TRANSPORTADORA DE GAS DEL PERU S.A. INTERIM FINANCIAL STATEMENTS MARCH 31, 2016

Transcription

1 TRANSPORTADORA DE GAS DEL PERU S.A. INTERIM FINANCIAL STATEMENTS MARCH 31, 2016

2 TRANSPORTADORA DE GAS DEL PERU S.A. INTERIM FINANCIAL STATEMENTS MARCH 31, 2016 CONTENTS Pages Interim statement of financial position 3 Interim statement of comprehensive income 4 Interim statement of changes in equity 5 Interim statement of cash flows 6 Notes to the interim financial statements 7-39 US$ = United States dollar S/ = 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 EQUITY CURRENT ASSETS CURRENT LIABILITIES Cash and cash equivalents 6 182, ,534 Trade payables 12 47,594 37,202 Trade receivables 7 45,706 46,643 Current income tax payable 11,339 14,258 Other receivables 9 6,371 5,744 Other payables 15 20,656 18,420 Other supplies 14,237 14,594 Current portion of long-term debt 13 and 14 17,560 8,590 Prepaid expenses 3,673 3,739 TOTAL CURRENT LIABILITIES 97,149 78, , ,254 NON-CURRENT LIABILITIES Assets held for sale, net 10 6,338 6,338 Liability for Main Grid Guarantee , ,107 TOTAL CURRENT ASSETS 259, ,592 Corporate bonds , ,186 Other long-term payables , ,161 NON-CURRENT ASSETS TOTAL NON-CURRENT LIABILITIES 1,189,222 1,187,454 Property, plant and equipment, net 10 1,292,225 1,267,397 TOTAL LIABILITIES 1,286,371 1,265,924 Deferred income tax asset 16 49,154 48,926 Intangible assets other than goodwill, net , ,909 EQUITY TOTAL NON-CURRENT ASSETS 1,489,789 1,466,232 Share capital 208, ,300 Other capital reserves 41,660 41,660 Retained earnings 212, ,940 TOTAL EQUITY , ,900 TOTAL ASSETS 1,749,000 1,692,824 TOTAL LIABILITIES AND EQUITY 1,749,000 1,692,824 The accompanying notes from page 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 (Unaudited) (Unaudited) Operating revenue , ,651 Cost of service 22 (61,009) (54,083) Gross profit 76,200 79,568 Other operating income (expenses): Administrative expenses 23 (6,009) (3,445) Other income Other expenses 24 (177) (27,872) Total operating expenses (5,704) (30,890) Operating profit 70,496 48,678 Finance expenses 25 (17,682) (17,324) Finance income Exchange difference, net ,427 Financial result, net (17,591) (13,892) Profit before income tax 52,905 34,786 Income tax 19 (17,176) (10,709) Total profit and total comprehensive income for the period 35,729 24,077 The accompanying notes from page 7 to 39 are part of the financial statements

5 TRANSPORTADORA DE GAS DEL PERU S.A. INTERIM STATEMENT OF CHANGES IN EQUITY FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2016 AND 2015 Number of Other Other common Share comprehensive capital Retained Note shares capital income reserves earnings Total In thousands US$000 Balances at January 1, , ,300 1,638 40, , ,416 Total comprehensive income for the period ,077 24,077 Transfer to legal reserve ,017 (1,017) - Reclassification to other comprehensive income (1,638) - 1,638 - Dividend distribution (60,000) (60,000) Balances at March 31, 2015 (Unaudited) 208, ,300-41, , ,493 Balances at December 31, , ,300-41, , ,900 Total comprehensive income for the period ,729 35,729 Balances at March 31, 2016 (Unaudited) 208, ,300-41, , ,629 The accompanying notes from page 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 (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Collections from customers 138, ,822 Payments to suppliers (39,023) (50,456) Income tax paid (17,404) (42,919) Interest paid (10,778) (10,932) Other collections related to operating activities 5, Net cash generated by operating activities 26 76,080 32,028 CASH FLOWS FROM INVESTING ACTIVITIES Payment for purchase of property, plant and equipment 10 (42,453) (22,525) Payment for purchase of intangible assets other than goodwill 11 (275) (340) Net cash applied to investing activities (42,728) (22,865) Net increase in cash and cash equivalents 33,352 9,163 Cash and cash equivalents at beginning of the period 149, ,094 Cash and cash equivalents at end of the period 6 182, ,257 The accompanying notes from page 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, BACKGROUND AND ECONOMIC ACTIVITY Transportadora de Gas del Peru S.A. (hereinafter the Company or TGP) was incorporated in Peru on November 2, 2000 and started its commercial activities on August 20, The Company s shareholders as of March 31, 2016 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 concession. 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 No. 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. During the effective period of the agreement, TGP will be the owner of the assets of the concession - 7 -

8 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 undertakes 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 for the transport of natural gas. The effective period of the agreement is 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. Addenda to BOOT Agreement - By means of Supreme Resolution No EM dated May 27, 2010, the signature of an addendum was approved 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 undertook to extend the capacity of the Natural Gas Transportation System in various stages up to 920 MMCFD. Furthermore, by 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 Natural Gas Transportation, which updated the conditions necessary for executing the extension foreseen 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 55 Kms long 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. These construction works for the extension of the pipeline system were affected mainly by the unsecure situations which occurred in the area of the location of Kiteni, which led the Peruvian Government to declare a State of Emergency over the entire 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 a delay in the referred execution and start-up of operation of the natural gas extension project while the Force Majeure event lasts. The conditions of insecurity described in the above paragraph resulted in the impossibility of continuing with the construction of the 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 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 undertook to build a Major Offshoot from the existing pipeline to the city of Ayacucho, as per the conditions set forth in said document. In this sense, capacity will be extended up to 920 MMCFD, 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 31 Kms long to run from Chilca, at Kp 699, where it will connect with the existing Loop Costa, then up to Lurín at 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 a guaranteed minimum revenue in its initial years of operation. If expected revenue from the service is less than the guaranteed revenue, then the Company will receive the difference. The mechanism of the guaranteed revenue expires, if after the fifth year of trading operations, the minimum guaranteed revenue differential is 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). These 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 above 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 power- generating 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 - By means of Supreme Resolution No dated May 26, 2010, an agreement was approved 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 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 - 9 -

10 natural gas transportation capacity to provide service 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 fixed monthly consideration of US$208,450, which will be paid with effect from the first month following the date on which PLNG informs TGP that it has satisfactorily completed testing and commissioning of the PLNG 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 Coast - Its purpose is to establish the rights and obligations of the parties and set forth the standards and rules between these parties 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 undertook to design, supply goods and services and construct 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 must 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. Issuance 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 issuance of senior bonds were used to refinance debt and other corporate objectives (Note 14). Approval of the financial statements - Financial statements corresponding to the three-month period ended March 31, 2016 were authorized for issue by Management on April 28, The financial statements as of December 31, 2015 were approved at the General Shareholders Meeting held on March 29, 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 years presented. 2.1 Basis of preparation - These financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) and IFRS Interpretations issued by IFRS Interpretations Committee. The preparation of financial statements is in conformity with IFRS as issued by the International Accounting Standards Board (IASB for the English acronym) The financial statements have been prepared under the historical cost convention, except for availablefor-sale financial assets which are measured at fair value less costs to sell (Note 2.14). The financial

11 statements are presented in thousands of US dollars, unless otherwise stated. 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 and amendments and interpretations not effective for 2016 and that have not been early adopted - IFRS 9, Financial instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortized cost, fair value through OCI and fair value through P&L. The basis of classification depends on the entity s business model and the contractual cash flow characteristics of the financial asset. Guidelines of IAS 39 regarding impairment of financial assets and hedging contracts are still applied. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the hedged ratio to be the same as the one management actually use for risk management purposes. Contemporaneous documentation is still required but is different to that currently prepared under IAS 39. The standard is effective for accounting periods beginning on or after 1 January Early adoption is permitted. The Company is yet to assess IFRS 9 s full impact. 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 2018 and earlier application is permitted. IFRS 16 Leases On January 13, 2016, IFRS 16, Leases (IFRS 16) was issued replacing the current guidance (IAS 17, Leases and IFRIC 4, Determining whether an arrangement contains a lease and other related standards). IFRS 16 introduces a new definition of a lease and a new accounting model that will have a material impact on lessees. As a result of the new accounting treatment, an entity is required to recognize in the statement of financial position, at the inception of the lease, an asset for the right of use of the leased asset and a liability for the obligation to make future contractual payments. At initial recognition, the asset and liability will be measured at the present value of the minimum lease payment under contract. As a result of this change, a large number of leases classified as operating leases under the current standards will be shown in the statement of financial position from the inception of the lease. This new accounting model is applicable to all contracts qualifying as leases, excepted for those contracts with an effective period of less than 12 months (considering in that determination the likelihood of contract extension) and lease contracts of assets that are considered immaterial. The standard applies to annual periods beginning on or after January 1, 2019, with earlier application permitted as long as IFRS 15, Revenue from Contracts with Customers, is also early applied. The Company is currently evaluating the impact these standards may have on the preparation of its

12 financial statements. 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 s financial statements. 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 profit or loss, 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 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 at fair value of which the transaction costs are recognized in profit and loss. 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, 2016 and December 31, 2015, 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 the costs directly attributable to the transaction

13 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 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 financial position statement 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

14 2.11 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 pipelines and associated 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 to a substantial improvement is recognized as part of the cost of the fixed asset, as long as the recognition criterion 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 these assets is transferred to their definitive category. Works in progress are not depreciated. Residual values, the assets useful lives and the depreciation methods applied are revised and adjusted, if required, on each financial position statement date. Any changes in these estimates are prospectively adjusted. Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to 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 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

15 2.12 Intangible assets other than goodwill, net - 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 for the permanent start-up 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 recognized for 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 of disposal and 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) Non-current assets held for sale Non-current assets are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value less costs of disposal 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%). The value of the MGG corresponds to the present value of the guaranteed revenues discounted at the rate of 12% and it is updated at the date of the financial statements, by applying said interest rate. Additionally, the principal of the granted advance is adjusted annually 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, said 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

16 2.17 Trade payables - Trade payables are obligations to pay for the provision of 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 it. 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 current regulations, which must be credited to the bank accounts designated by workers, in May and November each year. The employees severance indemnity 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 have been made. Vacation leave - Annual vacation leave is recognized on the accrual basis 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

17 2.21 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 is 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, generally not less than one year, 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 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 in close co

18 operation 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, 2016 and 2015 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 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, 2016 and 2015 and has been prepared considering that the proportion of financial instruments denominated in foreign currency will remain constant The main market risks to which the Company is exposed are: 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 Soles. Regarding the balances in 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 to be necessary. In this sense, the Company maintains certain receivables and payables in Soles for the purpose of hedging its needs in this currency (corporate bonds, taxes and payments). As of March 31, 2016 and December 31, 2015 the Company is exposed to changes in the exchange rate mainly as a result of the net liability position in Soles arising from corporate bonds in Soles (Note 14). For the three-month period ended March 31, 2016, the Company recorded exchange gains and losses for US$2,678,000 and US$2,640,000, respectively (US$3,642,000 and US$215,000, respectively, for the three-month period ended March 31, 2015). For the three-month period ended March 31, 2016, if the Sol had weakened/strengthened by 5% against its functional currency profit before taxes would have been US$5,345,000 and US$5,908,000 higher/lower; respectively (US$5,503,000 and US$6,082,000, respectively, for the three-month period ended March 31, 2015). 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 in first class financial

19 institutions that bear interest at floating rates. The Company has assets, mainly long-term interest-bearing deposits placed in first class local and international financial institutions. Said assets, with regard to interest rate evolution, would work as a partial hedging of a future borrowing arranged at variable rate. If the interest rate on deposits increased or decreased by 0.05%, the effect on profits before taxes for the three-month period ended March 31, 2016 and 2015, would be US$48,000 and US$77,000, respectively. As of March 31, 2016 and December 31, 2015, the Company maintains its debt at fixed rate. Borrowings at fixed rates expose the Company to 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, 2016 and 2015, an increase or decrease in the Constant Updated Value ( Valor de Actualización Constante - VAC ) factor by 0.5% represents an estimated increase or decrease in profits before taxes of S/ 1.85 million (equivalent to US$558,000) and S/ 1.77 million (equivalent to US$574,000) respectively, for the bonds issued in 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. Therefore, the Company does not expect to incur in significant losses arising from credit risk. The Company s financial assets are potentially exposed to concentrations of credit risk which mainly consist 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 operates mainly 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 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 More than 1 year 2 years 5 years 5 years As of March 31, 2016 (Unaudited) Trade payables 47, Corporate bonds ,312 Non-accrued interest payable 42,072 88, , ,330 Total 89,666 88, ,852 1,182,

20 Less than From 1 to From 2 to More than 1 year 2 years 5 years 5 years As of December 31, 2015 Trade payables 37, Corporate bonds ,547 Non-accrued interest payable 43,821 88, , ,553 Total 81,023 88, ,485 1,184, Capital management - The Company s objectives when managing capital are to safeguard the Company s ability to 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 67% as of March 31, 2016 (69% as of December 31, 2015). 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 (unadjusted) 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). When a financial instrument is traded in a liquid and active market, its market price in an actual transaction provides 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 techniques; 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 said estimation results in 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