million pursuant
to the Termination Agreement and ENDESA has foregone all claims based on past
conduct. Finally, the Amendment adjusted the maximum semi-annual compensation
that we would have to pay in connection with deficiencies in natural gas
deliveries.
On August
11, 2006, we received Note SE No. 1009 (the “Note”) from the Secretariat of
Energy, which reviewed the progress of reserves in the Ramos Area in the
Noroeste basin, in relation to the export authorization granted by Resolution SE
No. 169/97 (the “Export Authorization”). The Export Authorization concerns the
long-term natural gas export contract between us and GasAtacama Generación, for
a maximum daily volume of 530,000 m3/day. The Note stated that as a result of
the decrease in natural gas reserves supporting the Export Authorization, the
domestic market supply was at risk. The Note preventively provided that the
maximum natural gas daily volumes authorized to be exported under the Export
Authorization were to be reduced by 20%, affecting the export contract. We filed
an answer to the Note on September 15, 2006 stating our allegations and
defenses.
YPF
Holdings
The
following is a brief description of certain environmental and other liabilities
related to YPF Holdings Inc., a Delaware corporation.
In
connection with the sale of Maxus’ former chemical subsidiary, Chemicals, to
Occidental in 1986, Maxus agreed to indemnify Chemicals and Occidental from and
against certain liabilities relating to the business or activities of Chemicals
prior to the Closing Date, including certain environmental liabilities relating
to certain chemical plants and waste disposal sites used by Chemicals prior to
the Closing Date.
As of June
30, 2008, YPF Holdings’ reserves for environmental and other contingencies
totaled approximately U.S.$197.3 million. YPF Holdings management believes it
has adequately reserved for all environmental and other contingencies that are
probable and can be reasonably estimated based on information available as of
such time; however, many such contingencies are subject to significant
uncertainties, including the completion of ongoing studies, the discovery of new
facts, or the issuance of orders by regulatory authorities, which could result
in material additions to such reserves in the future. It is possible that
additional claims will be made, and additional information about new or existing
claims (such as results of ongoing investigations, the issuance of court
decisions or the signing of settlement agreements) is likely to develop over
time. YPF Holdings’ reserves for the environmental and other contingencies
described below are based solely on currently available information and as a
result, YPF Holdings, Maxus and Tierra may have to incur costs that may be
material, in addition to the reserves already taken.
In the
following discussion concerning plant sites and third party sites, references to
YPF Holdings include, as appropriate and solely for ease of reference,
references to Maxus and Tierra. As indicated above, Tierra is also a subsidiary
of YPF Holdings and has assumed certain of Maxus’ obligations.
Newark, New Jersey. A consent
decree, previously agreed upon by the U.S. Environmental Protection Agency (the
“EPA”), the New Jersey Department of Environmental Protection (the “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 agreement with
Occidental. Operations and maintenance of the constructed remedy are ongoing,
and as of June 30, 2008, YPF Holdings has
reserved approximately U.S.$15.4 million in connection with such
activities.
Passaic River/Newark Bay, New
Jersey. Maxus, acting 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 Newark, New Jersey plant site described above. While some
work remains, these studies were substantially completed in 2005. In addition,
the EPA and other agencies are addressing the lower 17-mile portion of the
Passaic River (including the six-mile portion already studied) in a joint
federal, state, local and private sector cooperative effort designated as the
Lower Passaic River Restoration Project (“PRRP”). Tierra, along with certain
other entities, has agreed to participate in and fund a remedial investigation
and feasibility study (“RIFS”) in connection with the PRRP. The parties are
discussing the possibility of further work with the EPA. The entities that have
agreed to fund the RIFS have negotiated allocations of RIFS costs among
themselves based on a number of considerations.
Tierra,
acting on behalf of Occidental, is also performing and funding a separate RIFS
to characterize sediment contamination and evaluate remedial alternatives in
Newark Bay and portions of the Hackensack River, the Arthur Kill,
and the
Kill van Kull pursuant to a 2004 administrative order on consent with EPA. The
EPA has issued General Notice Letters to a series of additional parties
concerning the contamination of Newark Bay. Tierra has reached
agreement with five of these parties to contribute anually toward Newark Bay
study costs, and is continuing to negotiate with other parties.
In
December 2005, the DEP issued a directive to Tierra, Maxus and Occidental
directing said parties to pay the State of New Jersey’s costs of developing a
Source Control Dredge Plan focused on allegedly dioxin-contaminated sediment in
the lower six-mile portion of the Passaic River described above. The development
of this Plan is estimated by the DEP to cost approximately U.S.$2.3 million. The
DEP has advised the recipients that they are not required to respond to the
directive until otherwise notified. Also in December 2005, the DEP and the New
Jersey Spill Compensation Fund sued YPF Holdings, Tierra, Maxus and other
affiliates, as well as 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 defendants have made responsive pleadings and/or
filings. In March 2008, the court denied motions to
dismiss for failure to state a claim by Occidental Chemical Corporation, and by
Tierra and Maxus. NJDEP filed its Second Amended Complaint in April,
2008; YPF’s motion
to dismiss for lack of personal jurisdiction was denied in September, 2008.
Notwithstanding, the Court denied the plaintiffs’ motion to bar third party
practice and allowed defendants to file third-party complaints. See “Legal
Proceedings—Argentina—New Jersey Claims.”
In June
2007, EPA released a draft Focused Feasibility Study (“FFS”) that outlines
several alternatives for remedial action in the lower eight miles of the Passaic
River. These range from no action (which would result in comparatively little
cost) to extensive dredging and capping (which according to the draft FFS,
EPA estimated could cost from U.S.$0.9 billion to U.S.$2.3 billion),
and are all described by EPA as involving proven technologies that
could be carried out in the near term, without extensive research. Tierra, in
conjunction with the other parties of the PRRP group, submitted comments on the
draft FFS to EPA, as did a number of other interested parties. EPA has recently
informed us that a revised remedy proposal will not be forthcoming
any earlier than mid-2009. Tierra plans to respond to any further EPA proposal
as may be appropriate at that time.
In August
2007, the National Oceanic Atmospheric Administration (“NOAA”), as one of the
Federal Natural Resources Trustees, sent a letter to the parties of the PRRP
group, including Tierra and Occidental, requesting that the group enter into an
agreement to conduct a cooperative assessment of natural resources damages in
the Passaic River and Newark Bay. The PRRP group has responded through its
common counsel to request that discussions relating to such an agreement be
postponed until 2008, due in part to the pending FFS proposal by EPA. Tierra
plans to continue to participate in the PRRP group with regard to this matter.
In January 2008, the NOAA sent a letter to us, YPF Holdings, CLH Holdings Inc.
and other entities designating each as a potentially responsible party
(“PRP”).
In June
2008, the EPA, Occidental, and Tierra entered into an Administrative Order on
Consent (“AOC”), pursuant to which Tierra (on behalf of Occidental) will
undertake the removal of sediment from a portion of the Passaic River in the
vicinity of Chemicals’ former Newark, New Jersey facility described above. This
action will result in the removal of approximately 200,000 cubic yards of
sediment, which will be carried out in two phases. The first phase, which will
encompass the removal of 40,000 cubic yards, is scheduled for completion within
approximately 30 months from the effective date of the AOC (June 2008). The
second phase, which will encompass the removal of approximately 160,000 cubic
yards of sediment, will be completed on a different schedule. Pursuant to the
AOC, the EPA has required the provision of financial assurance in the amount of
U.S.$80 million for the performance of the removal work through a trust fund, to
which U.S.$2 million must be contributed within 90 days of the effective date of
the AOC and an additional U.S.$10 million must be contributed every six months
thereafter until a total of U.S.$80 million has been deposited into the fund.
The total amount of required financial assurance may be decreased or increased
over time if the anticipated cost of completing the removal work contemplated by
the AOC changes. During the removal work, certain contaminants not produced by
the former Chemicals plant, such as PCBs and mercury, will be removed along with
dioxin. YPF Holdings may seek cost recovery from the parties responsible for
such contamination; however, at this time it is not possible to make any
predictions regarding the likelihood of success or the funds potentially
recoverable in a cost-recovery action. The removal work required pursuant to the
AOC will be conducted concurrently with and in addition to the other
investigations and remedial actions described above, including those undertaken
in connection with the FFS concerning the lower eight miles of the Passaic
River, the RIFS addressing the lower 17-mile portion of the Passaic River, and
the RIFS relating to contamination in Newark Bay, portions of the Hackensack
River, the Arthur Kill and the Kill van Kull.
As of June
30, 2008, YPF Holdings has reserved approximately U.S.$91.9 million in
connection with the foregoing matters related to the Passaic River, the Newark
Bay and the surrounding area comprising the estimated costs for studies,
estimated costs in connection with the AOC, and certain other matters related to
the Passaic River and Newark Bay. However, it is possible that other works,
including interim remedial measures, may be ordered. How these matters
are
resolved, including the development of new information, the imposition of
natural resource damages or the selection of remedial actions differing from the
scenarios we have proposed could result in Maxus and Tierra incurring material
costs in addition to the amount currently reserved.
Hudson and Essex Counties, New
Jersey. Until the 1970s, Chemicals operated a chromite ore processing
plant at Kearny, New Jersey (the “Kearny Plant”). Tierra, on behalf of
Occidental, is providing financial assurance in the amount of U.S.$20 million
for performance of the work associated with the issues described
below.
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 (the “Respondents”) directing them to arrange for
the cleanup of chromite ore residue at three sites in Jersey City and for the
conduct of a study by paying the DEP a total of U.S.$19.5 million. Second, the
DEP 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 (including in excess of U.S.$2.3 million dollars
allegedly spent for investigations and studies) and, with respect to certain
costs at 18 sites, treble damages. The DEP claims that the defendants are
jointly and severally liable, without regard to fault, for much of the damages
alleged. The parties have come to an agreement regarding this matter,
pursuant to which Tierra will pay U.S.$ 5 million, and will remediate three
sites at an estimated cost of U.S.$ 2.1 million.
Pursuant
to a request of the DEP, in the second half of 2006, Tierra and certain other
parties tested the sediments in a portion of the Hackensack River near the
former Kearny Plant. A report of those test results has been submitted to the
DEP for its comments. What, if any, additional work will be required is expected
to be determined once the results of this testing have been analyzed by the
DEP.
In
November 2005, several environmental groups sent a notice of intent to sue the
owner of the property adjacent to the former Kearny Plant and five other
parties, including Tierra, under the Resource Conservation and Recovery Act. The
parties have entered into an agreement that addresses the concerns of the
environmental groups, and these groups have agreed, at least for now, not to
file suit.
As of June
30, 2008, YPF Holdings has reserved a total of approximately U.S.$32.9 million
in connection with the foregoing chrome-related matters. Soil action levels for
chromium in New Jersey have not been finalized, and the DEP continues to review
the proposed action levels. The cost of addressing these chrome-related matters
could increase significantly depending upon the final soil action levels, the
DEP’s response to Tierra’s reports and other developments.
Painesville, Ohio. From about
1912 through 1976, Chemicals operated manufacturing facilities in Painesville,
Ohio (the “Painesville Works”). The operations there over the years involved
several discrete but contiguous plant sites over an area of about 1,300 acres.
The primary area of concern historically has been Chemicals’ former chromite ore
processing plant (the “Chrome Plant”). The Ohio Environmental Protection Agency
(“OEPA”) has approved certain work, including the remediation of specific sites
within the former Painesville Works area and work associated with the
development plans (the “Remediation Work”). The Remediation Work has begun. As
the OEPA approves additional projects for the site of the former Painesville
Works, additional amounts may need to be reserved. YPF Holdings has reserved a
total of approximately U.S.$8.0 million as of June 30, 2008 for its estimated
share of the cost to perform the remedial investigation and feasibility study,
the Remediation Work and other operation and maintenance activities at this
site.
Third Party Sites. Pursuant
to settlement agreements with the Port of Houston Authority (the “Port”) and
other parties, Tierra and Maxus are participating (on behalf of Occidental) in
the remediation of property adjoining Chemicals’ former Greens Bayou facility
where dichloro-diphenyl-trichloroethane (“DDT”) and certain other chemicals were
manufactured. Additionally, the parties have recently entered into a settlement
with federal and state natural resources trustees in connection with claims for
natural resources damages. As of June 30, 2008, YPF Holdings has reserved
approximately U.S.$17.2 million for its estimated share of the remediation and
the natural resources damages settlement associated with the Greens Bayou
facility.
In June
2005, the EPA designated Maxus as a PRP at the Milwaukee Solvay Coke & 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 in respect of this site
commenced in the second half of 2006. YPF Holdings has reserved approximately
U.S.$0.21 million as of June 30, 2008 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 is
responsible for certain liabilities attributable to Occidental, as successor to
Chemicals, in respect of the Malone Service 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.
Chemicals
has also been designated as a PRP by the EPA under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
(“CERCLA”) 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. Numerous PRPs have been named at substantially all of these
sites. At several of these, Chemicals has no known exposure. At June 30, 2008,
YPF Holdings had reserved approximately U.S.$2.3 million in connection with its
estimated share of costs related to the Milwaukee Solvay Coke & Gas Site,
the Malone Service Company Superfund Site, and the other sites mentioned in this
paragraph.
“Agent Orange” and VCM
Litigation. 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. The trial
court decided that the 12-year cut-off period did not apply and entered judgment
against Maxus. This decision was affirmed by the Court of Appeals in February
2008. Maxus’ petition to the Texas Supreme Court for review was denied. This
decision will require Maxus to accept responsibility for various matters for
which it has refused to indemnify Occidental since 1998, which could result in
the incurrence of material costs in addition to YPF Holdings’ current reserves
for this matter. This decision will also require Maxus to reimburse Occidental
for past costs on these matters. Maxus believes that its current reserves are
adequate for these past costs and is currently evaluating the decision of the
Supreme Court. As of June 30, 2008, YPF Holdings had reserved approximately
U.S.$14.9 million in respect of this matter.
Turtle Bayou Litigation. In
March 2005, Maxus agreed to defend Occidental, as successor to Chemicals, in
respect of an action seeking the contribution of costs for the remediation of
the Turtle Bayou waste disposal site in Liberty County, Texas. Judgment was
recently entered in this action, and Maxus filed a motion for reconsideration
which was partially successful. As a result, the court’s decision requires Maxus
to pay, on behalf of Occidental, approximately 16% of those costs incurred by
one of the plaintiffs. Maxus has appealed. As of June 30, 2008, YPF
Holdings has
reserved U.S.$3.8 million in respect of this matter.
YPF
Holdings, including its subsidiaries, is a party to various other lawsuits, the
outcomes of which are not expected to have a material adverse affect on the
Company’s financial condition. YPF Holdings has established reserves for legal
contingencies in situations where a loss is probable and can be reasonably
estimated.
YPF
Holdings 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,
except perhaps those commitments related to the development of the Neptune
Project located in the vicinity of the Atwater Valley Area, Blocks 573, 574,
575, 617 and 618. Total commitments for the Neptune Project are capital
expenditures of U.S.$19.3 million for the remainder of 2008, and a minimum
pipeline transportation payment obligation of approximately U.S.$3.1 million for
the remainder of 2008; U.S.$5 million for 2009; U.S.$4 million for 2010;
U.S.$3.1 million for 2011; U.S.$2.4 million for 2012 and U.S.$8.4 million
thereafter.
ITEM
4. OTHER RECENT
DEVELOPMENTS
Disposition
No. 1
The
Hydrocarbons Law establishes the basic legal framework for the regulation of oil
and gas exploration and production in Argentina. The Hydrocarbons Law empowers
the executive branch of the Argentine government to establish a national policy
for development of Argentina’s hydrocarbon reserves, with the principal purpose
of satisfying domestic demand. Pursuant to the Hydrocarbons Law, exploration and
production of oil and gas is carried out through exploration permits, production
concessions, exploitation contracts or partnership agreements.
According
to the Hydrocarbons Law, holders of production concessions, including us, also
are required to pay royalties to the province where production occurs. A 12%
royalty is payable on the value at the wellhead (equal to the price upon
delivery of the product, less transportation, treatment costs and other
deductions) of crude oil production and the natural gas volumes commercialized.
The value is calculated based upon the volume and the sale price of the crude
oil and gas produced, less the costs of transportation and storage. In addition,
if a concession holder allots crude oil production for further industrialization
processes at its plants, the concession holder is required to agree with the
provincial
authorities or the Secretariat of Energy, as applicable, on the reference price
to be used for purposes of calculating royalties.
However,
in January 2008, considering, among other things, that as a result of Resolution
394/2007 of the Ministry of Economy and Production companies began to negotiate
the price for crude oil in the domestic market, which would then be used as the
basis for calculation of royalties, the Secretariat of Energy passed Disposition
No. 1, which sets a minimum reference price for the calculation of royalties. As
of the date of this report we have negotiated with certain third parties sale
prices of crude oil that we have used as the basis for calculating and paying
royalties according to the methodology set forth in the Hydrocarbons Law.
According to certain interpretations, some of the prices negotiated by us may
differ from the ones set forth in Disposition No. 1. If the final interpretation
of Disposition No. 1 differs with the one considered by us, we could be subject
to higher royalty obligations in the future, although our management believes
the effect of such higher royalties would not be material.
In
addition to the above, the Public Emergency Law, which created the export
withholdings, established that export withholdings were not to be deducted from
the export price for purposes of calculating the 12% royalties. The royalty
expense is accounted for as a production cost. Any oil and gas produced by the
holder of an exploration permit prior to the grant of a production concession is
subject to the payment of a 15% royalty. See “Update of Legal
Proceedings—Argentina—Neuquén royalty disputes” in this report.
Tender
Offer for our Capital Stock by Petersen Energía S.A.
Since
1999, we have been controlled by Repsol YPF, an integrated oil and gas company
headquartered in Spain with global operations. Repsol YPF owned approximately
99% of our capital stock from 2000 until February 21, 2008, when Petersen
Energía, S.A. (“Petersen Energía”) purchased 58,603,606 of our ADSs,
representing 14.9% of our capital stock, from Repsol YPF for U.S.$2,235 million
(the “Petersen Transaction”). In addition, Repsol YPF also granted options to
Enrique Eskenazi, Sebastián Eskenazi, Ezequiel Eskenazi Storey and Matías
Eskenazi Storey, shareholders of Petersen Energía, or to companies that are,
directly or indirectly, wholly-controlled by any of them to purchase up to an
additional 10.1% of our outstanding capital stock within four years. On May 20,
2008, Petersen Energía Inversora S.A. (“PEISA”) exercised an option to purchase
shares representing 0.1% of our capital stock, which will close upon the
fulfillment of certain requirements. Additionally, PEISA launched a tender offer
to purchase all of the shares of YPF that it were not already of their own at a
price of U.S.$49.45 per share or ADS. Repsol, pursuant to its first option
agreement with Petersen Energía, had stated that it would not tender YPF shares
to PEISA. The offer period commenced on September 11, 2008 and expired on
October 20, 2008.A total of 461,868 shares, representing approximately 0.117% of
our total shares oustanding, have been tendered. The settlement will close upon
the fulfillment of certain requirements. We believe that the Petersen entities’
participation in our capital stock and management will strengthen our Argentine
ties and expertise.
Extension
of Exploitation Concessions in the province of Neuquén
During the
month of September, pursuant to the notice provided to firms holding
exploitation concessions by the Province of Neuquén, through provincial decree
No. 822/08, YPF entered into a Memorandum of Agreement provided under such
Regulation and an Addendum to such agreement (hereinafter, the “Memorandum of
Agreement”) to extend the term of the exploitation concessions identified below,
which was to become effective upon its approval by the Legislature of the
Province of Neuquén.
On October
2008, the legislation of the Province of Neuquén approved the Memorandum of
Agreement through provincial Act No. 2615, which was enacted by provincial
executive decree No. 1830/08, and was published in Official Gazette No. 3109 of
the Province of Neuquén.
The
Memorandum of Agreement between YPF and the Province of Neuquén establishes the
following provisions, among others:
|
·
|
Concessions
involved: Cerro Bandera, Señal Cerro Bayo, Chihuido de la Sierra Negra, El
Portón, Filo Morado, Octógono, Señal Picada – Punta Barda and Puesto
Hernández.
|
|
·
|
Extension
of concession terms within the province of Neuquén:
exploitation concession terms, which were originally set to expire on
November 14, 2017, are extended for a 10-year term, which means that they
will expire on November 14, 2027.
|
|
·
|
Under
Provincial Decree No. 822/08, YPF undertook the following commitments upon
the execution of the Memorandum of Agreement: i) to make, on the date
specified in the Memorandum of Agreement,
|
|
|
initial
payments of U.S.$ 109 million, U.S.$ 26 million, and U.S.$ 40 million, to
be applied to different accounts of different provincial agencies;
ii) to pay the Province “An Extraordinary Production Royalty”
of 3% of the production of the areas involved in the Memorandum of
Agreement. In addition, the parties agreed to make additional adjustments
of up to an additional 3% in the event of extraordinary income due to
lower export duties or if YPF actually received a higher price for the
sale of crude oil and/or natural gas according to a mechanism and
reference values established in the Memorandum of Agreement; iii) to carry
out exploration activities in the remaining exploration areas and make
certain investments and expenditures in a total amount of U.S.$ 3,200
million trough 2027, as stipulated in the Memorandum of Agreement, on the
exploitation concessions that constitute the subject-matter of the
mentioned Memorandum of Agreement; and iv) to make “Corporate Social
Responsibility” contributions to the province of Neuquén in a total amount
of U.S.$ 20 million, which will be made in installments in the years 2008,
2009 and 2010. The purpose of such contributions will be to contribute to
the development of the Province of Neuquén in terms of education,
environment, health, culture, science and research and community
development.
|
Changes
to our Board of Directors, Committees and Management
Since the
filing of our Annual Report on Form 20-F with the Securities and Exchange
Commission on April 15, 2008, the following changes to our Board of Directors,
committees and management have taken place:
|
·
|
Mr.
Eduardo Elsztain is no longer a member of our Board of Directors or an
alternate member of our Audit Committee. Our Board of Directors is
currently composed of 16 Directors and 14 Alternate
Directors.
|
|
·
|
Mr.
Ignacio Cruz Moran has replaced Mr. Walter Forwood as our Chief Financial
Officer. Both Mr. Moran and Mr. Forwood continue to serve as
Alternate Directors.
|
|
·
|
Our
Disclosure Committee is currently composed of the following
members:
|
|
|
|
|
|
Sebastián
Eskenazi
|
|
Chief
Executive Officer
|
|
Antonio
Gomis Sáez
|
|
Chief
Operating Officer
|
|
Carlos
Alfonsi
|
|
Director
Refining and Logistics
|
|
Fernando
Dasso
|
|
Director
of Human Resources
|
|
Juan
Carlos Miranda
|
|
Media
Director
|
|
Sergio
Resumil
|
|
Director
of Communication
|
|
Ignacio
Cruz Moran
|
|
Chief
Financial Officer
|
|
Tomás
García Blanco
|
|
Director
of Exploration and Production
|
|
Carlos
Jimenez
|
|
Director
of Management Control
|
|
Àngel
Ramos Sánchez
|
|
Director
of Administration and Tax
|
|
Rafael
López Revuelta
|
|
Director
of Chemicals
|
|
Alfredo
Pochintesta
|
|
Director
of Marketing
|
|
Gonzalo
López Fanjul
|
|
Director
of Industrial Subsidiaries
|
|
Alejandro
Quiroga López
|
|
General
Counsel
|
|
Aquiles
Rattia
|
|
Director
of Reserves Control
|
|
Rubén
Marasca
|
|
Director
of Internal Audit
|
ITEM
5. UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF AND FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2008
YPF
SOCIEDAD ANONIMA AND CONTROLLED AND JOINTLY CONTROLLED COMPANIES
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
|
|
Page
|
|
|
|
|
Condensed
consolidated statements of income for the six-month periods ended June 30,
2008, and 2007
|
F-2
|
|
|
|
|
Condensed
consolidated balance sheets as of June 30, 2008 and December 31,
2007
|
F-3
|
|
|
|
|
Condensed
consolidated statements of cash flows for the six-month periods ended June
30, 2008 and 2007
|
F-4
|
|
|
|
|
Condensed
consolidated statements of changes in shareholders' equity for the
six-month periods ended June 30, 2008 and 2007
|
F-5
|
|
|
|
|
Notes
to condensed consolidated financial statements for the six-month period
ended June 30, 2008 and comparative information
|
F-6
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
YPF
SOCIEDAD ANONIMA AND CONTROLLED AND JOINTLY CONTROLLED COMPANIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
FOR
THE SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(Amounts
expressed in millions of Argentine pesos, except for per share amounts in
Argentine pesos – Note 1)
(The
condensed consolidated statements of income for the six-month periods ended June
30, 2008 and June 30, 2007, are unaudited)
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Net
sales (Note 3.h)
|
|
|
16,443 |
|
|
|
13,099 |
|
|
Cost
of sales (Note 9.b)
|
|
|
(10,901 |
) |
|
|
(8,299 |
) |
|
Gross
profit
|
|
|
5,542 |
|
|
|
4,800 |
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
expenses (Note 9.c)
|
|
|
(429 |
) |
|
|
(361 |
) |
|
Selling
expenses (Note 9.c)
|
|
|
(1,102 |
) |
|
|
(992 |
) |
|
Exploration
expenses (Note 9.c)
|
|
|
(218 |
) |
|
|
(247 |
) |
|
Operating
income
|
|
|
3,793 |
|
|
|
3,200 |
|
|
|
|
|
|
|
|
|
|
|
|
Income
on long-term investments
|
|
|
67 |
|
|
|
29 |
|
|
Other
expenses, net (Note 3.i)
|
|
|
(241 |
) |
|
|
(18 |
) |
|
Financial
income (expense), net and holding gains:
|
|
|
|
|
|
|
|
|
|
Gains
(losses) on assets
|
|
|
|
|
|
|
|
|
|
Interests
|
|
|
75 |
|
|
|
160 |
|
|
Exchange
differences
|
|
|
(18 |
) |
|
|
59 |
|
|
Holding
gains on inventories
|
|
|
123 |
|
|
|
119 |
|
|
Losses
on liabilities
|
|
|
|
|
|
|
|
|
|
Interests
|
|
|
(189 |
) |
|
|
(145 |
) |
|
Exchange
differences
|
|
|
279 |
|
|
|
(19 |
) |
|
Reversal
of impairment of other current assets (Note 2.j)
|
|
|
- |
|
|
|
69 |
|
|
Net
income before income tax
|
|
|
3,889 |
|
|
|
3,454 |
|
|
Income
tax
|
|
|
(1,635 |
) |
|
|
(1,310 |
) |
|
Net
income
|
|
|
2,254 |
|
|
|
2,144 |
|
|
Earnings per share (Note
1)
|
|
|
5.73 |
|
|
|
5.45 |
|
The
accompanying notes are an integral part of these financial
statements.
YPF
SOCIEDAD ANONIMA AND CONTROLLED AND JOINTLY CONTROLLED COMPANIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
AS
OF JUNE 30, 2008 AND DECEMBER 31, 2007
(Amounts
expressed in millions of Argentine pesos – Note 1)
(The
condensed consolidated balance sheet as of June 30, 2008, is
unaudited)
|
|
|
2008
|
|
|
2007
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
|
|
|
105 |
|
|
|
196 |
|
|
Investments
(Note 3.a)
|
|
|
519 |
|
|
|
655 |
|
|
Trade
receivables (Note 3.b)
|
|
|
3,179 |
|
|
|
3,235 |
|
|
Other
receivables (Note 3.c)
|
|
|
2,053 |
|
|
|
4,361 |
|
|
Inventories
(Note 3.d)
|
|
|
2,854 |
|
|
|
2,573 |
|
|
Total
current assets
|
|
|
8,710 |
|
|
|
11,020 |
|
|
|
|
|
|
|
|
|
|
|
|
Non
current Assets
|
|
|
|
|
|
|
|
|
|
Trade
receivables (Note 3.b)
|
|
|
27 |
|
|
|
32 |
|
|
Other
receivables (Note 3.c)
|
|
|
854 |
|
|
|
809 |
|
|
Investments
(Note 3.a)
|
|
|
824 |
|
|
|
799 |
|
|
Fixed
assets (Note 3.e)
|
|
|
26,342 |
|
|
|
25,434 |
|
|
Intangible
assets
|
|
|
7 |
|
|
|
8 |
|
|
Total
non current assets
|
|
|
28,054 |
|
|
|
27,082 |
|
|
Total
assets
|
|
|
36,764 |
|
|
|
38,102 |
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable (Note 3.f)
|
|
|
4,784 |
|
|
|
4,339 |
|
|
Loans
(Note 3.g)
|
|
|
2,602 |
|
|
|
471 |
|
|
Salaries
and social security
|
|
|
199 |
|
|
|
213 |
|
|
Taxes
payable
|
|
|
1,561 |
|
|
|
1,441 |
|
|
Net
advances from crude oil purchasers
|
|
|
- |
|
|
|
9 |
|
|
Reserves
|
|
|
508 |
|
|
|
466 |
|
|
Total
current liabilities
|
|
|
9,654 |
|
|
|
6,939 |
|
|
|
|
|
|
|
|
|
|
|
|
Non
current Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable (Note 3.f)
|
|
|
2,845 |
|
|
|
2,542 |
|
|
Loans
(Note 3.g)
|
|
|
650 |
|
|
|
523 |
|
|
Salaries
and social security
|
|
|
134 |
|
|