TRANSPORTADORA DE GAS DEL PERU S.A. INTERIM FINANCIAL STATEMENTS MARCH 31, 2015

Transcription

1 TRANSPORTADORA DE GAS DEL PERU S.A. INTERIM FINANCIAL STATEMENTS MARCH 31, 2015

2 TRANSPORTADORA DE GAS DEL PERU S.A. INTERIM FINANCIAL STATEMENTS MARCH 31, 2015 CONTENTS Pages Interim statement of financial position 3 Interim statement of comprehensive income 4 Interim statement of changes in shareholders equity 5 Interim statement of cash flows 6 Notes to the interim financial statements 7-38 US$ = United States dollar S/. = New Peruvian sol

3 TRANSPORTADORA DE GAS DEL PERU S.A. INTERIM STATEMENT OF FINANCIAL POSITION As of As of As of As of March 31, December 31, March 31, December 31, Note Note (Unaudited) (Audited) (Unaudited) (Audited) ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT ASSETS CURRENT LIABILITIES Cash and cash equivalents 6 274, ,094 Trade payables 12 44,573 32,651 Trade receivables 7 44,296 46,832 Current income tax payable 13,505 37,185 Other receivables 9 13,896 10,901 Other payables 15 87,047 25,284 Other supplies 13,735 13,320 Current portion of long-term debt 13 y 14 17,445 8,495 Prepaid expenses 3,685 4,988 TOTAL CURRENT LIABILITIES 162, ,615 TOTAL CURRENT ASSETS 349, ,135 NON-CURRENT LIABILITIES NON-CURRENT ASSETS Liability for Main Grid Guarantee , ,308 Property, plant and equipment 10 1,243,153 1,243,829 Corporate bonds , ,258 Deferred income tax asset 16 35,431 26,902 Other long-term payables , ,786 Other assets , ,517 TOTAL NON-CURRENT LIABILITIES 1,202,405 1,210,352 TOTAL NON-CURRENT ASSETS 1,432,599 1,426,248 TOTAL LIABILITIES 1,364,975 1,313,967 SHAREHOLDERS' EQUITY Capital share 208, ,300 Other comprehensive income - 1,638 Legal reserve 41,660 40,643 Retained earnings 167, ,835 TOTAL SHAREHOLDERS' EQUITY , ,416 TOTAL ASSETS 1,782,468 1,767,383 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,782,468 1,767,383 The accompanying notes from 7 to 39 are part of the financial statements

4 TRANSPORTADORA DE GAS DEL PERU S.A. INTERIM STATEMENT OF COMPREHENSIVE INCOME For the three-month period ended March 31, Note Operating revenue , ,421 Cost of service 22 (54,083) (51,348) Gross profit 79,568 80,073 Other operating income (expenses): Administrative expenses 23 (3,445) (7,135) Other income Other expenses 24 (27,872) (505) Total operating expenses (30,890) (7,150) Operating profit 48,678 72,923 Finance expenses 25 (17,324) (18,676) Finance income Exchange difference, net 3.1a - i) 3, Financial result, net (13,892) (18,093) Profit before income tax 34,786 54,830 Income tax 19-c) (10,709) (17,109) Total profit and total comprehensive income for the period 24,077 37,721 The accompanying notes from 7 to 39 are part of the financial statements

5 TRANSPORTADORA DE GAS DEL PERU S.A. INTERIM STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2015 AND 2014 Number of Other Other common Capital comprehensive capital Retained shares share income reserves earnings Total In thousands US$000 Balances at January 1, , ,300 1,638 34, , ,373 Profit and total comprehensive income for the period ,721 37,721 Transfer to legal reserve ,343 (6,343) - Dividend distribution (Note 17) (150,000) (150,000) Balances at March 31, 2014 (Unaudited) 208, ,300 1,638 40, , ,094 Balances at January 1, , ,300 1,638 40, , ,416 Profit and total comprehensive income for the period ,077 24,077 Transfer to legal reserve ,017 (1,017) - Transfer to retained earnings (Note 17) - - (1,638) - 1,638 - Dividend distribution (Note 17) (60,000) (60,000) Balances at March 31, 2015 (Unaudited) 208, ,300-41, , ,493 The accompanying notes from 7 to 39 are part of the financial statements

6 TRANSPORTADORA DE GAS DEL PERU S.A. INTERIM STATEMENT OF CASH FLOWS For the three-month period ended March 31, Note CASH FLOWS FROM OPERATING ACTIVITIES Collections from customers 135, ,846 Payments to suppliers (50,456) (51,141) Income tax paid (42,919) (12,207) Interest paid (10,932) (16,273) Other payments related to operating activities 513 3,628 Net cash provided by operating activities 26 32,028 53,853 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment 10 (22,525) (13,373) Purchase of other assets 11 (340) (216) Net cash applied to investing activities (22,865) (13,589) CASH FLOWS FROM FINANCING ACTIVITIES Payments of dividends 17 - (150,000) Net cash applied to financing activities - (150,000) Net increase (decrease) in cash and cash equivalents 9,163 (109,736) Cash and cash equivalent at beginning of the period 265, ,724 Cash and cash equivalent at end of the period 274, ,988 The accompanying notes from 7 to 39 are part of the financial statements

7 TRANSPORTADORA DE GAS DEL PERU S.A. NOTES TO THE INTERIM FINANCIAL STATEMENTS MARCH 31, GENERAL INFORMATION AND ECONOMIC ACTIVITY Transportadora de Gas del Peru S.A. (hereinafter the Company or TGP) was established in Peru on November 2, 2000 and started its commercial activities on August 20, The Company s shareholders as of March 31, 2015 are detailed in Note 17. The Company s legal address is Av. Santo Toribio 173, Vía Central 125, Torre Real 8, oficina 901, San Isidro, Lima Peru. The Company is mainly engaged in transporting natural gas (NG) and natural gas liquids (NGL) through its pipelines. The Company may also carry out natural gas distribution activities by a pipeline network as well as the design, supply of goods and other facilities required for the transportation of NG and NGL, including any related activity, either by public or private license. TGP is the holder of two concessions that are part of the Camisea Project: i) Transportation of Natural Gas via pipelines from Camisea to the City Gate in Lima. ii) Transportation of Natural Gas Liquids via pipelines from Camisea to the Coast. As per the Build, Own, Operate & Transfer (BOOT) concession agreements (hereinafter BOOT Concession Agreements), described below, the operating and maintenance activities of the natural gas and natural gas liquids transportation systems have been assigned to Compañía Operadora de Gas del Amazonas S.A.C. (Note 8). Background of the Concession Agreements - On December 6, 2000, by Supreme Resolutions 101/2000 and 102/2000 of the Peruvian Ministry of Energy and Mines (the Licensor - MEM), TGP was granted the two afore-mentioned concessions for which the corresponding BOOT agreements were signed. On the same date, pursuant to Supreme Decree 033/2000-PCM, the Peruvian Government granted TGP, by means of an agreement signed under Art.1357 of the Peruvian Civil Code, a Peruvian Government Guarantee in support of the returns, securities and obligations contained in the above-mentioned BOOT agreements. Legal stability agreement - On December 5, 2000, TGP signed a Legal Stability Agreement with the National Commission for Foreign Investments and Technologies (CONITE, now Proinversion), by which TGP committed to issue shares for up to a certain amount and the Peruvian Government guaranteed the tax regime legal stability related to income tax rates and the employees hiring regimes in force at the agreement signing date. This stability agreement, which is effective from the signing date of the BOOT agreements and over the effective period of the concession, cannot be modified unilaterally, regardless of whether such eventual modifications may be more favorable or unfavorable for either of the parties. TGP has the right, on a one-time basis, to relinquish the legal stability agreement and automatically become subject to ordinary legislation. Basis of the BOOT Concession Agreements - The concessions for the transportation of natural gas through pipelines and the transportation of natural gas liquids through pipelines of which TGP is the concessionaire, have been granted free of charge by the Peruvian Government

8 During the effective period of the agreement, TGP will be the owner of the assets of the concession and, upon termination of the concession agreement, TGP will transfer to the Peruvian Government the assets received and the investments made and, as compensation, the Peruvian Government will pay TGP up to a maximum amount equivalent to the accounting value of such concession assets at that date. a) Concession of Natural Gas Transportation via pipelines from Camisea to the City Gate of Lima - Its purpose is to establish the rights and obligations of the parties and set forth the rules governing the design, supply of goods and services, and construction of the Gas Transportation System, the exploitation of the Assets of the Concession and the transfer of the concession Assets to the Peruvian Government, upon termination of the concession. TGP is obliged to design and build the infrastructure necessary for the gas transportation network, which has to be suitable to transport the minimum capacity specified in the agreement. For the service of gas transportation provided through the gas transportation network, the Company can charge the maximum regulated fee, determined based on the financial bid. The Company is responsible for the operation of the gas transportation system, including its maintenance and repair. For this service, a fee will be collected by TGP that allows the recovery of the cost of service to transport natural gas. The effective period of the agreement is of thirty-three years from the signing date. TGP may request an extension of the effective period; each extension period may not exceed ten years and may be granted successively, without exceeding a maximum cumulative period of sixty years. Addendum to BOOT Agreement - By means of Supreme Resolution No EM dated May 27, 2010, an addendum was signed between the Peruvian ministry of energy and mines (hereinafter MEM) and the Company to the BOOT Concession Agreement for the transportation of natural gas by which TGP is engaged to extend the capacity of the Natural Gas Transportation System up to 920 MMPCD. Also, under Supreme Resolution No EM dated April 15, 2011, a new addendum was approved to be signed between the MEM and the Company to the BOOT Concession Agreement for the Natural Gas Transportation, which updated the conditions necessary for executing the extension described in Supreme Resolution No EM. Within the Framework of the above-mentioned Addenda, the construction works to extend the pipeline transport system were located in the area of the district of Echarate, province of La Convencion, Cusco and comprised two projects. The first project was called Loop Sur and comprised the construction of a pipeline of 55 Kms long in parallel to the existing one. The second project comprised the construction of a Gas - Compressing Plant by Kp 127 of the gas transportation system and which would initially have an installed power of 54,000 HP. Those construction works for the extension of the pipeline system have been affected mainly by the insecurity events occurred in the area of the Kiteni location, which led the Peruvian Government to declare the State of Emergency all over the district of Echarate in April 2012 as well as the acceptance by the MEM of the Force Majeure claimed by the Company, given the fact that the extension works on the natural gas pipeline transportation system had been affected, resulting in the delayed execution and delayed start of operation of the natural gas extension project as long as the Force Majeure event lasts. The insecurity conditions described in the above paragraph resulted in unfeasible conditions to continue with the construction project called Loop Sur. In this sense, by means of Supreme Resolution No EM dated August 29, 2013 a new addendum was agreed to be signed between MEM and the Company to the BOOT Concession - 8 -

9 Agreement to transport natural gas, which was actually signed on September 14, 2013, by which the decision was made to re-define the construction project, terms and conditions under which the capacity of the Natural Gas Transportation System would be extended, considering that the obligation to build the Loop Sur project no longer exists. Also by this Addendum, the Company was engaged to build a Major Deviation from the existing pipeline up to the city of Ayacucho, as per the conditions set forth in such document. In this sense, capacity will be extended up to 920 MMPCD, in one single stage, with the execution of the following works: the first one, based on improved security conditions in the site, is to resume construction and set-up of the Compressing Plant at Kp 127, by adding more compression capacity: this plant will then be equipped with four (4) turbo-compressors (TTCC) of HP each: which means a total installed capacity of HP. The second one, called Loop Costa, located between Chilca and Lurín, comprises the construction of a pipeline of 31 Kms long to run from Chilca, at Kp 699, where it will connect with the existing Loop Costa, then up to Lurín at around Kp 730, where it will connect to the City Gate Lurín. Main Grid Guarantee (MGG) - The Main Grid Guarantee comprises an agreement whereby TGP is entitled to guarantee minimum revenue in its initial years of operation. If actual revenue is less than the guaranteed revenue, then the Company will receive the difference. The mechanism of the guaranteed revenue should expire, if after the fifth year of trading operations, the minimum guaranteed revenue differential was equal to zero for three consecutive years or three alternate years within a five-year period. Any differential to be collected by the Company was received by invoicing certain electric power generation companies, as required by the regulations to promote the electric industry. The mechanism of guaranteed income expired in April 2012, after determining a revenue differential of zero during the last three years. The Peruvian Government, by means of Supreme Decree No EM dated October 20, 2002, decided to allow TGP to anticipate from November 2002 collection of the potential minimum guaranteed revenue differential so as to reduce rates resulting from the beginning of the Camisea Project which were gradually assigned to the payment of the guarantee. In February 2003, the collection of the MGG started, as a result of which US$89.8 million was collected from electric powergenerating companies in years 2003 and This amount, net of applications and updating, is shown in Liability for Main Grid Guarantee in the statement of financial position (Note 13). Such collections are being re-paid to the power generation companies over the life of the Concession. TGP entered into a fiduciary agreement, for the collection of the MGG, with Red de Energía del Perú S.A (REP), GNLC (now Calidda S.A.) and Banco Wiese Sudameris (now Scotiabank Peru), the purpose of which is the administration and collection of the fees derived from the service provided by TGP, including the MGG. In accordance with the fiduciary agreement and the provisions of Emergency Decree , on December 6, 2004 TGP, PERUPETRO S.A. and Banco Wiese Sudameris (currently Scotiabank Peru) established a payment mechanism trust, which contains the amounts contributed by the electric powergenerating companies and the contingency fund contributed by PERUPETRO S.A. as guarantor of the Peruvian Government, in order to cover any possible delays or defaults in the payment of the MGG by the power-generating companies. Agreement for increase in and use of the gas transportation capacity of the major pipeline - Pursuant to Supreme Resolution No dated May 26, 2010, an agreement was signed with Peru LNG S.R.L. (hereinafter PLNG) for the increase in and use of the transportation capacity of the pipeline owned by this entity. By this agreement, PLNG maintains the right to a dedicated - 9 -

10 transportation capacity of 745 MMSCFD through its pipeline and grants TGP the right to use and create capacity in said pipeline for up to 550 MMSCFD. This agreement will permit TGP to extend its natural gas transportation capacity to provide services to its customers. In return for using PLNG's pipeline to create transportation capacity and use it for natural gas transportation for its customers, TGP agrees to pay a monthly consideration of US$208,450, which will be paid starting the next month following the date on which PLNG informs TGP that it has satisfactorily completed testing and commissioning of the PLNG's pipeline. The maturity date of this agreement is January 11, The notification date of the above communication was June 1, b) Concession of Natural Gas Liquids Transportation via pipelines from Camisea to the City Gate of Lima - Its purpose is to establish the rights and obligations of the parties and set forth the standards and rules governing the design, supply of goods and services, and construction of the Liquid Transportation System, the exploitation of the assets of the concession and the transfer of the assets of the concession to the Peruvian Government at the termination date of the concession agreement. By means of this agreement, TGP assumed the design, supply of goods and services and construction of the works committed for the liquid transportation system. For this service, TGP will charge a fee that permits the recovery of the cost of the liquids transportation service. From the starting date of commercial operations, the liquids transportation system should be capable of transporting liquids covering the capacity guaranteed by the holder of the license agreement for the production of hydrocarbons in Block 88 (the Producer ), which is 50,000 barrels per day. The construction of the transportation system which includes all of the works, installations and equipment necessary for the adequate operation of the transportation system is the responsibility of TGP. The separation and fractioning plants, as well as the marine facilities necessary for shipment of the final products obtained in the fractioning plant are not the responsibility of TGP. The Producer will guarantee to TGP the recovery of the liquids transportation service cost through the payment of a fee, which may be freely agreed upon between the parties. Issue of senior bonds - On April 30, 2013, the Company issued senior bonds under Rule 144A and Regulation S of the 1933 U.S. Securities Act for a total of US$850,000,000, bearing interest at 4.25% and with maturity on April 30, Funds raised from this international issue of senior bonds were used to refinance the debt and other corporate objectives (Note 14). Approval of the financial statements - Financial statements corresponding to the three-month period ended March 31, 2015, were authorized for issue by Management on April 30, The financial statements as of December 31, 2014 were approved at the General Shareholders Meeting held on March 24, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all periods presented. 2.1 Basis of presentation - The accompanying financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and IFRIC interpretations as issued by the International Accounting Standards Board (hereinafter the IASB )

11 The current financial statements have been prepared under the historical-cost convention. The financial statements are expressed in thousands of US dollars. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires Management to exercise its judgment in the process of applying the Company s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note Amendments to standards and interpretations - New standards, amendments and interpretations not effective for 2015 that have not been early adopted - IFRS 9, Financial instruments, is the first standard issued as part of a wider project to replace IAS 39. This standard maintains but simplifies the measurement combined model and sets forth two main measurement categories for financial assets: those measured at amortized cost and those measured at fair value. The classification base depends on the Company s business model and the characteristics of contractual cash flows of the respective financial asset. The IAS 39 guidance on financial assets impairment and hedge accounting is still being applied. The Company is yet to assess IFRS 9 s impact on its financial information. IFRS 15, Revenue from contracts with customers deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity s contracts with customers. Revenue is recognized when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 Revenue and IAS 11 Construction contracts and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2017 and earlier application is permitted. During the three-month period ended March 31, 2015, there are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Company. 2.3 Foreign currency translation - Functional and presentation currency - The Company has established the US dollar as its functional and presentation currency. Transactions and balances - Foreign currency transactions (other than the functional currency) are translated into the functional currency (U.S. dollars) using the exchange rates prevailing at the dates of the transactions. In translating foreign exchange balances, the exchange rates established by the Peruvian banking regulator (Superintendencia de Banca, Seguros y AFP) are used. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of comprehensive income. 2.4 Financial assets - The Company classifies its financial assets in the following categories: i) at fair value through comprehensive income, ii) loans and receivables, iii) held-to-maturity and iv) available-for-sale. The classification depends on the purpose for which the financial assets were acquired. Management

12 determines the classification of its financial assets at initial recognition, and when appropriate, revalues this calculation at each year-end. All financial assets are initially recognized at fair value plus the direct costs attributed to the transaction, except for financial assets whose transaction costs are recognized in comprehensive income. The fair value of the Company s financial assets is considered similar to their carrying amount because they are liquid or have short-term maturities (less than three months). As of March 31, 2015 and December 31, 2014, the Company only has financial assets in the category of loans and receivables, which are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Company provides money, assets or services directly to a debtor without intending to negotiate the receivable and are included in current assets. Loans and receivables comprise trade receivables, other receivables and cash and cash equivalents in the statement of financial position. The Company evaluates on each date of the statement of financial position whether there is any objective evidence that a financial asset or a group of financial assets is impaired. 2.5 Financial Liabilities - In accordance with IAS 39, financial liabilities are classified, as applicable, as: i) financial liabilities at fair value, and ii) other liabilities. The Company determines the classification of its financial liabilities at the date of their initial recognition. The Company s financial liabilities include trade payables, corporate bonds, and other payables. All financial liabilities are initially recognized at fair value and are subsequently measured at their amortized cost. The amortized cost includes costs directly attributable to the transaction. 2.6 Offsetting financial instruments - Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously. 2.7 Impairment of financial assets - Loans and receivables - The Company assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired, and impairment losses are incurred, only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, such as: i) default or delinquency in interest or principal payments, ii) the probability that the debtor will enter bankruptcy or other financial reorganization, and iii) where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. The amount of the loss is measured as the difference between the asset s carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not been

13 incurred) discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognized in the statement of comprehensive income. If a loan and receivable have a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the reversal of the previously recognized impairment loss is recognized in the statement of comprehensive income. 2.8 Cash and cash equivalents - Cash and cash equivalents shown in the Company s statement of financial position include cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less. In the statement of financial position, bank overdrafts are shown in current liabilities. 2.9 Trade receivables - Trade receivables are initially recognized at fair value, less provision for impairment. The provision for impairment is estimated in accordance with the policies described in Note 2.7. The amount of the provision is recognized in the statement of comprehensive income Other supplies - Supplies are recognized at cost by using the weighted average cost method. A review of obsolete supplies is performed at year-end and a provision for impairment is made, if required, in the statement of comprehensive income Property, plant and equipment - Property, plant and equipment are stated at historical cost less accumulated depreciation and if applicable, the accumulated impairment losses. The cost of an item of property, plant and equipment comprises its purchase price and includes the disbursements directly attributable to the acquisition of these items, including finance costs. The Company is not required to capitalize costs related to the final closing of associated pipelines and facilities due to the fact that the BOOT concession agreements require TGP to transfer the concession assets at the time of expiry of the concessions granted (Note 1). Disbursements incurred to replace a component of an item or element of property, plant and equipment are capitalized separately, writing down the carrying amount of the component being replaced. Subsequent costs are included in the asset s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. Also, the disbursement related with a substantial improvement is recognized as part of the cost of the fixed asset, as long as the recognition criteria is complied with. Other repair and maintenance costs are identified as expenditures as incurred. Assets in the construction stage are capitalized as a separate component. At their completion, the cost of such assets is transferred to their definitive category. Works in progress is not depreciated. Residual values, the assets useful lives and the depreciation methods applied are revised and adjusted, if required, at the date of each statement of financial position. Any changes in these estimates are prospectively adjusted. Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to

14 allocate their cost or revalued amount to their residual values over their estimated useful lives. If the estimated useful life exceeds the concession agreements, depreciation is calculated on a straight-line basis from the date it is recognized as an asset to the expiry of the concession. Residual value is considered insignificant since the assets will be transferred to the Peruvian Government at the end of the relevant agreements at their net accounting value. The estimated useful lives are as follows: Type of assets Years Buildings 30 to 33 Natural gas and natural gas liquids transportation system 30 Compressor plant 25 Internal inspection of pipelines 5 Stabilization works 5 Vehicles 5 Furniture and fixtures 10 Computer equipment 4 Property, plant and equipment items are written off when they are sold or when no economic benefits are expected from their use or subsequent sale. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount (Note 2.13). Gains and losses on disposals are determined by comparing the proceeds with the carrying amount of the assets. These are included in the statement of comprehensive income Other assets - Line pack - Comprises the cost of condensed natural gas and natural gas liquids acquired by the Company from the consortium operating the Camisea project and which are required by the Company to start the operation of the natural gas and natural gas liquids transportation system. They are recognized at cost and presented in Other assets in the statement of financial position. Due to its nature, the Line pack must always be maintained, it is not subject to depletion, and therefore, it is not amortized. Right to receive compression services - This item comprises the right to receive natural gas compression service by the consortium-operator of the Camisea project. The item of right to receive compression services is amortized based on the capacity of gas transportation over the useful life of the concession Impairment of non-financial assets - Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell or value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are largely independent cash inflows (cash-generating units) Liability for Main Grid Guarantee (MGG) - The decrease in the MGG is calculated on the basis of a decreasing application table using the same interest rate used in determining the MGG (12%)

15 The value of the MGG corresponds to the present value of the guaranteed revenues discounted at the rate of 12% and is updated at the date of the financial statements, by applying said interest rate. Additionally, the principal granted is annually adjusted by the US Producer Price Index (hereinafter the PPI). The restated amount of the MGG was recognized as a charge to the cost of construction of the transportation system of natural gas and natural gas liquid up to the start-up date of operations; and as from that date, such restated value is recognized with a charge to the finance cost account of the statement of comprehensive income Corporate bonds - Funds obtained from the issue of corporate bonds are initially recorded at fair value, net of transaction costs incurred. These loans are subsequently recorded at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the statement of comprehensive income during the period of the loan using the effective interest method. Loans are classified as current liabilities unless the Company has the unconditional right to defer the payment of the obligation for at least 12 months after the date of the statement of financial position Trade payables - Trade payables are obligations to pay for services and materials, supplies and spare parts necessary for the extension and provision of the service of natural gas and natural gas liquids transportation. Payables are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities Provisions - Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are reviewed periodically and are adjusted to reflect the best estimate at the date of the statement of financial position. When the time-value of money is significant, the amount of the provision is the present value of the disbursements that are expected to be incurred to settle them. The provision expense is shown in the statement of comprehensive income Employee benefits - Statutory bonuses - The Company recognizes an expense for statutory bonuses and the related liability on an accrual basis. Statutory bonuses comprise two annual payments, paid each year in July and December. Employees severance indemnities - Employees severance indemnities of the Company s staff comprises their indemnification rights, calculated in accordance with the regulations in force, which have to be credited to the bank accounts designated by workers, in May and November each year. The compensation for service time is equivalent to a half salary effective at the date of each bank deposit. The Company has no obligations to make any additional payments once the annual deposits to which workers are entitled to have been made. Vacation leave - Annual vacation leave is recognized on the accrual basis

16 2.19 Current and deferred income tax - The tax expense for the period comprises current and deferred income tax. Income tax is recognized in the statement of comprehensive income, except to the extent that it relates to items recognized directly in equity. In this case, the tax is also recognized in equity. The current income tax charge is calculated on the basis of the tax laws enacted at the signing date of the tax and legal stability agreements as well as any adjustment to prior-year taxes. Management periodically evaluates the position taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined using tax rates that have been enacted at the signing date of the tax and legal stability agreements (Note 1) and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized Revenue recognition - Services rendered - The Company recognizes revenue when the amount of revenue can be reliably measured and it is probable that future economic benefits will flow to the Company. Revenue from services are measured at the fair value of the consideration received or receivable for the services rendered to the users of the transport system of natural gas and natural gas liquid as per the rate schedules established under the BOOT Concession agreements. At the end of each monthly period, the Company estimates natural gas liquids and natural gas transportation service revenues on the basis of the daily reported gas volumes at each point of gas delivery. The difference between said estimate and the actual amount is not significant and is recognized in the statement of comprehensive income in the month following the estimation. Revenues from the natural gas and natural gas liquids transportation services are recognized when the service is rendered, regardless of when they are billed or collected. Interest - Revenue from interest is recognized on a time-proportion basis, using the effective interest method Leases - Leases in which a significant part of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the statement of comprehensive income on a straight-line basis over the period of the lease Borrowing costs - Borrowing costs directly attributable to the acquisition, or construction of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalized until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. All other borrowing costs are recognized in comprehensive income

17 2.23 Capital - Common shares are classified as equity Dividend distribution - Dividends distributed to the Company s shareholders are recognized as a liability in the financial statements in the period in which they are approved at the General Shareholders Meeting. 3 FINANCIAL RISK MANAGEMENT 3.1 Financial risk factors - The Company s activities expose it to a variety of financial risks: market risk (including currency risk, price risk and interest rate risk), credit risk and liquidity risk. The Company s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company s financial performance. Risk management is carried out by the Finance Department under policies approved by the Board of Directors. The Finance Department identifies, evaluates and hedges financial risks based in close cooperation with the Company s operating units. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest risk, credit risk, use of derivative financial instruments and non-derivative financial instruments and investment of excess liquidity. The sensitivity analysis has been prepared for the three-month period ended March 31, 2015 and 2014 using the balances of financial assets and liabilities recorded at those dates. It is the Company s policy not to maintain financial derivatives for speculative purposes. The most significant financial risks to which the Company is exposed to are as follows: a) Market risks - Market risk is the risk that the fair value of future cash flows of financial instruments fluctuates as a result of the changes in market prices. The sensitivity analysis of this section is related to the position for the three-month period ended March 31, 2015 and 2014 and has been prepared considering that the proportion of financial instruments denominated in foreign currency will remain constant. The major market risks to which the Company is exposed to comprise: i) Foreign exchange risk - The Company is exposed to exchange risk as a result of its exposure to other currencies with respect to the US dollar. The Company records its transactions in U.S. dollars, which is its functional currency. Its revenues, purchases, operating expenses and financial assets and liabilities are substantially made in US dollars and, to a lesser extent, in new Peruvian soles. Regarding the balances in new Peruvian soles, the Company is exposed to the effects of the current variations in the exchange rate of this currency with respect to the US dollar. Management periodically evaluates the impact that this effect could have on the Company. The Company has not considered the use of hedging instruments as necessary. In this sense, the Company maintains certain receivables and payables in new Peruvian soles for the purpose of hedging its needs in this currency (corporate bonds, taxes and payments). For the three-month period ended March 31, 2015, the Company recorded exchange gains and losses for US$3,642,000 and US$215,000, respectively (US$631,000 and US$107,000, respectively, for the three-month period ended March 31, 2014)

18 For the three-month period ended March 31, 2015, if the new Peruvian Sol had weakened/strengthened by 5% against its functional currency profit would have been US$5,503,000 and US$6,082,000 higher/lower; respectively (US$5,871,000 and US$6,489,000, respectively, for the three-month period ended March 31, 2014). ii) Price risk - The Company is not exposed to variation of its trade receivables resulting from changes in the prices of the natural gas liquids and natural gas transportation services because they are subject to the signing of a contract between the parties where the agreed consideration is established. The Company is not exposed to commodity price risk. iii) Cash flow and fair value interest rate risk - The Company s interest rate risk arises from long-term borrowings. The Company reduces unfavorable risk of changes in interest rates by maintaining excess funds with first class financial institutions that bear interest at floating rates. The Company has assets, mainly long-term deposits that are interest-bearing placed in first class local and international financial institutions. Such assets, with regard to interest rate evolution, would work as partial hedging of the future borrowings assumed at variable rates. If the interest rate on time deposits increased or decreased by 0.05%, the effect on profits for the three-month period ended March 31, 2015 and 2014, would be US$77,000 and US$78,000, respectively As of March 31, 2015 and December 31, 2014, the Company maintains its fixed rate debt.the borrowings at fixed rates expose the Company to fair value interest rate risk on the fair value of its liabilities; however, the Company considers that these rates are similar to market rates. For the three-month period ended March 31, 2015 and 2014, an increase or decrease in the Constant Updated Value ( Valor de Actualización Constante - VAC ) factor by 0.5% represents an estimated increase or decrease by S/.1.77 million (equivalent to US$574,000) and S/.1.72 million (equivalent to US$612,000) respectively, related to the bonds issued in new Peruvian soles. b) Credit risk - The Company s credit risk arises from debtors default on their obligations, as they reach maturity. Therefore, the Company sets conservative credit policies and constantly evaluates the market conditions in which it operates, using risk rating reports for commercial and credit transactions. Accordingly, the Company does not expect to incur in significant losses arising from credit risk. The Company s financial assets are potentially exposed to credit risk which mainly consists of deposits in banks and trade receivables. Regarding deposits in banks, the Company reduces the probability of significant credit risk by maintaining its deposits and placing its cash investments in first rate financial institutions. Regarding trade receivables, the risk is minimized due to fact that the Company deals substantially with first rate customers. Additionally, if a receivable has matured, the recovery of this account is secured by performance bonds provided by customers that secure the collection of two months of future payments. Management considers that credit risk related to receivables has been minimized. c) Liquidity risk - Prudent liquidity risk management implies maintaining sufficient cash and cash equivalents and the availability of funding through an adequate number of committed credit facilities and the ability to close

19 out market positions. Due to the dynamic nature of the business, Finance Management maintains flexibility in its financing through the availability of committed credit limits. Maturities of financial liabilities are shown in the short and long-term disclosures detailed in the statement of financial position, as well as in the note related to corporate bonds (Note 14). Less than From 1 to From 2 to Up to 5 1 year 2 years 5 years years As of March 31, 2015 (Unaudited) Trade payables 44, Corporate bonds ,003,037 Non-accrued interest payable 42,250 89, , ,636 Total 86,823 89, ,314 1,243,673 As of December 31, 2014 Trade payables 32, Corporate bonds ,009,039 Non-accrued interest payable 44,580 89, , ,281 Total 77,231 89, ,370 1,251, Capital management - The Company s objectives when managing capital is to safeguard the Company s ability of continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders, and to maintain an optimal capital structure to reduce the cost of capital. The Company seeks to maintain an appropriate level of indebtedness in relation to equity in accordance with the financial ratios established in the funding received. Therefore, the annual debt/equity ratio is calculated, wherein debt comprises all borrowings (bonds) and equity is the sum of all the Company's financial loans and equity. This ratio amounts to 70% as of March 31, 2015 (68% as of December 31, 2014). 3.3 Fair value estimation - Fair value is defined as the amount by which assets could be exchanged or a liability settled between knowledgeable willing parties in an arm s length transaction, based on the assumption that the entity is a going concern. For the classification of the type of valuation used by the Company for its financial instruments at fair value, the following levels of measurement have been established. - Level 1: Quoted prices in active markets for identical assets or liabilities. - Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability (level 1), either directly (that is, as prices) or indirectly (that is, derived from prices). - Level 3: Inputs for the asset or liability that is not based on observable market data (that is unobservable inputs)

20 When a financial instrument is traded in a liquid and active market, its market price in an actual transaction is the best evidence of its fair value. If active market prices are not available or said price is not indicative of the instrument s fair value, the market value of another substantially similar instrument may be used to determine its fair value as well as the discounted net cash flows or any other applicable valuation technique; which are significantly affected by the assumptions used. Notwithstanding that Management has used its best judgment in the estimation of the fair values of its financial instruments; any technique to perform such estimation brings a certain inherent weakness level. As a result, the fair value is not an indication of the net realizable or settlement value of the financial instruments. The following methods and assumptions were used to estimate fair values: i) Financial instruments with fair values similar to their carrying amounts - For financial assets and liabilities that are liquid or that have short-term maturities (less than three months), such as cash and cash equivalents, trade receivables, other receivables, trade payables and other current liabilities, it is considered that the carrying amount is similar to their fair value. ii) Financial instruments - The fair value of financial assets and liabilities at fixed rates at amortized cost is determined by comparing the market interest rates prevailing at initial recognition with the current market rates related to similar financial instruments. The fair value estimated of the deposits that accrue interest is determined using discounted cash flows using the market interest rates in the prevailing currency with similar maturities and credit risks. The carrying amount of corporate bonds is similar to their fair values because the impact of their discount is not significant. Based on the above, the table below shows a comparison between the carrying amount of the Company s financial instruments and their fair values shown in the statement of financial position. The table does not include the fair values of non-financial assets and liabilities. As of As of March 31, December 31, 2015 (Unaudited) 2014 Carrying Fair Carrying Fair amount value amount value Financial assets: Cash and cash equivalents 274, , , ,094 Trade receivables 44,296 44,296 46,832 46,832 Financial liabilities: Trade payables 44,573 44,573 32,651 32,651 Corporate bonds 975, , , ,744 Other payables (excluding Provision for litigations and penalties and Taxes and social contributions) 189, , , ,559 4 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances