20-F 1 tgs_20f.htm FORM 20-F
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
☐
REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2016
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
OR
☐
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report __________.
Commission file number: 1-13.396
TRANSPORTADORA DE GAS DEL SUR S.A.
(Exact name of Registrant as specified in its charter)
GAS TRANSPORTER OF THE SOUTH INC.
(Translation of Registrant’s name into English)
Republic of Argentina
(Jurisdiction of incorporation or organization)
Don Bosco 3672
5th Floor
C1206ABF City of Buenos Aires
Argentina
(Address of principal executive offices)
Leandro Pérez Castaño
(54-11)-4865-9077
inversores@tgs.com.ar
(Name, telephone, email and/or facsimile number of our contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class | Name of each exchange on which registered
American Depositary Shares (“ADS”), representing Class “B” Shares | New York Stock Exchange
Class “B” Shares, par value Ps.1 each | New York Stock Exchange*

*Not for trading, but only in connection with the registration of American Depositary Shares related to the TGS ADR Program, pursuant to the requirements of the Securities and Exchange Commission.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report:

Class “A” Shares, par value Ps.1 each | 405,192,594
Class “B” Shares, par value Ps.1 each | 389,302,689
| 794,495,283

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes | ☐ | No | ☒

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes | ☐ | No | ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes | ☒ | No | ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes | ☐ | No | ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b–2 of the Exchange Act.

Large accelerated filer | ☐ |  | Accelerated filer | ☒
Non-accelerated filer | ☐ |  | Emerging growth company | ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ___☐
†The term ‘‘new or revised financial accounting standard’’ refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which bases of accounting the registrant has used to prepare the financial statements included in this filing:

| U.S. GAAP
☒ | International Financial Reporting Standards as issued by the International Accounting Standards Board
| Other

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 | ☐ | Item 18 | ☐

If this is an Annual Report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes | ☐ | No | ☒

TABLE OF CONTENTS

|  | Page
| PRESENTATION OF FINANCIAL AND OTHER INFORMATION | i
| CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS | i
Item 1. | Identity of Directors, Senior Management and Advisers | 1
Item 2. | Offer Statistics and Expected Timetable | 1
Item 3. | Key Information | 1
Item 4. | Our Information | 20
Item 4A. | Unresolved Staff Comments | 53
Item 5. | Operating and Financial Review and Prospects | 54
Item 6. | Directors, Senior Management and Employees | 77
Item 7. | Major Shareholders and Related Party Transactions | 88
Item 8. | Financial Information | 92
Item 9. | The Offer and Listing | 96
Item 10. | Additional Information | 98
Item 11. | Quantitative and Qualitative Disclosures About Market Risk | 108
Item 12. | Description of Securities Other Than Equity Securities | 110
Item 13. | Defaults, Dividend Arrearages and Delinquencies | 112
Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds | 112
Item 15. | Controls and Procedures | 112
Item 16. | [Reserved] | 112
Item 16A. | Audit Committee Financial Expert | 112
Item 16B. | Code of Ethics | 113
Item 16C. | Principal Accountant Fees and Services | 113
Item 16D. | Exemptions from the Listing Standards for Audit Committees | 113
Item 16E. | Purchases of Registered Equity Securities of the Issuer by the Issuer and Affiliated Purchasers | 113
Item 16F. | Change in Registrant’s Certifying Accountant | 114
Item 16G. | Corporate Governance | 114
Item 16H. | Mine Safety Disclosure | 115
Item 17. | Financial Statements | 116
Item 18. | Financial Statements | 116
Item 19. | Exhibits | 116

PRESENTATION OF FINANCIAL AND OTHER INFORMATION
In this annual report on Form 20-F (“Annual Report”), references to “pesos” or “Ps.” are to Argentine pesos, and references to “U.S. dollars,” “dollars” or “US$” are to United States dollars. A “billion” is a thousand million. References to “km” are to kilometers. References to “m3” are to cubic meters. References to “cf” are to cubic feet, to “MMcf” are to millions of cubic feet, to “Bcf” are to billions of cubic feet, to “d” are to day and to “HP” are to horsepower.
Financial Statements
The audited consolidated financial statements as of December 31, 2016 and 2015 and for the years ended December 31, 2016, 2015 and 2014 included in this Annual Report (our “Financial Statements”) have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). These standards have been adopted by the Federación Argentina de Consejos Profesionales de Ciencias Económicas (“FACPCE”) as its professional accounting standards and added by the Comisión Nacional de Valores (“CNV”) to its regulations.
We fully adopted IFRS for the first time for our financial year ended December 31, 2013. All IFRS standards effective at the date of the preparation of our Financial Statements were applied. The opening IFRS statement of financial position was prepared as of our Transition Date of January 1, 2012 (“Transition Date”).
Our Financial Statements have been audited by Price Waterhouse & Co. S.R.L., Buenos Aires, Argentina (“PwC”) member firm of PricewaterhouseCoopers International Limited, an independent registered public accounting firm. The report of PwC, dated April 25, 2017, is included in this Annual Report.
Other Information
Unless otherwise specified, all exchange rate information contained in this Annual Report has been derived from information published by Banco de la Nación Argentina S.A. (“Banco Nación”), without any independent verification by us. See “Item 3. Key Information. —A. Selected Financial Data. —Exchange Rate Information.”
Certain monetary amounts and other figures included in this annual report have been subject to rounding adjustments. Any discrepancies in any tables between the totals and the sums of the amounts are due to rounding.
References to “we,” “us” and “our” mean Transportadora de Gas del Sur S.A. (“TGS”) and its consolidated subsidiary, Telcosur S.A. (“Telcosur”).
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this Annual Report, including information incorporated by reference herein, may constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “will likely result,” “intend,” “projection,” “should,” “believe,” “expect,” “anticipate,” “estimate,” “continue,” “plan” or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial condition or state other forward-looking information. Forward-looking statements are subject to various risks and uncertainties. When considering forward-looking statements, you should keep in mind the factors described in “Item 3. Key Information—D. Risk Factors” and other cautionary statements appearing in “Item 5. Operating and Financial Review and Prospects.” These factors and statements, as well as other statements contained herein, describe circumstances that could cause actual results to differ materially from those expressed in or implied by any forward-looking statement.
i
Forward-looking statements include, but are not limited to, the following:
●
statements regarding changes in general economic, business, political or other conditions in Argentina;
●
estimates relating to future tariffs and volumes for our natural gas transportation services and future prices and volumes for our natural gas liquid products such as propane and butane (“LPG”), ethane and natural gasoline (collectively “Liquids”) and for products and services respectively produced and provided in our other non-regulated businesses;
●
statements regarding expected future political developments in Argentina and expected future developments regarding the license granted to us by the Argentine Government (“Government”) to provide natural gas transportation services through the exclusive use of the southern natural gas transportation system in Argentina (“License”), the renegotiation process of the License with the Government, principally, the adoption of a new revised scheme of tariffs, regulatory actions by Ente Nacional Regulador del Gas (“ENARGAS”), the legal framework for the local provision of LPG with the Ministry of Energy and Mining (“Ministry of Energy”) (formerly known as the Federal Energy Bureau (“Federal Energy Bureau”)), and any other applicable governmental authority that may affect us and our business;
●
risks and uncertainties with respect to labor relations in Argentina;
●
statements and estimates regarding future pipeline expansion and the cost of, or return to us from, any such expansion;
●
estimates of our future level of capital expenditures, including those required by ENARGAS and other governmental authorities; and
●
the risk factors discussed under “Item 3. Key Information—D. Risk Factors.”
The following important factors could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted by us in our forward-looking statements:
●
the impact of the Public Emergency Law No. 25,561 (“Public Emergency Law”) enacted by the Government in January 2002, as amended from time to time, which, among other effects, ended the U.S. dollar-peso parity and resulted in the amendment of the Convertibility Law No. 23,928 and Decree No. 529/01 (collectively, “Convertibility Law”);
●
risks and uncertainties related to changes in the peso-U.S. dollar exchange rate and the Argentine domestic inflation rate, which may materially adversely affect our revenues, expenses and reported financial results;
●
risks and uncertainties associated with our non-regulated business, including those related to international and local prices of Liquids, taxes, cost and restrictions on the supply of natural gas and other restrictions imposed on Liquids exports, our ability to renegotiate our agreements with customers and possible increased Government regulation of the Liquids industry;
●
risks and uncertainties resulting from past Government regulations that affected our business or financial condition or results of operations, such as the prohibition on tariff increases related to our natural gas transportation segment, restrictions on payments abroad and exchange controls;
●
capital expenditures effectively required by ENARGAS or other governmental authorities for the expansion of our pipeline system or other purposes, including the risk that we may be forced to make investments or take other actions that are not profitable or are not as commercially attractive as other actions;
ii
●
risks and uncertainties associated with unscheduled and unexpected expenditures for the repair and maintenance of our fixed or capital assets;
●
risks and uncertainties resulting from the prospect of additional Government regulation or other Government involvement in our business;
●
developments in legal and administrative proceedings involving us and our affiliates;
●
changes to or revocation of our License; and
●
risks and uncertainties impacting us as a whole, including changes in general economic conditions, changes in Argentine laws and regulations to which we are subject, including tax, environmental and employment laws and regulations, and the cost and effects of legal and administrative claims and proceedings against us.
Our actual results may differ materially from the results anticipated in the forward-looking statements contained in this Annual Report because such statements, by their nature, involve estimates, assumptions and uncertainties. These forward-looking statements speak only as of the date of this Annual Report and we do not undertake any obligation to update any forward-looking statement or other information contained in this Annual Report to reflect events or circumstances occurring after the date of this Annual Report or to reflect the occurrence of unanticipated events.
iii
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
A.
Selected Financial Data
The following selected consolidated financial data is derived from our Financial Statements. This information should be read in conjunction with and is qualified in its entirety by reference to our Financial Statements, including the report of the independent registered public accounting firm thereon and the notes related thereto, and the discussion in “Presentation of Financial and Other Information” and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this Annual Report.
For important information relating to our Financial Statements, including information relating to the preparation and presentation of the Financial Statements and the following selected financial data, see “Presentation of Financial and Other Information” above.

| For the year ended December 31,
| 2016 | 2015 | 2014 | 2013 | 2012
| (in thousands of pesos, except per share and per ADS amounts and common stock or as otherwise indicated)
Consolidated Statement of Comprehensive Income Data: |  |  |  |  |
Revenues from sales (1) | 7,402,172 | 4,226,569 | 4,303,971 | 2,864,986 | 2,574,968
Operating profit | 2,231,821 | 688,247 | 932,514 | 706,632 | 701,767
Net financial results | (813,361) | (974,163) | (765,650) | (532,729) | (342,428)
Net income before income tax | 1,419,982 | (285,662) | 169,754 | 173,387 | 359,544
Total comprehensive income / (loss) for the year | 930,678 | (172,109) | 104,988 | 107,506 | 232,747
Total comprehensive income / (loss) for the year attributable to: |  |  |  |  |
Owners of the Company | 930,675 | (172,109) | 104,983 | 107,504 | 232,747
Non-controlling interest | 3 | - | 5 | 2 | -
Per Share Data:(2) |  |  |  |  |
Net income per share | 1.17 | (0.22) | 0.13 | 0.14 | 0.29
Net income per ADS | 5.86 | (1.08) | 0.66 | 0.68 | 1.46

(1)
Includes Ps. 2,087,191, Ps. 1,013,998, Ps. 744,089, Ps. 661,023 and Ps. 603,355 of gas transportation net revenues, Ps. 4,768,326, Ps. 2,907,770, Ps. 3,243,299, Ps. 2,065,321 and Ps. 1,835,738 of liquids production and commercialization net revenues, Ps. 546,655, Ps. 304,801, Ps. 316,583, Ps. 138,642 and Ps. 135,875 for the other services and telecommunications net revenues for the years ended December 31, 2016, 2015, 2014, 2013 and 2012, respectively.
(2)
Net income per share under IFRS has been calculated using the weighted average shares outstanding. Each ADS represents five shares.
1

| As of December 31,
| 2016 | 2015 | 2014 | 2013 | 2012
| (in thousands of pesos, except per share and per ADS amounts and common stock or as otherwise indicated)
Balance Sheet Data: |  |  |  |  |
Total current assets | 3,347,071 | 2,230,219 | 1,958,963 | 1,803,063 | 1,502,544
Property, plant and equipment, net | 5,333,344 | 4,219,520 | 4,082,071 | 3,966,908 | 3,948,031
Total non-current assets | 5,584,261 | 4,416,358 | 4,215,457 | 4,269,847 | 4,050,181
Total assets | 8,931,332 | 6,646,577 | 6,174,420 | 6,072,910 | 5,552,725
Total current liabilities | 1,902,948 | 1,320,581 | 1,251,754 | 1,347,734 | 829,777
Total non-current liabilities | 4,502,006 | 3,630,562 | 3,055,123 | 2,702,094 | 2,689,081
Total liabilities | 6,404,954 | 4,951,143 | 4,306,877 | 4,049,828 | 3,518,858
Non-controlling interest | 9 | 6 | 6 | 3 | 1
Shareholders’ equity | 2,526,378 | 1,695,434 | 1,867,543 | 2,023,082 | 2,033,867
Other Data: |  |  |  |  |
Common stock (nominal value) | 794,495 | 794,495 | 794,495 | 794,495 | 794,495
Additions to property, plant and equipment(1) | 1,407,823 | 407,323 | 373,390 | 265,685 | 200,944
Depreciation | 286,798 | 261,393 | 254,311 | 242,917 | 233,670
Number of outstanding shares | 794,495,283 | 794,495,283 | 794,495,283 | 794,495,283 | 794,495,283

(1)
Represents additions to property, plant and equipment (including works in progress). For information by business segment, see Note 7 (Consolidated Business Segment Information) to our Financial Statements, included in this Annual Report.
Dividends
A summary of the dividends declared during the last five years is set forth below:

| Millions of Ps. (1) | Ps. per share (1) | Millions of US$ (2) | US$ per share (2) | US$ per ADS (2)
2013 | - | - | - | - | -
2014(3) | 260.5 | 0.328 | 30.5 | 0.038 | 0.192
2015 | - | - | - | - | -
2016(4) | 99.7 | 0.125 | 7.1 | 0.009 | 0.045
2017 | - | - | - | - | -

(1) Stated in Ps. as of the payment date.
(2) Stated in U.S. dollars translated from pesos at the exchange rate in effect on the payment date, except that the amount of the dividends payment declared but unpaid as of December 31, 2014 was translated from pesos at the selling exchange rate at such date.
(3) The Future Dividend Payment Reserve created by the General Annual Shareholders’ Meeting held on April 30, 2014 was fully released by the Board of Directors’ meeting held on November 26, 2014, which approved cash dividend payments.
(4) The Future Dividend Payment Reserve created by the General Annual Shareholders’ Meeting held on April 23, 2015 was fully released by the Board of Directors’ meeting held on January 13, 2016, which approved cash dividend payments.
According to Argentina’s Law No. 19,550 (“General Companies Law”), dividends may be lawfully declared and paid only out of retained earnings reflected in the financial statements and must be approved at a General Annual Shareholders’ Meeting, as described below.
To that extent, the Board of Directors must annually submit our financial statements for the preceding fiscal year, together with reports thereon by our statutory committee (“Statutory Committee”), for the consideration and approval of the shareholders at the General Annual Shareholders’ Meeting which must be held annually to approve our financial statements and determine the allocation of net income for such year. In the case of listed companies, such as us, this meeting must take place before the end of April. Pursuant to the General Companies Law, companies are required to allocate a legal reserve (“Legal Reserve”) equal to at least 5% of each year’s net income, as long as there is no unappropriated retained deficit. If there is such a retained deficit, 5% should be calculated on any excess of the net income over the no unappropriated retained deficit. This allocation is only legally required until the aggregate amount of such reserve equals 20% of the sum of (i) “Common stock nominal value” plus (ii) “Cumulative inflation adjustment to common stock”, as shown on our Consolidated Statement of Changes in Shareholders’ Equity (“Adjusted Common Stock Nominal Value”). If the Legal Reserve amount is reduced, we must restore it before making any dividend payment. The Legal Reserve is not available for distribution as a dividend.
2
Pursuant to our articles of association (“By-laws”), after the allocation to the Legal Reserve has been made, an amount will be allocated to pay dividends on preferred stock, if any, and an amount equal to 0.25% of the net income for the year will be allocated to pay the participation in earnings of employee profit-sharing certificates. The balance of the retained earnings for the year may be distributed as dividends on common stock or retained as a voluntary reserve, as determined at the General Annual Shareholders’ Meeting. The dividend must be paid within 10 business days of the decision. For information on dividend taxation, see “Item 10. Additional Information—E. Taxation—Argentine Taxes.”
The General Annual Shareholders’ Meeting held on April 20, 2016 (the “2016 Shareholders’ Meeting”) approved the creation of a new voluntary reserve for capital expenditures of Ps. 2.9 million. Our financial statements for the year ended December 31, 2015 showed a comprehensive loss. As a result, under the General Companies Law we were not required to allocate any amount to the Legal Reserve.
The General Annual Shareholders’ Meeting to be held on April 26, 2017 (the “2017 Shareholders’ Meeting”) will consider the allocation of the net income for the fiscal year ended December 31, 2016. As our 2016 Financial Statements showed a comprehensive income, we have to allocate a sum to the Legal Reserve. A portion of the income for 2016, Ps. 21.5 million, must be allocated to the Legal Reserve, thereby increasing the amount of the Legal Reserve to Ps. 269.1 million, which represents 20.0% of the Adjusted Common Stock Nominal Value. The balance of the 2016 comprehensive net income may be allocated to dividends or to a voluntary reserve. The balance of the future capital expenditures reserve created by the 2016 Shareholders’ Meeting amounted to Ps. 2.9 million as of the date of this Annual Report. Pursuant to the Commercial Companies Law, the purpose of any voluntary reserve, once approved by shareholders, cannot be changed without the further approval of the shareholders.
Our existing debt instruments impose additional restrictions on our ability to pay dividends on our shares. We may pay dividends as long as (i) no default exists under our debt obligations and (ii) immediately after giving effect to such dividend payment, (a) the consolidated coverage ratio (i.e., the ratio of our consolidated adjusted EBITDA to our consolidated interest expense (each as defined in the indentures for the 2014 Notes (as defined herein)) would be greater than or equal to 2.0:1; and (b) the consolidated debt ratio (ratio of our consolidated total indebtedness to our consolidated adjusted EBITDA (as each of the terms is defined in the indenture for the 2014 Notes)) would be less than or equal to 3.75:1. See “Item 10. Additional Information—C. Material Contracts—Debt Obligations.”
The transitional agreement signed on March 30, 2017 (the “2017 Transitional Agreement”) prohibits us from distributing dividends, without the prior authorization of ENARGAS, until the date on which the final tariff, which will result from the Integral Tariff Review process (“RTI”), are authorized by ENARGAS and become effective. For additional information see Item 4. Our Information—B. Business Overview—Natural Gas Transportation—Regulatory Framework—The Public Emergency Law and Renegotiation Agreement.”
Under the General Companies Law, during a given fiscal year, interim dividends may be declared by the Board of Directors, in which case the members of the Board of Directors and the members of our Statutory Committee (“Syndics”) are jointly and severally liable for such distribution, if such declaration is not in accordance with the General Companies Law and the By-laws.
Exchange Rate Information
Fluctuations in the exchange rate between pesos and U.S. dollars would affect the U.S. dollar equivalent of the peso price of our Class “B” Shares, par value Ps.1 each (the “Class B Shares”), on the Buenos Aires Stock Market (Bolsas y Mercados Argentinos (“BYMA”)) and, as a result, would likely affect the market price of our ADS on the New York Stock Exchange (“NYSE”) as well. In addition, such fluctuations will affect the U.S. dollar equivalent of peso amounts reported in this Annual Report. Currency fluctuations would also affect the U.S. dollar amounts received by holders of ADSs on conversion by the Bank of New York Mellon (the “Depositary”), pursuant to our deposit agreement signed between the Depositary and us, of cash dividends paid in pesos on the underlying Class B Shares.
On December 17, 2015, the BCRA issued Communication “A” 5850, which introduced several changes to the existing foreign exchange control regime. For additional information, see “Item 10. Additional Information—D. Exchange Controls.”
3
The following table sets forth, for the periods indicated, high, low, average and period-end exchange rates between the peso and the U.S. dollar, as reported by Banco Nación. The Federal Reserve Bank of New York does not publish a buying rate for the peso. The average rate is calculated by using the average of Banco Nación reported exchange rates on each day during the relevant monthly period and on the last day of each month during the relevant annual period.

| Pesos per U.S. dollar
| High | Low | Average | Period end
Most recent six months: |  |  |  |
November 2016 | 15.8680 | 14.9200 | 15.3463 | 15.8680
December 2016 | 16.0300 | 15.4970 | 15.8381 | 15.8900
January 2017 | 16.0800 | 15.8100 | 15.9093 | 15.8970
February 2017 | 15.8000 | 15.3600 | 15.5917 | 15.4800
March 2017 | 15.6350 | 15.3900 | 15.5176 | 15.3900
April 2017 (through April 21, 2017) | 15.4900 | 15.1900 | 15.3296 | 15.4900
Year ended December 31, |  |  |  |
2012 | 4.9180 | 4.3040 | 4.5532 | 4.9180
2013 | 6.5210 | 4.9250 | 5.4859 | 6.5210
2014 | 8.5570 | 6.5450 | 8.1195 | 8.5510
2015 | 13.4000 | 8.5550 | 9.2485 | 13.0400
2016 | 16.0300 | 13.2000 | 14.7807 | 15.8900

For your convenience and except as we specify otherwise, this Annual Report contains translations of certain peso-denominated amounts to U.S. dollars at the reported exchange rate on December 31 of each year or as otherwise indicated. These translations should not be construed as representations that the amounts actually represent such U.S. dollar amounts or could be or have been converted into U.S. dollars at the rates indicated or at any other rates. On April 21, 2017, the reported selling exchange rate was Ps. 15.49 = US$1.00.
Our results of operations and financial condition are highly susceptible to changes in the peso-U.S. dollar exchange rate because a significant portion of our annual revenues (43.1% of our total consolidated revenues from sales for the year ended December 31, 2016), most of our capital expenditures, substantially all of our liabilities and the cost of purchased natural gas used in our Liquids business are U.S. dollar denominated, but our primary assets are based in Argentina and our functional currency is the peso.
We will pay any cash dividends on our shares in Pesos, and exchange rate fluctuations could affect the U.S. Dollar amounts received by holders of American Depositary Shares (“ADSs”), on conversion by us or by the Depositary of these cash dividends. Fluctuations in the exchange rate between the Peso and the U.S. Dollar will also affect the U.S. Dollar equivalent of the Peso price of our shares on the BYMA and, as a result, can also affect the market price of the ADSs.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
You should carefully consider the following risks and uncertainties, and any other information appearing elsewhere in this Annual Report. The risks and uncertainties described below are intended to highlight risks and uncertainties that are specific to us. Additional risks and uncertainties, including those generally affecting Argentina and the industry in which we operate, risks and uncertainties that we currently consider immaterial or risks and uncertainties generally applicable to similar companies in Argentina may also impair our business, results of operations, the value of our securities, and our ability to meet our financial obligations.
4
The information in this Risk Factors section includes forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of numerous factors, including those described in “Cautionary Statement Regarding Forward-Looking Statements” above.
Risks Relating to Argentina
Overview
We are a stock corporation with limited liability, or sociedad anónima, incorporated and organized under the laws of Argentina, and all of our operations and all of our operating assets are located in Argentina. For the year ended December 31, 2016, 43.1% of our consolidated revenues were peso-denominated. Conversely, substantially all of our indebtedness, most of our capital expenditures and the cost of the natural gas purchased to be processed in our liquids processing plant located at General Cerri Complex, in the Province of Buenos Aires (“Cerri Complex”) are U.S. dollar-denominated. Accordingly, our financial condition and results of operations depend to a significant extent on economic, regulatory and political conditions prevailing in Argentina, the exchange rate between the peso and the U.S. dollar and the reference international prices of Liquids.
Economic volatility in Argentina in recent decades has adversely affected and may continue to adversely affect our financial condition and results of operations.
The Argentine economy has experienced significant volatility in recent decades, characterized by periods of low or negative growth, high and variable levels of inflation and currency devaluation. As a consequence, our business and operations have been, and could in the future be, affected from time to time to varying degrees by economic and political developments and other material events affecting the Argentine economy, such as: inflation; price controls; fluctuations in foreign currency exchange rates and interest rates; currency devaluation; governmental policies regarding tariff, spending and investment, and other regulatory initiatives increasing government involvement with economic activity; international conflicts; civil unrest; and local insecurity concerns.
Beginning in 2001, Argentina went through a period of severe political, economic and social crisis. The crisis resulted in Argentina defaulting on its foreign debt obligations in 2002, introducing emergency measures and numerous changes in economic policies that affected utilities and many other sectors of the economy, and suffering a significant real devaluation of the peso. Many private sector companies with foreign currency exposure, including us, defaulted on their outstanding debts. Since that crisis, Argentina has substantially increased its real Gross Domestic Product (“GDP”). However, after the 2008 global financial crisis, the Argentine economy suffered a slowdown attributable to local and external factors, including an extended drought affecting agricultural activities and the effects of the global financial crisis. According to data published by the Instituto Nacional de Estadísticas y Censos (the “INDEC”), growth in real GDP resumed in 2011, with the Argentine GDP increasing 8.4% in 2011, 0.8% in 2012 and 2.9% in 2013. For the year 2014, Argentina experienced a slowdown in real GDP growth showing an increase of 0.5%. During 2015, economic activity recovered slightly, as real GDP grew 2.1% during the year. In 2016, however, GDP fell 2.3%.
In addition, Argentina has confronted inflationary pressures, evidenced by significantly higher fuel, salaries and food prices, among other indicators. Inflation in Argentina has contributed to a material increase in our costs of operation, in particular labor costs, and negatively affected our results of operations and financial condition. There can be no assurance that inflation rates will not escalate in the future, and the effects of measures adopted or that may be adopted in the future by the Government to control inflation are uncertain. See “—Government intervention in the Argentine economy could adversely affect our results of operations or financial condition.”
In addition, other factors could adversely harm economic growth and future inflow of capitals necessary to support further economic growth in Argentina, such as:
●
Public debt continues to increase as a percentage of GDP, long-term credit is scarce and international financing remains limited;
●
Increasing public expenditures could result in fiscal deficits;
●
The political difficulties associated with reducing the burden on businesses of taxes and social contributions, which make costs of production in Argentina higher than those in the rest of the region;
5
●
The lack of necessary investments to develop oil and gas reserves and increase the production of natural gas and oil necessary to accompany the increase in economic activity;
●
The obstacles to reducing inflation, which in the past undermined Argentina economy and the capacity of the Argentina Government to create conditions for economic growth;
●
The increased distrust of business and political classes in Argentina, caused in part by measures taken in the past.
We cannot provide any assurance that economic, social and political events in Argentina, which are beyond our control, will not adversely affect our financial condition or results of operations, including our ability to service our debts or pay dividends.
High levels of inflation and the lack of credibility regarding Argentina’s official inflation statistics, could negatively affect our results of operations and our ability to reach credit markets.
The INDEC is statutorily the only institution in Argentina with the power to produce official nationwide statistics. In the past, inflation has undermined the Argentine economy and the Government’s ability to stimulate economic growth. According to inflation data published by the INDEC, from 2011 to 2014, the Argentine consumer price index (“CPI”) increased 9.2%, 10.5%, 10.6% and 23.9%, respectively; and 11.9% in the ten-month period ended October 31, 2015. The wholesale price index (“WPI”) increased 12.7%, 13.1%, 14.8% and 28.3%, respectively, and 10.6% in the ten-month period ended October 31, 2015. Significantly, higher prices for fuel and food, and higher salaries, among other indicators, evidenced these inflationary pressures.
In addition, there have been concerns in the past regarding the accuracy of the INDEC statistics. In 2007, the INDEC changed the way it calculated inflation statistics such as CPI and WPI. Several economists, as well as the international and Argentine press, have suggested that this change in methodology was related to the policy of the Government intended to curb the increase of inflation. In addition, the International Monetary Fund (“IMF”) requested several times that Argentina clarify its inflation rates.
Despite consultations between the Government and the IMF regarding the reliability of the INDEC statistics, in February 2013, the IMF Executive Board issued a declaration of censure against Argentina in connection with the breach of its related obligations to the IMF under the Articles of Agreement and called on Argentina to adopt remedial measures to address the inaccuracy of inflation and GDP data without further delay.
On February 13, 2014, the INDEC released a new inflation index (the “IPCNu”) that measures prices on goods across the country and replaces the previous index that only measured inflation in the urban sprawl of the City of Buenos Aires. In June 2015, IMF Executive Board issued a statement affirming that Argentina was not yet in full compliance with Article VIII, Section 5 of the IMF Articles of Agreement, with respect to the accurate provision of CPI and GDP data to the IMF. The IMF also stated that specified actions called for by end-February 2015 had not yet been completely implemented. For this reason, the IMF Executive Board decided to extend the ongoing process by one year to give Argentina additional time to remedy the provision of inaccurate official data and to undertake an additional set of specified actions. Recently, the government appointed new officials to INDEC and expressed its intention to restore the credibility of this body. For this reason, the Government declared the national statistics emergency, and on November 9, 2016, the Executive Board of the IMF concluded consultation with Argentina.
Decree No. 55/2016 declared a state of administrative emergency in the national statistical system and in the INDEC, until December 31, 2016. Following this declaration, the INDEC ceased publishing statistical data until a rearrangement of its technical and administrative structure is finalized. Instead, the INDEC has released alternative CPI figures based on data published by the Province of San Luis and the City of Buenos Aires. These indexes reflected an increase in CPI of 26.9% and 31.6%, respectively, for 2015. For the first four months of 2016, these same alternative indexes have shown an increase 19.1% and 14.1%, respectively.
In June 2016, the INDEC began again to publish monthly CPI data. The reported increase in CPI for the period from May – December 2016 was 15.9%; as of the date of this Annual Report, however, the increase in CPI for the first four months of 2016 has not been published and there have been no indications from the INDEC or any other government agency as to the timeline for their publication. The WPI for the year 2016 increased by 34.5%, according to information published by the INDEC.
6
In addition, on June 29, 2016, the INDEC published recalculated historical GDP data dating back to 2014. According to this data, the estimated changes in GDP were 2.3% in 2013, (2.6%) in 2014, 2.4% in 2015 and (2.3%) in 2016.
The uncertainty relating to the inaccuracy of the economic indexes and rates in question could adversely affect our results of operations and financial conditions. Notwithstanding measures taken by the INDEC to address appropriate inflation statistics, some private economists estimate significantly higher inflation rates than those published by the INDEC for the period 2007 - 2015.
Fluctuations in the value of the peso may also adversely affect the Argentine economy, our financial condition and results of operations.
Since January 2002, the peso has fluctuated significantly in value and generally depreciated against the U.S. dollar, with adverse consequences to our business. A substantial increase in the value of the peso against the U.S. dollar could also present risks for the Argentine economy since it may lead to a deterioration of the country’s current account balance and the balance of payments. Between 2011 and December 2015, the Government strengthened exchange controls in response to an increase of capital outflows as compared to inflows and to a drop in the commercial surplus. However, these controls were not able to prevent the decrease of international reserves of the BCRA between 2012 and 2015. In the past, the decrease in the BCRA’s reserves resulted in Argentina being vulnerable to inflation and external shocks, affecting the country’s capacity to overcome the effects of an external crisis.
On December 17, 2015, the new Government administration, which took office in December 2015, implemented certain measures including the lifting of most of foreign exchange controls. As a result, the official exchange rate published by Banco Nación increased from Ps. 9.83 per U.S. dollar on December 16, 2015 to Ps. 13.95 per U.S. dollar on December 18, 2015. After these measures were taken, the value of the Argentine peso could freely fluctuate against the U.S. dollar. Therefore, we are unable to predict the future value of the peso against the U.S. dollar and how any fluctuations may affect the costs that we incur in conducting our operations. See “Item 10. Additional Information—D. Exchange Controls.”
Further depreciation of the peso against the U.S. dollar would likely result in a material adverse effect on our business because of our exposure to financial debt in U.S. dollars. In addition, future devaluations could result in high inflation, reduce real wages, and adversely affect the Government’s ability to honor its foreign debt obligations. On the other hand, significant appreciation of the peso could harm the competitiveness of Argentina companies and lead to reduced exports.
As of March 31, 2017, the total amount of principal and accrued but unpaid interest under our consolidated U.S. dollar-denominated indebtedness was US$247.5 million.
Government intervention in the Argentine economy could adversely affect our results of operations or financial condition.
In addition to the economic factors described above, our business and operations have been, are and could in the future be, affected by actions taken by the Government through the implementation of new or amended laws and regulations, such as: nationalizations, expropriations or forced divestiture of assets; restrictions on production, imports and exports; exchange and/or transfer restrictions, including those relating to dividend payments; direct and indirect price controls; tax increases, changes in the interpretation or application of tax laws and other retroactive tax claims or challenges; cancellation of contractual rights; and delays or denials of governmental approvals.
During recent years, the Government has increased its direct intervention in the economy, including through the implementation of expropriation and nationalization measures, price controls and exchange controls. Although the new administration has reversed some of these measures, there is no guarantee that this trend will continue.
In 2008, the Government absorbed and replaced the former private pension system with a public “pay as you go” pension system. As a result, all resources administered by the private pension funds, including significant equity interests in a wide range of listed companies, were transferred to a separate fund (“Fondo de Garantía de Sustentabilidad” or “FGS”) to be managed by the Administración Nacional de la Seguridad Social (“ANSES”). Purchases of debt and equity instruments which previously could be placed with pension fund administrators are now entirely subject to the discretion of ANSES. ANSES has been entitled to designate government representatives to the boards of directors of these companies. ANSES currently holds 23.1% of our outstanding capital stock and has two representatives in our Board of Directors. On July 25, 2012, the Executive Branch issued Decree No. 1,278/12, which governed FGS representatives’ role in companies in which FGS had participation.
7
On October 5, 2015, the Argentine Congress passed law No. 27,181, declaring the protection of the Government’s shareholdings, including those forming part of the portfolio of the FGS, to be in the public interest, and creating the Argentine Agency of Government Investments in Companies as an enforcement authority. This agency was later replaced by the Secretary of Economic Policy and Development Planning of the Ministry of Finance (“MH”). This agency is in charge of implementing any policies and actions related to the exercise by the Argentine Government of any rights arising out of the shares it holds.
In June 2016, Argentine Congress passed Law No. 27,260, repealing or modifying earlier laws relating to the FGS. Among other things, Law No. 27,260 established that ANSES’ shareholding in public companies may not be sold, in most cases, without the prior authorization of the Argentine Congress if this sale represents a reduction in the FGS’s aggregate shareholding in public companies to below 7%.
Decree No 894/2016, which regulates Law No, 27,260, created the Secretary of Economic Policy and Development Planning. This new agency is responsible for executing policies relating to the exercise of rights corresponding to shareholdings of companies where the Government holds a minority interest. Decree No. 897/2016 states that the directors appointed by ANSES shall have the functions, duties and powers established by General Companies Law.
In May 2012, Argentine Congress passed Law No. 26,741, which declared hydrocarbons self-sufficiency, production, industrialization, transport and marketing to be activities of public interest and primary goals of Argentina, and empowered the Government to take the necessary measures to achieve such goals. Law No. 26,741 expropriated 51% of the shares of YPF S.A. (“YPF”), formerly known as Repsol YPF S.A. (“Repsol YPF”). On February 25, 2014, the board of Repsol S.A., controlling entity of Repsol YPF, approved a compensation package offered by the Government of the equivalent of US$ 5 billion in Argentine bonds for the expropriation. As of February 28, 2014 YPF market capitalization was US$ 10.6 billion.
Our business and operations in Argentina may also be adversely affected by measures adopted by the Government to address inflation and promote sustainable growth. For example, increases in the costs of services and labor could negatively affect our results of operations if we are not permitted to pass those costs along to customers in the tariffs, which we charge due to the imposition of price controls. See “—Risks Relating to Our Business— Our License has been subject to renegotiation pursuant to the Public Emergency Law. Failure or delay to negotiate further improvements to our tariff structure, and/or to have our tariffs adjusted to reflect increases in our costs in a timely manner or at all, has affected our financial condition and results of operations and could also have a material adverse effect on them.”
In addition, in the past the Government has also adopted numerous measures to directly or indirectly control the access by private companies and individuals to foreign trade and foreign exchange markets, such as restricting its free access and imposing the obligation to repatriate and sell within the local foreign exchange market all foreign currency revenues obtained from exports. These regulations prevented or limited us from offsetting the risk derived from our exposure to the U.S. dollar.
In 2012 and again in 2013, the Argentine Congress established new regulations relating to domestic capital markets. The new regulations generally provide for increased intervention in the capital markets by the Government. The new administration, however, is working on an amendment to the Capital Markets Law, which would, among other things, limit the scope of intervention by the CNV in public companies.
In October 2015, presidential, congressional, municipal and state government elections were held. Candidate Mauricio Macri won the Argentina presidency, beginning his presidential term on December 10, 2015. Mr. Macri’s victory for Argentina’s center-right opposition ended the 12-year rule of the Peronist Party.
A low growth and high inflation rates scenario is likely going forward, as a result of the accumulation of macroeconomic imbalances over recent years, the actions of the Government in regulatory matters and challenging conditions in the international economy. We can offer no assurance that policies implemented by the Government will not adversely affect our business, results of operations and financial position.
Argentina is an emerging market economy that is highly sensitive to local political developments which have had an adverse impact on the level of investment in Argentina and the access of Argentine companies to the international capital markets. Future developments may adversely affect Argentina’s economy and, in turn, our business, results of operations and financial condition.
8
Even though the new administration took several measures that had the positive effect of lifting most exchange controls in Argentina, we cannot provide any assurance that we will be able to access foreign exchange markets or that these measures will not cause fluctuations in the value of the peso. The lifting of certain exchange controls and other future economic, social and political developments in Argentina, over which we have no control, may adversely affect our financial condition or results of operations, including our ability to pay our debts at maturity or dividends. For additional information on developments relating to exchange controls, see “Item 10 – Additional Information—D. Exchange Controls.”
The Argentine economy can be adversely affected by economic developments in other markets and by more general “contagion” effects, which could have a material adverse effect on Argentina’s economic growth.
Argentina’s economy is vulnerable to external shocks that could be caused by adverse developments affecting its principal trading partners. A significant decline in the economic growth of any of Argentina’s major trading partners could have a material adverse impact on Argentina’s balance of trade and adversely affect Argentina’s economic growth. For example, recent economic slowdowns, especially in Argentina’s major trading partners, led to declines in Argentine exports in the last few years. Specifically, fluctuations in the price of the commodities sold by Argentina and a significant revaluation of the peso against the U.S. dollar could harm Argentina’s competitiveness and affect its exports.
The economy in Brazil, one of the main import and export markets for Argentina, experienced a recession in 2016 when GDP declined 3.6% as a consequence of political uncertainty, including the recent removal from office of the President Dilma Rousseff following an impeachment vote in the Senate, and the fallout from the continuing investigation into the Lava Jato corruption scandal.
Financial and securities markets in Argentina are also influenced by economic and market conditions in other markets worldwide. U.S. monetary policy has significant effects on capital inflows and asset price movements in emerging market economies. Increases in U.S. interest rates result in the appreciation of the U.S. dollar and decreases in prices for raw materials, which can adversely affect commodity-dependent emerging economies.
Additionally, a slowing of China's GDP growth has led to a reduction in exports to this Asian country, which in turn has caused oversupply and price declines in certain commodities. Decreases in exports have a material adverse effect on Argentina’s public finances due to a loss of tax on exports, causing an imbalance in the country’s exchange market.
Although economic conditions vary from country to country, investors’ perceptions of events occurring in other countries have in the past substantially affected, and may continue to substantially affect, capital flows into and investments in securities from issuers in other countries, including Argentina. International investors’ reactions to events occurring in one market sometimes demonstrate a “contagion” effect in which an entire region or class of investment is disfavored by international investors. Argentina could be adversely affected by negative economic or financial developments in other countries, which in turn may have an adverse effect on our financial condition and results of operations.
Certain economic policies of the former government administration in Argentina, including the relationship with the International Monetary Fund and the foreign exchange restrictions, led in the past to a reduction in exports and foreign direct investments, to a decline in national tax revenues and to the inability to access international capital markets. There can be no assurance that the Argentine financial system and securities markets will not be adversely affected by policies that may be adopted by the government in the future or by events in the economies of developed countries or in other emerging markets. A slowdown in economic activity in Argentina would adversely affect our business, financial condition and results of operations.
Argentina’s past default and litigations with holdout bondholders may limit our ability to access international markets.
Argentina’s history of defaults on its external debt and the protracted litigation with holdout creditors, summarized below, may reoccur in the future and prevent Argentine companies such as us from accessing the international capital markets readily or may result in higher costs and more onerous terms for such financing, and may therefore negatively affect our financial condition or cash flows.
9
Following the default on its external debt in 2001, Argentina sought to restructure its outstanding debt by offering holders of the defaulted bonds two opportunities to exchange them for newly issued debt securities, in 2005 and again in 2010. Holders of approximately 93% of Argentina’s defaulted debt participated in the exchanges. Nonetheless, a number of bondholders held out from the exchange offers and pursued legal actions against Argentina in the courts of the United States and several other countries.
After almost 15 years of litigation, and following the beginning of Mr. Macri’s administration, in February 2016 Argentina negotiated and reached settlement agreements with its largest holdout creditors. As required by the settlement, on March 31, 2016, the Argentine Congress voted to repeal laws that had prevented Argentina from paying the holdouts. On April 13, 2016, Argentina announced that it would proceed with a new bond offering of up to US$ 12.5 billion to repay the holdouts. After issuing US$ 16.5 billion of new bonds to international investors, on April 22, 2016 Argentina notified the competent U.S. court that it had made full payment under the settlement agreements with the holdout creditors, and the court vacated its injunctions which had been preventing Argentina from making payments on its restructured external debt.
However, even though Argentina has successfully accessed the international capital markets since the settlement, there continues to be a risk that the country will not attract the foreign direct investment and financing needed to restart the investment cycle and achieve sustainable rates of economic growth. If that risk occurs, Argentina’s fiscal condition could be adversely affected, which could lead to more inflation and undermine the government’s ability to implement economic policies designed to promote growth. The difficulty of sustaining over time economic growth with reasonable price stability could result in a renewed episode of economic instability.
In addition, the foreign shareholders of several Argentine companies (including us), together with public utilities and certain bondholders that did not participate in the exchange offers described above, filed claims in excess of US$15 billion with the International Centre for Settlement of Investment Disputes (“ICSID”), alleging that the emergency measures adopted by the Government in 2002 do not meet the just and equal treatment requirements of several bilateral investment treaties to which Argentina is a party. While certain plaintiffs have prevailed against Argentina in their ICSID proceedings, and although Argentina has agreed to compensate some of the plaintiffs by issuing sovereign bonds to them, other successful plaintiffs including British Gas (a US$ 185 million award) and GDF Suez (a US$ 405 million award), have not been paid.
Recently approved Argentine judicial, commercial and civil reforms, as well as challenges thereto, have generated uncertainty with respect to future administrative and judicial proceedings, including those involving the Government.
Law No. 26,854, which regulates injunctions in cases in which the Government is a party or has intervened, was promulgated on April 30, 2013 as part of a judicial reform bill approved by the Argentine Congress. A significant change included in the judicial reform bill is a time limitation on injunctions imposed in proceedings brought against the Government. Legal challenges to the law have resulted in rulings which for the time being have declared the law unconstitutional. If the law is ultimately upheld our ability in the future to pursue claims against the Government could be adversely affected.
On October 1, 2014, the Argentine Congress passed Law No. 26,994, which approved the new Argentine Civil and Commercial Code, abrogated several laws and modified others, including the General Companies Law and the Consumer Protection Law. The new Civil and Commercial Code, which came into effect on August 1, 2015, introduced significant changes to the Argentine private law system.
Although this reform substantially reflects numerous judicial precedents and introduces certain changes, it is not possible to predict the degree to which it might affect current or future contracts and/or administrative and/or judicial proceedings to which we are or will be a party.
Risks Relating to Our Business
Because we receive a significant portion of our net revenues from public service contracts, which tariffs are no longer stated in dollars or subject to indexing, our net revenues and liquidity have been harmed as a result of inflation and the devaluation of the peso.
All of our net revenues from our gas transportation segment (which represented 28.2% and 24.0% of total net revenues during 2016 and 2015, respectively) are attributable to public service contracts, which are subject to Government regulation. Prior to the passage of the Public Emergency Law, our tariffs were stated in U.S. dollars and subject to indexing, based on semi-annual changes in the U.S. Producer Price Index (“PPI”), with adjustments every five years, based on the efficiency of, and investments in, our gas transportation operations. The Public Emergency Law, however, eliminated tariff indexation. Pursuant to the Public Emergency Law public service tariffs were converted into pesos and fixed at an exchange rate of Ps. l.00 = US$l.00 even as the peso was allowed to devalue against the U.S. dollar.
10
Consistent inflation in Argentina since 2002, without any corresponding increase in our natural gas transportation tariffs until recently, has adversely affected, and continued inflation would continue to adversely affect, our natural gas transportation revenues, net revenues and financial condition.
In addition, since 2002, the peso has fluctuated in value and generally depreciated against the U.S. dollar, adversely affecting our results and financial position. In particular, because substantially all of our debt is denominated in U.S. dollars significant devaluations of the peso may adversely affect our ability to make required interest or amortization payments, when due.
Our License has been subject to renegotiation pursuant to the Public Emergency Law. Failure or delay to negotiate further improvements to our tariff structure, and/or to have our tariffs adjusted to reflect increases in our costs in a timely manner or at all, has affected our financial condition and results of operations and could also have a material adverse effect on them.
The Public Emergency Law granted the Executive Branch the power to renegotiate contracts entered into with utility companies. In July 2003, Public Services Contracts Renegotiation and Analysis Unit (“UNIREN”) was created under the joint jurisdiction of the former Ministry of Economy and Finance (“MEF”) and the Ministerio de Producción y de Planificación Federal, Inversión Pública y Servicios (the “MPFIPyS”) in order to renegotiate public service contracts, including the respective tariffs (the “Renegotiation Process”).
Little progress had been made in our Renegotiation Process with UNIREN. Since 2003, multiple proposals from UNIREN, with varying levels of tariff increase, had been discussed with our management. In the past 15 years, we have signed two transitional agreements, one in October 2008 (the “2008 Transitional Agreement”) and the second one in February 2016 (the “2016 Transitional Agreement”).
On February 16, 2016, the Decree No. 367/2016, effective since March 2016, dissolved the UNIREN, assigning the Renegotiation Process to the Ministry of Energy and the MH.
Finally, on March 30, 2017 we signed the 2017 Transitional Agreement, which was ratified by Resolution No. 4362/2017 (the “Resolution 4632”) issued by the ENARGAS. The tariff increase granted by this resolution will be implemented in three stages.
See “Item 4. Our Information—B. Business Overview—Natural Gas Transportation—Regulatory Framework” below for more information.
In October 2008, 2011, 2015 and 2017, we received separate integral license renegotiation agreement proposals (the “2008, 2011, 2015 and 2017 Integral Renegotiation Agreement”, respectively). Our Board of Directors approved the 2017 Integral Renegotiation Agreement, which we have already executed. Such agreement is expected to be finalized and executed by the Ministry of Energy during 2017 after approval by the ENARGAS, the Office of the Attorney for the National Treasury, and the General Office of the Comptroller, and thereafter it will be sent to the National Congress for approval within 60 calendar days. Once so approved, it will be ready to be ratified by the Executive Branch.
The tariff increases granted to us by the 2016 and 2017 Transitional Agreement, the latter ratified by Resolution 4362, are subject to our compliance with mandatory investment plans to ensure the availability and quality of the natural gas transportation service. In the event that we do not comply with the investment plans as approved by ENARGAS, we could be subject to payment of a fine to that agency, which would be applied to the value of the scheduled work that is not timely executed.
Our inability to reach an agreement with the Government on the renegotiation of our License, any failure by the Government to comply with the terms of the renegotiated License, when agreed, and our failure to comply with the investment plans could materially adversely affect the profitability of our natural gas transportation business segment. Even if we are able to renegotiate our License, we cannot provide any assurance regarding the terms of the renegotiated License, including, the amount or timing of any tariff increases.
11
Failure or delay in the implementation of future tariff increases or the RTI process could have a material adverse effect in our financial and economic situation. In addition, our inability to obtain tariff adjustments reflecting the increase in operating cost could harm the development of our natural gas transportation business segment.
Recently the Resolution 4362 issued by the ENARGAS approved a staged tariff increase which contemplates an aggregate transportation tariff increase of 214.2% and an aggregate Access and Use Charge (“CAU”) increase of 37%. This staged increase is structured to provide the same economic benefits to us as if the increases had been fully effective on April 1, 2017. Pursuant to this resolution, we must also execute a capital expenditures program for a five-year period (from April 1, 2017 to March 31, 2022), which contemplates investments of approximately Ps. 6,786.5 million to improve the operation and maintenance of the pipeline system (the “Five-Year Plan”). If we do not execute the Five Year Plan in accordance with ENARGAS’s regulations, we would be subject to fines to be calculated on the value of the work pending execution.
See “Item 4. Our Information—B. Business Overview—Natural Gas Transportation—Regulatory Framework” below for more information.
In the past, we have suffered from our inability to adjust our tariff increase, which implied the deterioration of our financial and economic condition. Our inability to bill the increases granted by Resolution 4362 in a timely manner, and to obtain future tariff adjustments in line with the increase in our costs could affect adversely our economic and financial condition. Moreover, the RTI process could result in the adoption of an entirely new regulatory framework for our business, with additional terms and restrictions on our operations and the imposition of mandatory investments. We also cannot predict whether a new regulatory framework will be implemented and what terms or restrictions could be imposed.
We conduct our business in a unionized environment.
The sectors in which we operate are largely unionized. Although we consider our current relations with our workforce to be acceptable, we have experienced organized work disruptions and stoppages in the past and we cannot assure you that we will not experience them in the future. Additionally, labor demands regarding salary increases and labor conditions, are commonplace in Argentina’s energy sector and unionized workers have blocked access to plants and routes in the recent past. In addition, our collective bargaining agreements generally expire after a one-year term. We are currently negotiating the collective bargaining agreements for the current period 2017 – 2018.
We maintain insurance coverage for business interruptions, including business interruptions caused by labor actions. We cannot assure you that we will be able to negotiate new collective bargaining agreements on the same terms as those currently in effect, or that we will not be subject to strikes or work stoppages before or during the negotiation process. Natural Gas Industry and national strikes, picketing or other types of conflict with the unionized personnel may adversely affect our results of operations and financial condition.
In the past, the Government has enacted laws and regulations forcing private companies to maintain certain wage levels and to provide additional benefits to their employees. We cannot assure you that in the future the Government will not increase wage or require additional benefits for workers or employees or that unions will not pressure the Government to demand such measures. All wage increases, as well as any additional benefits, could result in increased costs and a decrease in our results of operations.
Our regulated business is dependent on our ability to maintain our License, which is subject to revocation under some circumstances.
We conduct our natural gas transportation business pursuant to the License, which authorizes us to provide natural gas transportation services through the exclusive use of the southern natural gas transportation system in Argentina. Our License may be revoked in certain circumstances based on the recommendation of ENARGAS. Revocation of our license would require an administrative proceeding, which would be subject to judicial review. Reasons for which our License may be revoked include:
●
repeated failure to comply with the obligations of our License and failure to remedy a significant breach of an obligation in accordance with specified procedures;
12
●
total or partial interruption of service for reasons attributable to us that affects transportation capacity during the periods stipulated in our License;
●
sale, assignment or transfer of our essential assets or the placing of encumbrances thereon without ENARGAS’ prior authorization, unless such encumbrances serve to finance extensions and improvements to the gas pipeline system;
●
our bankruptcy, dissolution or liquidation;
●
ceasing and abandoning the provision of the licensed service, attempting to assign or unilaterally transfer our License in full or in part without the prior authorization of ENARGAS, or giving up our License, other than in the cases permitted therein; and
●
delegation of the functions granted in such contract without the prior authorization of ENARGAS, or the termination of such agreement without regulatory approval of a new contract.
If our License were revoked, we would be required to cease providing natural gas transportation services. The impact of a loss of our License on our business, financial condition and results of operations would be material and adverse.
Our creditors may not be able to enforce their claims against us in Argentina.
We are a stock corporation with limited liability (“sociedad anónima”) organized under the laws of Argentina. Substantially all of our assets are located in Argentina.
Under Argentine law, foreign judgments may be enforced by Argentine courts, provided that the requirements of Articles 517 through 519 of the Federal Code of Civil and Commercial Procedure are met. Foreign judgments cannot violate principles of public policy (orden público) of Argentine law, as determined by Argentine courts. It is possible that an Argentine court would deem the enforcement of foreign judgments ordering us to make a payment in a foreign currency outside of Argentina to be contrary to Argentine public policy if at that time there are legal restrictions prohibiting Argentine debtors from transferring foreign currency outside of Argentina. Although currently there are no legal restrictions prohibiting Argentine debtors from transferring foreign currency outside of Argentina to satisfy principal or interest payments on outstanding debt that has been previously reported to the BCRA, we cannot assure you that the Government or an Argentine court will not impose such restrictions in the future.
In addition, under Argentine law, attachment prior to execution and attachment in aid of execution will not be ordered by an Argentine court with respect to property located in Argentina and determined by such courts to be utilized for the provision of essential public services. A significant portion of our assets may be considered by Argentine courts to be dedicated to the provision of an essential public service. If an Argentine court were to make such determination with respect to any of our assets, unless the Government ordered the release of such assets, such assets would not be subject to attachment, execution or other legal process as long as such determination stands and the ability of any of our creditors to realize a judgment against such assets may be adversely affected.
In order to mitigate the energy crisis, the Government adopted new strategies, measures and programs with respect to the natural gas transportation industry, including the expansion of our pipeline and the interruption of natural gas firm transportation service (including the diversion of natural gas supply from the Cerri Complex), which could materially adversely affect our business, results of operations and financial condition.
Since 2002, the natural gas industry has experienced a sharp increase in demand, while the supply of natural gas has not been sufficient to meet this increased demand. The Government has adopted different strategies, measures and programs to mitigate the resulting energy crisis.
Specifically, natural gas distribution companies have been prohibited from passing through price increases to consumers since 2002. Producers of natural gas, therefore, have had difficulty implementing wellhead natural gas price adjustments that would increase the costs of distribution companies, which has caused such producers to suffer a sharp decline in their rate of return on investment activities. As a result, natural gas production has not been high enough to meet the increasing demand. Likewise, the lack (until very recently) of tariff adjustments for natural gas transportation companies has caused transportation companies to suffer a decrease in their profitability.
13
In light of these events, the Government implemented a number of strategies, measures and programs aimed at mitigating the energy crisis and supporting the recovery of the Argentine economy generally. With respect to the natural gas industry, these strategies, measures and programs included, among others, the expansion of our pipeline, through the creation of financial trust funds used as vehicles to facilitate financing of those investments (“Gas Trusts”). For more information on the pipeline expansions, please see “Item 4. Our Information—B. Business Overview—Natural Gas Transportation—Pipeline Operations—Pipeline Expansion. Although the expansion projects described above have not adversely affected our results of operations or financial condition, we cannot assure you that future, or even present, expansion projects will not have such adverse effects.
Government-mandated interruption of contracted firm transportation services
In 2004, the Executive Branch issued Presidential Decree No. 181/04 directing the Federal Energy Bureau to establish a system of priority pursuant to priority demand customers could receive natural gas in priority to other users, even those with firm transportation and firm natural gas supply contracts. Pursuant to ENARGAS Resolution No. 1,410/2010, due to the lack of sufficient natural gas provision, natural gas transportation service (including those with firm transportation contracts) may be interrupted and / or relocated in order to service priority demand customers.
On June 1, 2016, the Ministry of Energy issued Resolution No. 89/2016, which requires ENARGAS to develop a procedure to amend and supplement ENARGAS Resolution No. 1,410/2010 and establish daily operating conditions of the transportation and distribution systems. It has also established a methodology to satisfy the demand of natural gas of those customers classified as “high-priority.”
On June 5, 2016, ENARGAS issued Resolution No. I/3833/2016 creating the “Supplementary Procedure for Gas Requests, Confirmations and Control.” According to this resolution, if any gas transportation and distribution company finds that the transportation capacity is not sufficient to supply priority demand customers; such company shall summon an emergency committee composed of company and ENARGAS representatives. This emergency committee shall determine adjustments to be made to the daily natural gas deliveries to address such shortage, considering the availability of natural gas and the demand of residential consumers and power plants.
Although neither our results of operations nor our financial condition have been materially adversely affected by transportation service interruptions in recent years, we cannot assure you that similar interruptions will not materially adversely affect our results of operations or financial condition in the future. As of the date of this Annual Report there are some unresolved disputes with one of our clients (Profertil S.A.), in respect of service interruptions between 2007 and 2013. In that action ENARGAS ruled in our favor finding that there was a shortage in the supply of natural gas. However, we cannot assure you that future interruptions of supply to our firm natural gas transportation clients will not lead to further legal action, which could have a significant adverse economic and financial effect on us.
Despite having increased in recent years, natural gas arriving from the Neuquina basin has declined in volume between 2009 and 2013. Our Liquids production depends on the natural gas that arrives at the Cerri Complex through three main pipelines from the Neuquina and Austral natural gas basins. The flow and caloric power of this natural gas are subject to risks that could materially adversely affect our Liquids and midstream business segment.
Argentina relies heavily on natural gas. However, its natural gas reserves are declining. There is some risk that natural gas production will continue to decrease in the future and that new exploration will not compensate for such decline, which would adversely affect our Liquids business segment by reducing the amount of natural gas flowing to the Cerri Complex and, therefore, the amount of Liquids we produce. In addition, the reduction in the production of natural gas could affect the flow of natural gas provided for our midstream clients for its compression and treatment.
In 2016, 44.6% of the natural gas transported by our system originated in the Neuquina basin with the remainder coming primarily from the Austral basin. Since 2009, the quality and the volume of natural gas injected from the Neuquina basin has been lower (as a consequence of the reduction of natural gas production in this basin) and not appropriate for processing in the Cerri Complex, negatively impacting our level of output from this facility. As a consequence of this lower output of natural gas from the Neuquina basin, we have had to buy natural gas at higher prices causing an increase in the cost of Liquids production and commercialization activities for our own account that reduces our profit from these activities.
14
Since the construction of a natural gas processing plant upstream of the Cerri Complex by Compañía MEGA S.A. (“MEGA”), a sociedad anónima owned by YPF, Petrobras International Braspetro B.V. and Dow Investment Argentina S.A the volumes and quality of natural gas arriving at the Cerri Complex have been reduced. There can be no assurance that there will not be further reductions in the future. Any reduction of natural gas volumes arriving at the Cerri Complex for Liquids could adversely affect our revenues from Liquids production and commercialization services and consequently, our net revenues.
In 2009, non-conventional natural gas was discovered in the Neuquina basin by YPF, which at that time was a subsidiary of Repsol S.A. Exploration and exploitation of this natural gas reserve will require several years and involve high extraction costs. Since the expropriation of YPF in 2012, the Government has played an important role signing agreements with foreign and local oil companies in order to develop an investment plan, which allows for the increase of the reserves of this basin. Because of the measures taken by the Government to ensure production levels, during 2016, natural gas production has increased approximately 4.9% from the 2015 production level.
We cannot assure you, however, that this new natural gas resource at the Neuquina basin, or any other measures taken by the Government to increase natural gas production and supplies, will be successful in increasing Argentine proved natural gas reserves or production our midstream or Liquids production and commercialization businesses could be adversely affected by a sustained decrease in the production of natural gas.
Measures taken by the Government may have an adverse effect on the supply of natural gas to the Cerri Complex, and the margins we are able to obtain from our Liquids business, which may adversely affect the results in our Liquids production and commercialization segment and, as a result, our overall business and results of operations.
As described above, actions taken by the Government during the winter periods of recent years resulted in natural gas being redirected away from certain users, including the Cerri Complex, towards priority users, including residential customers. See “—In order to mitigate the energy crisis, the Government has initiated new strategies, measures and programs with respect to the natural gas transportation industry, including the expansion of our pipeline and the interruption of natural gas firm transportation service, which could materially adversely affect our business, results of operations and financial condition” above. During the winter of 2016, processing at the Cerri Complex was interrupted because of continued governmental actions to ensure natural gas supply to the domestic market. Any diversion of the supply of natural gas from the Cerri Complex may require us to purchase natural gas from third parties to supply our Liquids business, which may result in increased costs. If we are unable to purchase natural gas from other sources, the volume of our Liquids productions may decrease.
The new administration has taken several measures to guarantee the production of natural gas. The Ministry of Energy increased the natural gas price paid by industrial users and increased the price at which we purchase natural gas to be processed in the Cerri Complex. For further information see, “Item 4 – Our Information – Business Overview – Liquids Production and Commercialization.” Any additional increase in the costs of our Liquids production and commercialization segment, or decrease in the volume of Liquids processed may adversely affect our revenues, business and results of operations.
Although our Liquids production and commercialization activities are not subject to regulation by ENARGAS, the Government has taken certain regulatory actions in recent years that have affected our Liquids business. For example, in April 2005, the Government enacted Law No. 26,020, which set the framework by which the Secretary of Hydrocarbon Resources (“SHR”) (formerly the Federal Energy Bureau) may establish regulations to cause LPG suppliers guarantee sufficient supply of LPG in the domestic market at low prices. Law No. 26,020 creates a price regime pursuant to which the SRH periodically publish reference prices for LPG sold in the local market. It also sets forth LPG volumes to be sold in the local market.
We participate in two programs created by the Government under this framework, which provide for the payment of compensation based on the difference between the price set by the Government and the export parity price. Over recent years, this compensation has been paid to us with significant delays. For further information, see “Item 4. Our Information—Business Overview—Liquids Production and Commercialization.”
We cannot assure you that we will be able to maintain or increase the domestic prices of our products, and limitations on our ability to do so would adversely affect our financial condition and results of operations. Similarly, we cannot assure you that LPG prices in Argentina will track increases or decreases in the international or regional markets.
15
After the issuance of Resolution No. 1,982/11 and 1,991/11 (the “Gas Charge Resolutions”), The natural gas processing charge created by Decree No. 2,067/08 (the “Natural Gas Processing Charge”) increased from Ps. 0.049 to Ps. 0.405 per cubic meter of natural gas effective from December 1, 2011, representing a significant increase in our variable costs of natural gas processing.
In order to avoid an adverse effect on our Liquids business, we initiated legal proceedings against Decree No. 2,067/08 and the Gas Charge Resolutions, including the Government, ENARGAS and MPFIPyS as defendants. For additional information, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal and Regulatory Proceedings—Tax Claims.”
On March 28, 2016, the Ministry of Energy issued Resolution No. 28/2016, which instructs the ENARGAS to take all the necessary measures to reduce to zero the Natural Gas Processing Charge since April 1, 2016. Since that date, we have not been required to pay for the Natural Gas Processing Charge.
We cannot provide any assurance that our Liquids production and commercialization business will not be subject to any further actions from the Government to increase the value of the Natural Gas Processing Charge or any other tax affecting the cost of the natural gas we process in the Cerri Complex, which may have a material adverse impact on our business and results of operations.
Fluctuations in market prices and the enactment of new taxes or regulations limiting the sales price of LPG and natural gasoline may affect our Liquids business.
We extract LPG and natural gasoline from natural gas delivered to the Cerri Complex and sell LPG and natural gasoline for our own account. As a result of the deterioration of our natural gas transportation segment, operations relating to our Liquids production and commercialization have represented more than 50% of our total net revenues since 2003. Since 2009, the international market for Liquids generally has been favorable, driven by strong international prices for LPG and natural gasoline. However, since the fourth quarter of 2014, as a consequences of weaker demand of emerging markets as wells as higher production levels and export capacity due to the development of shale gas fields in the United States of America, our average liquids sales prices were lower than the ones recorded previously. High volatility and a downward trend in oil and liquids prices continued during 2016.
In recent years, the Government issued a series of measures, which significantly affected our Liquids production and commercialization segment. Since 2002, LPG and natural gasoline exports have been subject to a withholding tax on exports. After several modifications, in March 2008, the Government introduced a “sliding-scale” regime for LPG and natural gasoline, where the withholding rate (as a percentage) would increase to the same extent as the international reference prices.
At the end of 2014, to reduce the impact of the sharp decrease in the international reference prices for LPG and Natural Gasoline, the Government reduced to 1% the applicable rate of withholding tax for exports, maintaining the “sliding-scale” regime in case international prices were higher than a certain level set by the Federal Energy Bureau. This regime was in effect through the end of 2016. The withholding tax was suspended on January 7, 2017.
For further information, see: “Item 4. Our Information—B. Business Overview—Liquids Production and Commercialization.”
Any new regulations regarding the cost and availability of the natural gas used in the production of Liquids and the effect of the continuing decline or volatility in international prices of LPG or natural gasoline could cause our operating margins to drop significantly and materially adversely affect our results of operations and financial condition. In addition, the Government could modify the current export tax scheme and export regulations in a manner that could adversely affect our financial condition and results of operations.
Our ethane sales depend on the capacity of PBB Polisur S.A. (“PBB”), as the sole purchaser of our ethane production.
Between 2005 and 2015, we sold all our ethane to PBB under a long-term agreement that expired on December 31, 2015. Following the expiration of this agreement, we negotiated a renewal of the agreement for the period from May 1, 2016 to May 1, 2017.
16
Pursuant to this agreement, the ethane price was calculated in U.S. dollars and was subject to adjustments, including for changes in the U.S. PPI, the natural gas price, the quality of the ethane shipped by us and transportation tariffs and charges, among others. This agreement also includes take or pay (“TOP”) and deliver or pay (“DOP”) commitments for minimum annual quantities. Under these terms, if one party does not comply with the applicable TOP or DOP condition, that party will be required to compensate the other party.
In addition, in recent years, PBB has suffered several adverse operational conditions that affected its capacity to purchase our ethane production.
We cannot assure you that these adverse conditions affecting PBB will not recur in the future. We also cannot assure you that PBB will not decide to reduce its purchases of ethane from us. These considerations, or our inability to negotiate a new long-term purchase agreement with PBB on similar terms to the agreement that will expire on May 1, 2017, may adversely affect our results of operations and financial condition.
Defaults on or deferrals of payments by our customers, or our inability to renew natural gas firm transportation contracts maturing in the short-term, may adversely affect our natural gas transportation segment revenues.
The lack of progress by our main natural gas transportation customer, MetroGAS S.A. (“Metrogas”), in renegotiating its licenses with the Government according to the terms of the Public Emergency Law may in the future cause Metrogas not to fulfill its payment obligations under the natural gas firm transportation contracts with us. We may in the future be subject to extensions in collection terms and payment obligations. We cannot assure you that our natural gas distribution customers in Argentina will not default in the future, and therefore negatively impact our financial position.
We cannot assure you that our natural gas firm transportation contracts will be renewed in whole or in part in the existing routes or by the current customers. We may not to renew some natural gas transportation contracts in light of the diminishing supply of natural gas from the Neuquina basin. If we are unable to renew the majority of our natural gas firm transportation contracts as they mature, our revenues, business and results of operation could be adversely affected.
The affirmative and restrictive covenants in our currently outstanding indebtedness could adversely restrict our financial and operating flexibility and subject us to other risks.
The terms of our currently outstanding indebtedness provide for numerous affirmative and restrictive covenants that limit our ability to, among other things, create liens, incur additional debt, pay dividends, acquire shares of stock and make payments on subordinated debt, enter into transactions with affiliates, sell assets, or consolidate, merge or sell substantially all of our assets.
These restrictions may limit our ability to operate our businesses and may prohibit or limit our ability to enhance our operations or take advantage of potential business opportunities as they arise. The breach of any of these covenants by us or the failure by us to meet any of these conditions could result in a default under any or all of such indebtedness. Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions and the renegotiation of public works and licenses process. In addition, if we are unable to generate sufficient cash flow from operations, we may be required to refinance outstanding debt or to obtain additional financing. We cannot assure you that a refinancing would be possible or that any additional financing would be available or obtained on acceptable terms.
Our insurance policies may not fully cover damage or we may not be able to obtain insurance against certain risks.
As of December 31, 2016, our physical assets are insured for up to US$ 2,023 million subject to certain deductibles. We maintain insurance policies intended to mitigate our losses due to customary risks. These policies cover our assets against loss for physical damage, loss of revenue and also third party liability. However, we cannot assure you that the scope of damages suffered in the event of a natural disaster or catastrophic event would not exceed the policy limits of our insurance coverage. We maintain all-risk physical damage coverage for losses resulting from, but not limited to, earthquakes, fire, explosions, floods, windstorms, strikes, riots, mechanical breakdowns and business interruption. Our level of insurance may not be sufficient to fully cover all losses that may arise in the course of our business or insurance covering our various risks may not continue to be available in the future. In addition, we may not be able to obtain insurance on comparable terms in the future. We may be materially and adversely affected if we incur losses that are not fully covered by our insurance policies or if we are required to disburse significant amounts from our own funds to cover such losses.
17
Changes in the interpretation by the courts of labor laws that tend to favor employees could adversely affect our results of operations.
In addition to our employees, we rely on a number of third party service providers to outsource certain services. We follow very strict policies to control the compliance by such third party service providers with their labor and social security obligations. However, due to changes in the interpretation by the courts of labor laws that tend to favor employees in Argentina, companies’ labor and social security obligations towards their own employees and employees of third party service providers have significantly increased. As a result of the foregoing, potential severance payment liabilities have significantly increased and, in the event any third party service provider fails to duly comply with its labor and social security obligations towards its employees, we may be faced with litigation by employees of such third party service provider to hold us liable for the payment of any labor and social security obligations defaulted by any such third party services provider. Therefore, our labor costs may increase as our indemnification responsibilities and costs expand, adversely affecting the result of our operations.
We may be exposed to risks related to litigation and administrative proceedings that could materially and adversely affect our business and financial performance in the event of an unfavorable ruling.
Our business may expose us to litigation relating to labor, environmental, health and safety matters, regulatory, tax and administrative proceedings, governmental investigations, tort claims and contract disputes and criminal prosecution, among other matters. In the context of these proceedings, we may not only be required to pay fines or money damages but also may be subject to complementary sanctions or injunctions affecting our ability to continue our operations. While we may contest these matters vigorously and make insurance claims when appropriate, litigation and other proceedings are inherently costly and unpredictable, making it difficult to estimate accurately the outcome of actual or potential litigation or proceedings. Although we may establish provisions, as we deem necessary, the amounts that we reserve could vary significantly from any amounts we actually pay due to the inherent uncertainties in the estimation process.
Risks Relating to Our Shares and ADSs
Shareholders outside Argentina may face additional investment risk from currency exchange rate fluctuations in connection with their holding of our shares or American Depositary Receipts (“ADRs”). Exchange controls imposed by the Government may limit our ability to make payments to the Depositary in U.S. dollars, and thereby limit ADR holders’ ability to receive cash dividends in U.S. dollars.
We are an Argentine company and any future payments of dividends on our shares will be denominated in pesos. The peso has historically fluctuated significantly against many major world currencies, including the U.S. dollar. A depreciation of the peso would likely adversely affect the U.S. dollar or other currency equivalent of any dividends paid on our shares and could result in a decline in the value of our shares and ADRs as measured in U.S. dollars.
From 2011 to December 2015, Argentine companies were required to obtain prior approval from BCRA and Argentine tax authorities in order to engage in certain foreign exchange transactions. Thus, our shareholders’ ability to receive cash dividends in U.S. dollars was limited by the ability of the Depositary for our ADR program to convert cash dividends paid in Pesos into U.S. dollars. Under the terms of our deposit agreement for the ADRs, to the extent that the Depositary can in its judgment, and in accordance with local exchange regulations, convert Pesos (or any other foreign currency) into U.S. dollars on a reasonable basis and transfer the resulting U.S. dollars abroad, the Depositary will as promptly as practicable convert or cause to be converted all cash dividends received by it in Pesos on the deposited securities into U.S. dollars. If in the judgment of the Depositary this conversion is not possible on a reasonable basis (or is not permitted by applicable Argentine laws, regulations and approval requirements), the Depositary may distribute the pesos received or in its discretion hold, such currency un-invested without liability for interest thereon for the respective accounts of the owners entitled to receive the same. As a result, if the exchange rate fluctuates significantly during a time when the depositary cannot convert the foreign currency, you may lose some of the value of the dividend distribution.
18
Our principal shareholders exercise significant control over matters affecting us, and may have interests that differ from those of our other shareholders.
As of the date of issuance of this Annual Report, our controlling shareholder is Compañía de Inversiones de Energía S.A. (“CIESA”), which holds 51% of the common stock. FGS holds 23.1% of our common stock. Local and foreign investors hold the remaining ownership of TGS’s common stock. CIESA is under co-control of: (i) Petrobras Argentina S.A. (in the process of merging with Pampa Energía S.A. (“Pampa Energía”), which holds 10% of CIESA’s common stock, (ii) CIESA Trust (whose trustee is TMF Trust Company (Argentina) S.A. and whose beneficiary is Petrobras Hispano Argentina SA, a wholly owned subsidiary of by Pampa Energía) (the “CIESA Trust”), who has a trust shareholding of 40% of the share capital of CIESA) and (iii) Grupo Inversor Petroquímica S.L. (member of GIP Group, headed by the Sielecki family; “GIP”), and PCT L.L.C. (“PCT”), which directly and together with WST S.A. (member of Werthein Group, “WST”) indirectly through PEPCA S.A. (“PEPCA”), hold a 50% of the shareholding in CIESA.
We cannot assure you that the interests of our principal shareholders will not diverge from interests of our other investors. See “Item 7. Major Shareholders and related party transactions.”
Sales of a substantial number of shares could decrease the market prices of our shares and the ADRs
CIESA holds 51% of our Class A shares. Pursuant to the Pliego de Bases y Condiciones para la Privatización de Gas del Estado S.E. (the “Pliego”) and the terms of the 2014 Notes, CIESA may not reduce its shareholding below 51% of our share capital without the competent authorities’ approval. The market prices of our common shares and ADR could decline as a result of sales by our existing shareholders, such as the ANSES, or of any other significant shareholder of common shares or ADRs in the market, or the perception that these sales could occur.
Under Argentine law, shareholder rights may be fewer or less well defined than in other jurisdictions
Our corporate affairs are governed by our By-laws, the General Companies Law and Law No. 26,831 (the “Capital Market Law”), which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States or in other jurisdictions outside Argentina. In addition, rules governing the Argentine securities markets are different and may be subject to different enforcement in Argentina than in other jurisdictions.
Changes in Argentine tax laws may adversely affect the tax treatment of our Class B Shares or ADSs.
On September 23, 2013, the Argentine income tax law was amended by Law No. 26,893. Pursuant to the amended law, the sale, exchange or other transfer of shares and other securities is subject to capital gain tax at a rate of 15% when the purchaser and the seller are not Argentine residents. When both the purchaser and the seller of our Class B Shares or ADRs are non-residents, the purchaser is required to pay the capital gains tax in addition to the purchase price of the Class B Shares or ADSs. In addition, if the purchaser is legally liable for capital gain taxes in Argentina, then the purchaser will likely not be entitled to receive any tax credit in the United States in respect of the payment of any such taxes. As of the date hereof, certain aspects of the amended Argentine tax law remain unclear, including the criteria to determine the residence of the purchaser of shares or other securities. Further rulemaking or interpretation of the amended income tax law by the Argentine tax authority may adversely affect the tax treatment of our Class B Shares or ADSs.
Holders of ADRs may be unable to exercise voting rights with respect to our Class B shares underlying the ADRs at our shareholders’ meetings
We will treat the Depositary for all purposes as the shareholder with respect to the shares underlying your ADRs. As a holder of ADRs representing the ADRs being held by the Depositary in your name, you will not have direct shareholder rights and may exercise voting rights with respect to our Class B Shares represented by the ADRs only in accordance with the deposit agreement relating to the ADRs. There are no provisions under Argentine law or under our By-laws that limit the exercise by ADR holders of their voting rights through the Depositary with respect to the underlying Class B Shares. However, there are practical limitations on the ability of ADR holders to exercise their voting rights due to the additional procedural steps involved in communicating with these holders. ADR holders may be unable to exercise voting rights with respect to our Class B Shares underlying the ADRs as a result of these practical limitations.
19
Item 4. Our Information
A. Our History and Development
General
Operations
We commenced commercial operations on December 29, 1992, as the largest company created in connection with the privatization of Gas del Estado S.E. (“GdE”), the Argentine state-owned natural gas company, whose integrated operations included natural gas transportation and distribution. GdE was divided into 10 companies: two transportation companies and eight distribution companies.
Our legal name is Transportadora de Gas del Sur S.A. We are a sociedad anónima, incorporated with limited liability under Argentine law on December 1, 1992. Our registered offices are located at Don Bosco 3672, 5th Floor, Buenos Aires (C1206ABF), Argentina, our telephone number is (54 11) 4865-9050 and our web address is www.tgs.com.ar. Our contact agent in New York is Grayling, and its telephone number is (646) 284-9416.
We are currently the largest transporter of natural gas in Argentina, delivering, as of December 31, 2016, 57.8% of the total natural gas transported in Argentina, through 5,706 miles of pipeline, of which we own 4,745 miles. We operate the remaining 961 miles, which are owned by the Gas Trusts, for a regulated tariff. Substantially all of our transportation capacity, approximately 2.8 Bcf/d as of December 31, 2016, is subscribed for under firm long-term natural gas transportation contracts. Natural gas transportation customers with firm contracts pay for the contracted pipeline capacity regardless of actual usage. Our natural gas transportation business is regulated by ENARGAS, and revenues from this business represented 28.2% and 24.0% of our total net revenues for the years ended December 31, 2016 and 2015, respectively.
We conduct our natural gas transportation business pursuant to the License, which is currently scheduled to expire in 2027, extendable for an additional 10-year period at our option if certain technical conditions described in the License are met. ENARGAS is required at that time to evaluate our performance and make a recommendation to the Executive Branch. If ENARGAS determines that we are in substantial compliance with all our obligations arising under the Natural Gas Law, related regulations and our License, the renewal should be granted by the Executive Branch. ENARGAS would bear the burden of proving that we had not met the technical conditions referred to above and, therefore, should not be granted a renewal. To the extent that we were found not to have complied with the obligations described above or chose not to seek renewal of our License, we would be entitled to certain specified compensation. See “—Certain Restrictions with Respect to Essential Assets” below.
The License gives us the exclusive right to operate the existing southern Argentine natural gas transportation pipeline system. Our natural gas transportation system connects major natural gas fields in southern and western Argentina with both distributors and large consumers of natural gas in those regions as well as in the greater Buenos Aires area, the principal population center of Argentina.
The map below illustrates our natural gas pipeline system and the location of our compressor plants as of December 31, 2016:
20
For additional information regarding our property, plant and equipment, see “—D. Property, Plant and Equipment” below.
We are also one of the largest processors of natural gas and one of the largest marketers of Liquids in Argentina. We operate the Cerri Complex and the associated Galván loading and storage facility in Bahía Blanca in the Province of Buenos Aires where Liquids are separated from natural gas transported through our pipeline system and stored for delivery. Revenues from our Liquids production and commercialization business represented 64.4% and 68.8% of our total net revenues during the years ended December 31, 2016 and 2015, respectively.
We also provide midstream integral solutions related to natural gas production, from the wellhead up to the transportation systems. In addition, through our subsidiary Telcosur S.A. (“Telcosur”), we provide telecommunication services. Aggregate net revenues from our midstream and telecommunications business segment represented 7.4% and 7.2% of our total net revenues during the years ended December 31, 2016 and 2015, respectively.
Controlling shareholders
Our controlling shareholder is CIESA, which holds 51% of our common stock. Other local and foreign investors hold the remaining shares of our common stock, including FGS, which holds 23.1% of our common stock. CIESA is under co-control of: (i) Pampa Energía, which holds 10% of CIESA’s common stock, (ii) CIESA Trust, which has a trust shareholding of 40% of the share capital of CIESA) and (iii) GIP and PCT, which directly and together with WST indirectly through PEPCA, hold a 50% of the shareholding in CIESA.
For additional information regarding CIESA’s current organizational structure, see “Item 7. Major Shareholders and Related Party Transactions. A. Major Shareholders.”
Capital expenditures
From January 1, 2014 through December 31, 2016, our aggregate capital expenditures amounted to approximately Ps. 2,188.6 million. Such capital expenditures include Ps. 35.2 million related to our natural gas transportation system expansions, which were mostly carried out under prepayment schemes, Ps. 871.2 million related to improvements to our gas transportation system, Ps. 255.3 million related to liquids production and commercialization activities and Ps. 1,026.9 million related to other services activities. Information relating to the size and financing of future investments is included in “Item 5. Operating and Financial Review and Prospects.”
21
For the year 2016, other services capital expenditures by Ps. 750.4 million were financed through a financial leasing agreement entered into with Pampa Energía in August 2016. The objective of this agreement was to finance the acquisition of property, plant and equipment located in the Río Neuquén field, which will allow us to expand our midstream services in such area.
B. Business Overview
NATURAL GAS TRANSPORTATION
As a transporter of natural gas, we receive natural gas owned by a shipper, usually a natural gas distributor, at one or more intake points on our pipeline system for transportation and delivery to the shipper at specified delivery points along the pipeline system. Under applicable law and our License, we are not permitted to buy or sell natural gas except for our own consumption and to operate the pipeline system. See “—Regulatory Framework” below for more information.
Our pipeline system connects major natural gas fields in southern and western Argentina with distributors and other users of gas in those areas and the greater Buenos Aires area. Transportadora de Gas del Norte S.A. (“TGN”), the only other natural gas transportation operating company that supplies the Argentine market, holds a similar license with respect to the northern pipeline system, which also provides natural gas transportation services to the greater Buenos Aires area.
Natural gas transportation services accounted for 28.2% and 24.0% of our total net revenues in the years ended December 31, 2016 and 2015, respectively. In 2016, 80.2% of our average daily natural gas deliveries were made under long-term firm transportation contracts. See “—Customers and Marketing” below. Natural gas firm transportation contracts are those under which capacity is reserved and paid for regardless of actual usage by the customer. Almost all of our natural gas firm contracted capacity is currently subscribed for at the maximum tariffs allowed by ENARGAS. During 2016, the amount of net revenues derived from natural gas firm transportation contracts was approximately Ps. 1,485.1 million, representing 71.1% of the total net revenues for the natural gas transportation segment. Substantially all of our remaining natural gas deliveries were made under natural gas interruptible transportation contracts entered into predominantly with four natural gas distribution companies, power plants and industrial customers. Interruptible contracts provide for the transportation of natural gas subject to available pipeline capacity. The Government has at times directed us to interrupt supply to certain customers and make deliveries to others without regard to whether they have natural gas firm or interruptible contracts. See “Regulatory Framework—Industry Structure” below for more information.
Customers and Marketing
Our principal service area is the greater Buenos Aires region in central-eastern Argentina. We also serve the more rural provinces of western and southern Argentina. As of December 31, 2016, our service area contains 6.0 million end-users, including 4.0 million customers in greater Buenos Aires area. Direct service to residential, commercial, industrial and electric power generation end-users is mostly provided by four gas distribution companies in the area, all of which are connected to our pipeline system: MetroGAS, BAN, Camuzzi Pampeana and Camuzzi Sur. These natural gas distribution companies serve in the aggregate 63.1% of the natural gas distribution market in Argentina. The other five Argentine distribution companies are located in and serve northern Argentina and are not connected directly to our pipeline system.
The table below contains certain information for 2016, as it relates to the distribution companies that are connected to our pipeline system:

Company | Annual Deliveries (Bcf) | % of Market Served | No. of End-Users (in millions) | % of deliveries received from us
MetroGAS (1) | 224.3 | 20.5% | 2.4 | 77%
Camuzzi Pampeana (1) | 169.8 | 15.5% | 1.3 | 98%
Camuzzi Sur | 165.4 | 15.1% | 0.7 | 100%
BAN (1) | 132.6 | 12.1% | 1.6 | 66%
|  | 63.1% | 6.0 |

(1)Also connected to the TGN system.
Source: ENARGAS
22
The firm average contracted capacity for our four largest distribution customers, Pampa Energía and for all other customers, as a group, as at December 31, 2016, 2015 and 2014, together with the corresponding net revenues derived from natural gas firm transportation services during such years and the net revenues derived from interruptible services during such years are set forth below:

| For the years ended December 31,
| 2016 | 2015 | 2014
Firm: | Average firm contracted capacity (MMcf/d) | Net revenues (millions of pesos) | Average firm contracted capacity (MMcf/d) | Net revenues (millions of pesos) | Average firm contracted capacity (MMcf/d) | Net revenues (millions of pesos)
MetroGAS | 639 | 450.6 | 752 | 268.6 | 766 | 194.9
Camuzzi Pampeana | 516 | 285.8 | 470 | 154.2 | 470 | 108.7
BAN | 357 | 226.6 | 346 | 110.3 | 346 | 78.9
Camuzzi Sur | 388 | 51.9 | 381 | 36.6 | 381 | 26.3
Pampa Energía(1) | 39 | 27.4 | 78 | 27.7 | 127 | 30.2
Others | 837 | 442.8 | 805 | 213.5 | 752 | 156.1
Total firm | 2,776 | 1,485.1 | 2,832 | 810.9 | 2,842 | 595.1
Interruptible and others: |  | 602.1 |  | 203.1 |  | 149.0
Total |  | 2,087.2 | 2,832 | 1,014 | 2,842 | 744.1

(1)
Until July 27, 2016, includes average firm contracted capacity and net revenues to Petrobras Argentina. From that date, as a consequence of the merger between Pampa Energía and Petrobras Argentina, includes the average firm contracted capacity and net revenues corresponding to Pampa Energía.
Upon the expiration of firm natural gas contracts for a total amount of 169.5 MMcf/d. in 2016, we managed to enter into new contracts for an aggregate capacity of 116,5 MMcf/d, so that firm contracted capacity at the end of 2016 had only decreased by 53,0 MMcf/d compared to 2015.
During 2017, contracts for firm transportation capacity for an aggregate of 727.5 MMcf/d were automatically renewed for a term of one year. Therefore, during 2018 and 2019, contracts for firm transportation capacity of 1,341.9 MMcf/d and 257.8 MMcf/d, respectively will expire. Renewing these contracts or otherwise contracting the available capacity, especially on routes from Neuquén, where production has declined in recent years, will be a significant challenge for us.
Pipeline Operations
Pipeline Deliveries. The following table sets forth our average daily natural gas firm and interruptible transportation deliveries for 2016, 2015 and 2014:

| For the year ended December 31,
| 2016 | 2015 | 2014
Firm: | Average daily deliveries (MMcf/d) | Average daily deliveries (MMcf/d) | Average daily deliveries (MMcf/d)
MetroGAS | 544 | 615 | 590
Camuzzi Pampeana | 371 | 378 | 374
Camuzzi Sur | 240 | 247 | 254
BAN | 229 | 226 | 237
Others | 505 | 431 | 431
Subtotal firm | 1,889 | 1,897 | 1,886
Subtotal interruptible | 466 | 434 | 424
Total | 2,355 | 2,331 | 2,310
Average annual load factor (1) | 76% | 82% | 81%
Average winter heating season load factor (1) | 93% | 87% | 88%
(1) Average daily deliveries for the period divided by average daily firm contracted capacity for the period, expressed as a percentage

The average temperature of the April-June 2016 quarter was the lowest recorded over the last 50 years, and consequently residential consumption increased significantly. Our efficient administration of natural gas dispatch, combined with the cooperative interaction among the different industry actors and the Government, coupled with a more intensive maintenance plan, allowed us to operate the pipeline in a manner that met the higher demand. ENARGAS continued to restrict the supply of natural gas to the industrial and generation customers in order to re -direct and target the fluid to the users considered to be priority, mainly residential, commercial and compressed natural gas stations. However, these restrictions were lower as a result of the higher average injections to the system.
23
We were able to achieve this level of service due in part to several maintenance, prevention and inspection measures. Among them, we have conducted in-line inspections throughout 676 miles of pipeline, using several technologies to identify, assess and control threats to the integrity of pipelines- such as external corrosion, material and geometrical defects, among others. In addition, we performed direct evaluation using Close Interval Survey (CIS) and Direct Current Voltage Gradient Survey (DCVG) techniques throughout 583 miles of pipeline. These tasks have been carried out to identify, assess and control threats to the integrity of pipelines- such as external and internal corrosion, material and geometrical defects, manufacture anomalies, among others.
For additional information see “—Natural Gas Transportation System Improvements” below.
Natural Gas Transportation System Improvements. In 2016, 2015 and 2014, we made capital expenditures enhancement of the natural gas transportation system’s safety and reliability in the aggregate amount of approximately Ps. 176.0 million. We operate our pipeline system and the pipeline constructed pursuant to the Gas Trust in accordance with Argentine natural gas transmission safety regulations, which are substantially similar to U.S. federal regulations. We believe that, based on the pipeline inspection reports we have received to date and the pipeline repairs and/or replacements being made to the General San Martín and Neuba I and II pipelines, the current operation of the pipeline system poses no significant safety risks. However, in order to identify changes in the safety regulations that our system pipeline has to comply with, we conduct inspections for the purpose of detecting increases in the population density in the areas through which our pipeline system extends. Changes in population densities may require us to increase safety measures in certain sections of the system.
The “greater” Buenos Aires is the surrounding area of the City of Buenos Aires, including the City of Buenos Aires. The last part of our natural gas transportation system (the “Buenos Aires ring”) is located in the greater Buenos Aires, where we transfer natural gas to deliver natural gas to major natural gas distribution companies. At the Buenos Aires ring, in the section ranging from General Rodríguez to General Pacheco, we conducted a thorough quantitative risk assessments and implementing measures designed to minimize the risk in this segment, which runs through the most densely populated part of Argentina.
During 2016, we experienced one rupture in the General San Martín pipeline. The rupture caused a brief disruption of services to certain customers. No casualties or significant damages to third parties were experienced as a result of the rupture. For this reason, we have implemented measures to ensure that the service would not be interrupted for any consumption center. Except for the rupture described above there has not been any other major safety related incident in our system.
In January 2016, we successfully finished recoating works on 2.5 miles of the Neuba I pipeline near Fernandez Oro in the Province of Río Negro. We also completed a six-kilometer recoating work along the Southern San Martin Pipeline, San Antonio Oeste, and we have started another 3.9 miles work north of Conesa, which is estimated to be concluded in early 2017.
Within the “Stress Corrosion Cracking” or “SCC” assessment and mitigation plan, we conducted a constant strain test along the San Martín and Neuba I pipelines (in their sections located in the Province of Buenos Aires), which will feed our susceptibility model and is used by us to determine whether there is any corrosion in the pipeline. We have also performed 6 SCC assessment pits in recoating areas, finding cracks in 3 of them. Finally, we started the pipeline fit out processes in order to conduct an inline inspection with “EMAT” (to detect cracks) over 74.6 miles along the Neuba I Pipeline, a process which was concluded in February 2017.
Additionally, based on the analysis and planning carried out by the pipeline integrity team, we conducted a campaign for the survey and repair of 24 external corrosion and/or geometrical failures.
Regarding Cathodic Protection, to hinder the advance of corrosion we continued strengthening the system with the installation of six new units and eight anode reinforcements. We have also updated 37 remotely-operated cathodic protection units and linked them to the SCADA system (“Supervisory Control and Data Acquisition”). This optimizes the monitoring process, saving time and resources allocated to this critical task in our operations. In addition, regarding integrity inspections we conducted a diagnosis plan to verify the state of insulation coating in 280.2 miles of pipeline, and have not detected critical failures.
With the purpose of minimizing risks on the Buenos Aires ring section extending from General Rodríguez to General Pacheco, the area with greatest demographic concentration along the system, we conducted quantitative risk assessments to assess and define the implementation of adequate mitigation measures. We also implemented several preventive measures, such as:
24
●
Filling of 6 casing pipes in special crossings along the pipeline system to mitigate the corrosion phenomenon;
●
Installation of 632 linear meters of pre-stressed material tiles in a sensitive pipeline section, to strengthen protection for the facilities and its surroundings.
●
Finalization of the civil works for the assembling and startup of the odoriferous unit.
Finally, we installed earth connections in 50 cathodic protection units, to avoid electric discharge risks for the staff.
Pipeline Expansions. In light of the lack of expansion of the natural gas transportation system in 2002 and 2003 and of growing natural gas demand in all segments of the Argentine economy, the Government established in April 2004, through Decree No. 180/04 and Resolution No. 185/04 issued by MPFIPyS, the framework for the creation of various Gas Trusts aimed at financing the expansion of the natural gas transportation system in a different manner from that established in the License.
In 2005, the first Gas Trust was constituted to carry out the First Expansion. The First Expansion, completed in August 2005, was achieved through the construction of approximately 316 miles of pipeline and a compression capacity increase of 30,000 HP through the construction of a new compressor plant and the revamping of some existing units. The Gas Trust invested approximately US$311 million, which was repaid by applying 20% of the revenues generated by the additional firm contracted capacity plus a surcharge, which is ultimately paid by industries, power plants and compressed natural gas (“CNG”) suppliers for whom gas transportation supply is made under firm contracts. We invested approximately US$40 million in the First Expansion (including Value Added Tax (“VAT”) in the amount of US$7 million), which was recovered through our right to collect 80% of the revenues obtained from the additional transportation capacity based on our current tariff rate (but not to the extent of certain increased rate that may apply in the future).
In addition, in April 2006, the MPFIPyS, the Federal Energy Bureau and natural gas transporters, among others, signed a letter of intent to carry out the Second Expansion (the “Second Expansion”) which is significantly larger than the First Expansion. The Second Expansion would increase the aggregate transportation capacity of our system by 378 MMcf/d. It involves the installation of over 708 miles of pipeline loops and 196,800 HP of additional power and the construction of a new pipeline in the Magellan Strait (the “New Magellan Strait Pipeline”), which permits the transportation of additional natural gas from the Austral basin. As of December 31, 2016, the aggregate transportation capacity has increased by 307 MMcf/d and is operational. The New Magellan Strait Pipeline was completed in March 2010 and is 24 miles long.
Ownership of the works of the Second Expansion is vested in a second Gas Trust and the investment is financed by other gas trust funds whose trustors are the natural gas producers and the shippers that have or will subscribe to the additional capacity. The works will be repaid with a new tariff charge that will ultimately be paid by the business and industrial users with firm transportation contracts, and not by the residential users. In addition, as the assets related to the Second Expansion become operational, we are in charge of their operation, maintenance (together with the assets related to the First Expansion) through an operation and maintenance agreement (“O&M Agreement”) and the rendering of natural gas firm transportation services. In order to compensate us for the operation and maintenance services provided with respect to the incremental transportation capacity associated with the expansions carried out by the Gas Trusts and us since 2006, we are paid a monthly CAU, which currently is lower than the transportation tariff. The CAU has resulted in increased fees and revenues in our natural gas transportation segment as the expansion works have become operational.
In May 2011, we received Valores Representativos de Deuda (“debt securities”) from the Gas Trust, issued February 2010, which cancelled the account receivable of Ps. 48.1 million related to services rendered for the 247 MMcf/d expansion works of the Second Expansion. These debt securities were issued in an aggregate principal amount of Ps. 48.1 million, amortize principal in 85 consecutive and equal monthly installments, and bear interest at the Coeficiente de Estabilización de Referencia (“CER”), or Reference Stabilization Ratio as published by the BCRA, plus a fixed spread of 8% from their date of issue.
25
In October 2011, we, the Federal Energy Bureau and the trustee of the second Gas Trust agreed on the terms and conditions under which we manage the operation of the assets associated with the Second Expansion. As compensation for these additional services, we will receive a total of Ps. 37 million for the 131 MMcf/d expansion works remaining to complete the Second Expansion, in addition to the debt securities received in May 2011. The amendment agreement provided for an advance payment equal to the 20% of the total remuneration, which was paid, 10% in cash and 90% in the form of additional debt securities from the Gas Trust. The principal of said debt securities amounted to Ps. 36.5 million (including accrued interest) as of December 31, 2016. The securities are being amortized in 96 monthly, consecutive and equal installments and bear interest at CER plus a fixed spread of 8% from their date of issue.
On July 20, 2016, Nación Fideicomisos S.A. (“NAFISA”) notified us of Ministry of Energy’s decision to suspend works for the Second Expansion. We have taken the necessary measures for the collection of the amounts owed by NAFISA to us. Subsequently NAFISA resumed repayment of the debt securities it issued to us for our work on the Second Expansion. In March 2017, we received payments of Ps. 6.9 million (including principal plus interest) corresponding to the installments for the period October 2016 to February 2017.
In February 2017, the Ministry of Energy called for a national public tender for the purchase of pipes, with the aim of extending the natural gas network in certain areas of the province of Santa Fe, the Patagonian Andes and the country’s sea coast. These four projects will require investments totaling Ps. 4,078 million and will reach 140,500 homes. One of this projects consists of the construction of the Cordillerano natural gas pipeline, which will be connected to our pipeline system. The expansion of the capacity will be done from the two points that feed our system from the field called The Zorro. We will act as managers of the Cordillerano project. This project also includes the installation of the Río Senguerr Compressor Plant, in Neuquén. As of the date of issuance of this Annual Report, the final schedule for the construction of this pipeline has not yet been set.
Technical Assistance Service Agreement. As part of its bid to purchase a 70% interest in us from the Government, CIESA was required to have an investor-company with experience in natural gas transmission that would serve as our technical operator. In late 1992, we entered into a Technical Assistance Agreement with PEPCA (the “Technical Assistance Agreement”), an indirect, majority-owned subsidiary of Enron. The term of the Technical Assistance Agreement was for eight years from December 28, 1992, renewable automatically upon expiration for an additional eight-year term and was assigned to Petrobras Argentina S.A. as part of the Master Settlement Agreement. Since July 2004, Petrobras Argentina S.A. has been our technical operator and is in charge of providing assistance related to, among others, the operation and maintenance of the natural gas transportation system and related facilities and equipment in order to ensure that the performance of the system is in conformity with international natural gas transportation industry standards and in compliance with certain Argentine environmental standards. With the prior approval of ENARGAS and our Board of Directors, in October 2014, we and Petrobras Argentina Group agreed to a technical assistance service agreement (the “Technical Assistance Service Agreement”) for a three-year term, expiring on December 28, 2017, which substantially contains the same terms as the Technical Assistance Agreement, as amended. Any amendment, renewal or even termination of the Technical Assistance Service Agreement has to be authorized by ENARGAS. Pursuant to the Technical Assistance Service Agreement, the currency for the technical assistance fee paid to Petrobras Argentina Group was changed from U.S. dollars to Argentine pesos. Our Audit Committee analyzed the Technical Assistance Service Agreement and concluded that its price is on market terms.
On July 27, 2016, Petrobras Argentina S.A. was acquired by Pampa Energía. For further information see, “Item 7. Major Shareholders and Related Party Transactions. A. Major Shareholders.”
The Technical Assistance Service Agreement sets out the services to be provided by Petrobras Argentina S.A. (now Pampa Energía) to us, at the request of our Chief Executive Officer (“CEO”), in return for payment of a technical assistance fee paid on a monthly basis equal to the greater of (i) a fixed annual sum of Ps. 3 million or (ii) 7% of the amount obtained after subtracting Ps. 3 million from net income before interests and income taxes of the year. For the year ended December 31, 2016, we paid Pampa Energía Ps. 168.0 million for services rendered pursuant to the Technical Assistance Service Agreement. The services to be provided by Pampa Energía to us under the Technical Assistance Service Agreement include assisting us in the following matters to the extent that they arise in the ordinary course of business: (i) replacement, repair and renovation of facilities and equipment to ensure that the performance of the system is in accordance with international gas transportation industry standards; (ii) preparation of performance evaluations, operating cost analyses, construction assessments and advice related to budget control; (iii) advice regarding safety, reliability and efficiency of system operation and gas industry services; (iv) advice regarding compliance with applicable laws and regulations relating to safety and health, pollution and environmental protection of the system; (v) routine and preventive maintenance of the system; (vi) staff training; (vii) design and implementation of the procedures necessary to accomplish the aforesaid services; and (viii) design and implementation of a management information and inspection system for all major aspects of natural gas transportation and liquids production.
26
The Argentine Natural Gas Industry
Historical Background. Prior to the privatization of GdE, the Argentine natural gas industry was effectively controlled by the Government.
In 1992, Natural Gas Law (the “Natural Gas Law”) was passed providing for the privatization of GdE. The Natural Gas Law and the related decrees provided for, among other things, the transfer of substantially all of the assets of GdE to two natural gas transportation companies and eight distribution companies. The transportation assets were divided into two systems on a broadly geographical basis, the northern and southern trunk pipeline systems, designed to give both systems access to natural gas sources and to main centers of demand, including the greater Buenos Aires area. As a result of the division, our natural gas transportation system is connected to the two natural gas distribution systems serving the greater Buenos Aires area, one serving Buenos Aires Province (excluding the greater Buenos Aires area and the northeast of this province) and one serving southern Argentina. TGN is connected to five distribution systems serving northern Argentina. TGN is also connected to the natural gas distribution systems serving the greater Buenos Aires area and, to a limited extent, the natural gas distribution system serving Buenos Aires Province (excluding the greater Buenos Aires area). In the two instances where we are directly connected to a natural gas distribution system with TGN, we are the principal supplier of natural gas transportation services.
The Natural Gas Law and the related decrees granted each privatized natural gas transportation company a license to operate the transferred assets, established a regulatory framework for the privatized industry based on open, non-discriminatory access, and created ENARGAS to regulate the transportation, distribution, marketing and storage of natural gas. The Natural Gas Law also provided for the regulation of wellhead gas prices in Argentina for an interim period. Prior to deregulation, the regulated price was set at US$0.97 per million British thermal units (“MMBtu”) at the wellhead, which had been the regulated price since 1991. Pursuant to Presidential Decree No. 2,731/93, gas prices at the wellhead were deregulated as of January 1, 1994 and, from that date until the year 2002, the average price of gas increased.
In spite of the devaluation of the peso in 2002, increases in wellhead natural gas prices were limited until 2004. From May 2004 until August 2005, wellhead gas prices increased in a range from 105% to 180% (depending on the gas basins) for power plants, industries and large businesses. These adjustments were complemented by lower increases in the price of natural gas for CNG vehicles.
In October 2008, the Federal Energy Bureau through Resolution No. 1,070/2008 increased natural gas at the wellhead for residential, CNG and power station users. According to this resolution, natural gas producers agreed to transfer all of the increase in prices actually received less certain deductible amounts to a trust fund established by Law No. 26,020, to allow low-income consumers with no access to natural gas to buy LPG at a subsidized price (the “Stabilization Agreement”). With Resolution No. 73/2015, the Federal Energy Bureau, under Decree No. 470/2015, ordered the termination of the trust approved by Resolution No. 1080/2008 with effect from April 1, 2015. Through the Stabilization Agreement, we agreed to supply LPG fractionation companies at a reference price, which is substantially below market prices, certain volumes of LPG, which are determined by the SRH. As compensation, we received a fixed fee determined by the SRH.
Currently, the natural gas wellhead prices remain regulated in most cases for residential, power plants and CNG users.
In recent years, the Argentine natural gas industry has experienced rising demand, decreased supply, and lower investment in exploration, production, transportation and distribution of natural gas as a result of economic factors, including the economic recovery of many industries and GDP growth since 2003, and government restrictions on increases in the wellhead price of natural gas and in the transportation and distribution tariffs.
In order to address these factors, the Government played a decisive role in the natural gas industry through a set of measures designed to address the combination of rising demand and lower investment in exploration, production, transportation and distribution of natural gas, including, among others:
●
creation of ENARSA in 2004 for the purposes of restoring levels of reserves, production and supply of natural gas and meeting the infrastructure needs of the natural gas transportation and electricity industries;
27
●
creation of the Gas Plus Program (the “Gas Plus Program”) in 2008, which aims to encourage producers to make further investments in natural gas infrastructure by allowing them to sell the resulting production of natural gas from new fields and fields that require more expensive extraction techniques at higher prices than the current authorized prices. In 2010, the Government increased the price paid to natural gas producers who invest in new fields, shale and tight natural gas under the Gas Plus Program;
●
hiring of two re-gasifying LNG tankers through ENARSA, in Bahía Blanca (2008) and Escobar (2011), to inject natural gas into the pipeline. The tanker located at Bahía Blanca is connected to our pipeline, and the tanker at Escobar is connected to TGN’s pipeline;
●
establishment of a framework for the constitution of Gas Trusts to finance natural gas pipeline expansions;
●
the passage of Law No. 26,741, which declares that hydrocarbons self-sufficiency, as well as their production, industrialization, transport and marketing, are activities of public interest and primary goals of Argentina, empowering the Government to take the necessary measures to achieve such goals;
●
importation of natural gas from Bolivia and Chile, which has increased significantly over the past two years; and
●
creation of tariff charges to be paid by all consumers other than residential consumers in order to finance natural gas and electricity expansions and the import of natural gas.
In January 2013, in order to encourage the production of natural gas, the Commission of Planning and Strategic Coordination of the National Hydrocarbon Investments Plan (the “Commission”) created by Decree No. 1277/12, issued Resolution No. 1/2013. This resolution creates the Natural Gas Surplus Injection Promotion Program, which aims to evaluate and approve projects contributing to the national self-supply of hydrocarbons through a natural gas production increase and its infusion into the domestic market, as well as to generate higher levels of activity, investment and employment in this sector. Projects included in the Natural Gas Surplus Injection Promotion Program will receive preferential payment terms, allowing a price on additional injection of US$7.5 per million of British Term Unit (“MMBtu”). The new price for the additional natural gas injected into the pipelines will be funded with funds from the Argentine National Treasury on a monthly basis. The Commission must approve the proposed production increase.
On March 31, 2014, the Federal Energy Bureau issued Resolution No. 226/2014 to implement a Program for the Rational Use of Natural Gas. This Resolution provides a new tariff scheme according to cubic meter consumption and the basin or region of the country. The program encourages a reduction in consumption by providing different prices for those commercial and residential users that effectively reduce consumption.
By Decree No. 272/2015 of the Executive Branch dated December 29, 2015, the Commission was dissolved and the functions and powers of federal jurisdiction were transferred to the Ministry of Energy. Meanwhile the provincial authorities preserve the powers that correspond to their jurisdictions.
On March 16, 2016, the Ministry of Energy enacted Resolution No. 24/2016 which delegates to the SRH the following functions, among others:
●
Resolving appeals filed against ENARGAS resolutions;
●
Acting as the enforcement authority of Laws No. 17,319 and 26,020;
●
Managing the investment projects included in the framework of the programs created under Decree No. 1,277/2012, modified by Decree No. 272/2015; and
●
Acting as the enforcement authority regarding import and export of fuels.
During 2016, the Ministry of Energy issued Resolutions No. 28/2016 (“Resolution 28”) and No. 31/2016 (“Resolution 31”). These resolutions: (i) increased the price of natural gas at the supply point (“PIST”) and the tariffs for the transportation and distribution of natural gas, and (ii) instructed ENARGAS to carry out the RTI process. The new prices have been in force since April 1, 2016. Resolution 28 also established a social tariff regime to subsidize tariffs for the poverty-stricken sectors of the community. The beneficiaries under this regime must register with the Argentine government and meet certain criteria established by the Ministry of Energy.
In addition, on March 30, 2017 the Ministry of Energy enacted Resolution No. 74/2017 (“Resolution 74”), which increased the price of the natural gas consumed by power plants starting on April 1, 2017.
These resolutions were subject to several legal actions questioning their validity and on August 18, 2016, the National Supreme Court of Justice (hereinafter, the “Supreme Court”) issued a decision: (i) requiring compulsory public hearings prior to the establishment of new natural gas transportation and distribution tariffs, (ii) requiring compulsory public hearings prior to the establishment of a new point-of-injection gas price, and (iii) invalidating Resolutions 28 and 31 with respect to residential users, for whom the tariffs effective as of March 31, 2016 were required to be restored.
28
On August 19, 2016 ENARGAS issued Resolution No. 3953/2016, mandating the holding of the required public hearing, which was held from September 16 to 18 of 2016 (“September 2016 Public Hearing”) to consider the following: (i) determination of the new PIST price (ii) establishment of the transitory tariffs for transportation and distribution of natural gas, to be effective until new tariffs are set by the RTI process, (iii) establishment of new prices for the distribution of undiluted propane gas through networks (“Propane for Networks Agreement”) and (iv) rate adjustments are to be implemented in April and October of each year, until the total elimination of subsidies in 2019, at which time it is expected that prices are expected to reach market prices.
After the September 2016 Public Hearing, the Ministry of Energy issued Resolution N° 212 – E/2016 (“Resolution 212”) through which among other things:
●
Fixes the natural gas prices in PIST;
●
establishes that the total amount of natural gas prices in PIST shall not exceed certain limits according to the type of customer;
●
maintains the social tariff for the protection of the socio-economically most vulnerable sectors;
●
establishes the new propane prices for the distribution under the Propane Networks Agreement, settling at Ps. 800/Tn for Residential Users and General Service P1 and P2, and Ps. 2,100/Tn for General Service P3 users.
●
Provides that adjustments will be implemented in the months of April and October of each year, until the total elimination of the subsidies in 2019, at which point PIST is expected to reach market prices.
In January 2017, the Government announced that certain new benefits will be implemented in order to increase oil and natural gas production. This announcement is aimed at attracting local and foreign investments with an emphasis in the Vaca Muerta formation of the Neuquén basin. The announcements included:
●
An agreement with unions to amend current existing collective bargaining agreements for the sector.
●
The elimination of the obligation of repatriation of funds due to oil and gas exports currently regulated by Decree No. 1,722/11.
●
The creation of a program, the Investment in Natural Gas Production from Non-Conventional Reservoirs Stimulus Program, which establishes a support price for the volume of non-conventional natural gas production from concessions located in the Neuquina basin included in the program. This program will be effective until December 31, 2021 and includes a sliding-scale schedule for the minimum price to be paid per MMBtu: US$7.50 for 2018, US$7.00 for 2019, US$6.50 for 2020 and US$6.00 for 2021; and
●
The elimination of export duties applicable to oil and gas exports, which became effective as from January 7, 2017.
Natural Gas Demand. Natural gas consumption in Argentina has played a significant role in the energy industry in recent years, reaching more than 50% of total national energy consumption, which is greater than the comparable percentage for worldwide energy consumption. The graphics below illustrate the increase and breakdown of natural gas consumption in Argentina in 2003 and 2016 by type of consumer:
29
Source: ENARGAS
Beginning in 2003, a sharp increase in natural gas demand occurred as a consequence of: (i) the recovery of certain industries in the Argentine economy since 2003, (ii) the 2002 devaluation of the peso and pesification of transportation and distribution tariffs and the elimination of both tariff and wellhead gas price adjustments, making this fuel relatively inexpensive for consumers as compared to other types of fuel the prices of which are affected by inflation, and (iii) the growth of GDP between 2003 and 2013. As a result, natural gas became, by far, the cheapest fuel in Argentina and high rates of substitution of natural gas for other fuels in industry, power plants and vehicles have been observed. Likewise, the rising demand for gas has also been based on the recovery of many industrial segments of the Argentine economy, and the lack of availability of natural gas to meet current demand represents a challenge for continued industrial growth at the rates achieved in recent years.
The following table sets forth local natural gas consumption by type of consumer since 2003:
References:
(1)
Includes: distribution users, commercial by-pass, by-pass physical and off system users.
(2)
Includes subdistributors.
(3)
Includes shrinkage natural gas (“TRP”) from the Cerri Complex, which is included in Others.
(4)
Includes governmental bodies.
Source: ENARGAS, based on data from the Licensees and off system users.
The demand for natural gas in Argentina is highly seasonal, with natural gas consumption peaks in winter. The source of seasonal changes in demand is primarily residential consumers. In order to bridge the gap between supply and demand, especially with respect to peak-day winter demand, the Government has entered into several natural gas import agreements. The most important agreement was signed with the Bolivian government in June 2006 and amended in May 2010 and July 2012. The agreement provides for the import of natural gas from Bolivia to Argentina to be managed by ENARSA. To deal with the drop in domestic natural gas production and in an effort to maintain supplies at similar levels to the previous years. The Government slightly decreased imports from Bolivia from 579.2 MMcf/d in 2015 to 554.4 MMcf/d in 2016, with a maximum volume of around 765.3 MMcf/d in 2016.
In addition, between May and September 2016, re-gasified LNG was imported from Chilean terminals, which contributed an annual average of 120.1 MMcf/d to TGN’s transportation system.
In addition, in recent years, injections of natural gas from LNG tankers have played an important role in satisfying the growing natural gas demand during the coldest months of the year. Natural gas injection from the LNG re-gasification tankers located in Bahía Blanca and Escobar. During 2016, the natural gas injected decreased to 466.1 MMcf/d from an average of 533.2 MMcf/d in 2015. ENARGAS has assigned to us the responsibility of controlling the operation and maintenance of certain new facilities constructed to connect the regasification ship at Bahía Blanca to our existing transportation pipeline.
30
Gas Supply. For the most part, Argentina’s natural gas reserves were discovered as a result of exploration for oil reserves. There are 19 known sedimentary basins in the country, 10 of which are located entirely onshore, six of which are combined onshore/offshore and three of which are entirely offshore. Production is concentrated in five basins: Noroeste in northern Argentina, Neuquén and Cuyo in central Argentina, and Golfo San Jorge and Austral in southern Argentina. In 2016, 44.6% of the natural gas transported by our system originated in the Neuquina basin with the remainder coming primarily from the Austral basin and the re-gasifying LNG tanker located in Bahía Blanca. Our pipeline system is connected to the Neuquina, Austral and Golfo San Jorge basins. We are not connected to the Cuyo or Noroeste basins. Set forth in the table below is the location of the principal natural gas producing basins by province, their proved natural gas reserves estimated as of December 31, 2015 and 2014 (the most recent years for which information is available), production in 2015 and 2014 and the calculated reserve life for each basin:

Basin |  | Location by province | Proved Gas Reserves(Bcf)(1)(2) | Production (Bcf) | Reserve Life (years)(3)
|  |  | 2015 | 2014 | 2015 | 2014 | 2015 | 2014
Neuquén |  | Neuquén, Río Negro, La Pampa, Mendoza (south) | 5,526.2 | 5,221.0 | 869.8 | 820.0 | 6 | 6
Austral |  | Tierra del Fuego, Santa Cruz (south), and offshore | 4,270.1 | 1,695.0 | 340.9 | 187.0 | 13 | 9
Golfo San Jorge |  | Chubut, Santa Cruz (north) | 1,716.0 | 3,867.0 | 201.8 | 354.0 | 9 | 11
Cuyo |  | Mendoza (north) | 25.7 | 27.0 | 1.9 | 2.0 | 13 | 14
Noroeste |  | Salta, Jujuy, Formosa | 839.2 | 920.0 | 100.7 | 115.0 | 8 | 8
Total |  |  | 12,377.2 | 11,730.0 | 1,515.2 | 1,478.0 | 8 | 8

(1) Estimated as of December 31, 2015 and 2014, respectively. There are numerous uncertainties inherent in estimating quantities of proved natural gas reserves. The accuracy of any reserve estimate is a function of the quality of available data, and engineering and geological interpretation and judgment. Results of drilling, testing and production after the date of the estimate may require substantial upward or downward revisions. Accordingly, the reserve estimates could be materially different from the quantity of natural gas that ultimately will be recovered.
(2)
Reserve figures do not include significant reserves located in certain Bolivian basins to which TGN is connected.
(3)
Weighted average reserve life for all basins, at the 2015 or 2014 production levels, respectively.
Source: Ministry of Energy.
In 2015, total natural gas production went up to 42,904 million cubic meters, representing a 3.3% increase with respect to the volumes produced in 2014. This inter annual increase has been the first since 2006, when it had increased by 0.7%. Between 2007 and 2013, the decrease rate was around 3% and this decline was restrained in 2014 when it fell only by 0.5%. On the other hand, in 2016, natural gas production increased by 4.9% compared to 2015.
In order to increase the existing natural gas reserves from the Neuquina basin, in July 2013, YPF announced the execution of an agreement with Chevron to develop oil and gas shale deposits in this province. During 2014, YPF continued negotiating with oil companies to reach new partnership agreements that will provide technology and capital resources for the exploitation of new reserves. In December 2014, YPF signed agreements with Petronas to invest US$ 550 million and in January 2015, YPF and SINOPEC signed a memorandum of understanding aimed at eventually collaborating to develop oil-and-gas projects.
In December 2015, YPF and Dow Argentina S.A., a subsidiary of Dow Chemical Co., announced an investment of US$ 500 million in 2016 for shale gas exploration in Argentina. Both companies, which have already invested $350 million in a joint shale gas venture, said in a statement that total investment could reach US$ 2.5 billion in coming years. The joint venture is the leading shale gas project of its kind in Argentina, with daily production of about 2 million cubic meters.
Neuquina Basin. The largest natural gas basin and the major source of natural gas supply for our system is the Neuquina basin, located in west central Argentina. However, in recent years, its proved natural gas reserves have been decreasing sharply as a result of exploration and exploitation, and new gas reserves have not been found in order to replace the natural gas produced. In December 2010, new non-conventional natural gas was discovered in the Neuquina basin by YPF. This new natural gas reserve is at the early stages of its exploitation, which will require approximately three to four years, and involve high investments and extraction costs. In recent years, as mentioned above, in order to increase the existing natural gas reserves from the Neuquina basin, YPF announced the signing of certain agreements to develop oil and natural gas shale deposits in the province of Neuquén. In addition, YPF continues negotiating with oil companies to reach new partnership agreements that will provide technology and capital resources for the exploitation of new reserves.
31
If brought on-line, this newly discovered reserve could potentially help offset the continued decline of the existing production of the Neuquina basin. The TGN system also accesses the Neuquina basin. Of the transported natural gas coming from the Neuquina basin, approximately 55.3% was transported by us and approximately 44.7% by TGN for the year ended December 31, 2016.
Austral and Golfo San Jorge Basins. Natural gas provided by these basins, located in the southern region of Argentina, was transported mainly by us (Camuzzi Sur also transports natural gas through regional pipelines). In the Austral basin, exploration has centered in and around the basin’s existing natural gas fields and on other fields located offshore. The Golfo San Jorge basin is primarily an oil-producing basin.
Under the framework enacted by the Government to promote investments after the issuance of Decree No. 929/2013, in 2014, a joint operation was formed by Wintershall, Total and PAE for the investment of approximately US$ 1,000 million in off-shore gas fields (Vega Pleyade) located in the Tierra del Fuego region. In August 2016, the companies started up production at this field which will have a production capacity of 353.1 MMcf/d.
In addition, ENAP Sipetrol, YPF and ENARSA signed an agreement to explore and develop offshore fields in the continental shelf of Argentina.
The map below illustrates the distribution of the gas basins in Argentina:
NGL Production Plant
Regulatory Framework
Industry Structure. The legal framework for the transportation and distribution of natural gas in Argentina comprised of the Natural Gas Law, Decree No. 1,738/92, other regulatory decrees, the Pliego, the transfer agreements and the licenses of the newly privatized companies. The Hydrocarbons Law regulates the midstream natural gas industry, under a competitive and partially deregulated system. The Public Emergency Law and related laws and regulations have had the practical effect of significantly altering the regulatory regime under which we have operated since 2002. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business.”
Natural gas transportation and distribution companies operate in an “open access,” non-discriminatory environment under which producers and certain third parties, including distributors, are entitled to equal and open access to the transportation pipelines and distribution system in accordance with the Natural Gas Law, applicable regulations and the licenses of the privatized companies. In addition, a regime of concessions under the Hydrocarbons Law is available to holders of exploitation concessions to transport their own natural gas production.
The Natural Gas Law prohibits natural gas transportation companies from also being merchants in natural gas. Also, (i) natural gas producers, storage companies, distributors, and consumers who contract directly with producers may not own a controlling interest (as defined in the Natural Gas Law) in a transportation company; (ii) natural gas producers, storage companies and transporters may not own a controlling interest in a distribution company, and (iii) merchants in natural gas may not own a controlling interest in a transportation or distribution company.
32
Contracts between affiliated companies engaged in different stages in the natural gas industry must be approved by ENARGAS, which may reject these contracts if it determines that they were not entered into on an arm’s-length basis.
ENARGAS, which was established by the Natural Gas Law, is an autonomous entity responsible for enforcing the provisions of the Natural Gas Law, the applicable regulations and the licenses of the privatized companies. Under the provisions of the Natural Gas Law, ENARGAS is required to be governed by a board of directors composed of five full-time directors appointed by the Executive Branch subject to confirmation by the National Congress. However, from 2004 to 2007, ENARGAS was governed by three directors who were not confirmed by the National Congress, and, since 2007, ENARGAS has been administered by an intervention inspector appointed by the Executive Branch for consecutive 180-day terms. After several renewals, the Executive Branch extended its intervention of ENARGAS and appointed a sub-inspector who continues to function in this position, the last of which was ruled through Decree No. 844/2016 on July 17, 2016.
ENARGAS has broad authority to regulate the operations of the transportation and distribution companies, including the ability to set rates pursuant to the Public Emergency Law. ENARGAS has its own budget which must be included in the Argentine national budget and submitted to the Federal Congress for approval. ENARGAS is funded principally by annual control and inspection fees that are levied on regulated entities in an amount equal to the approved budget, net of collected penalties, allocated proportionately to each regulated entity based on its respective gross regulated revenues, excluding natural gas purchase and transportation costs in the case of distribution companies. ENARGAS also collects the fines imposed for violations of the Natural Gas Law.
Since 2004, the Government adopted a series of measures to redistribute the effects of the crisis in the energy sector caused by the natural gas shortage. Most of the electrical power stations do not have firm gas supply agreements and have increasingly used imported natural gas or alternative fuels that are more expensive than natural gas produced in Argentina. For this reason, ENARGAS and the Federal Energy Bureau have issued a series of regulations aimed at averting a crisis in the internal system of natural gas supply.
The Executive Branch issued Decree No. 181/04, directing the Federal Energy Bureau to establish a system of priority pursuant to which power stations and natural gas distribution companies (for their residential clients) could receive natural gas in priority to other users, even those with firm transportation and firm gas supply contracts. On April 21, 2004, MPFIPyS issued Resolution No. 208/04 that ratified an agreement between the Federal Energy Bureau and natural gas producers to give effect to this new system.
Under certain circumstances and pursuant to the terms of our License, when ENARGAS asks us to restrict the provision of natural gas to clients who hold firm transportation contracts, we are exposed to potential claims from, among others, our customers. Therefore, we have requested that in connection with these new procedures, ENARGAS submit to us written instructions for any such natural gas firm transportation service interruption request. However, if ENARGAS does not accept our petition and we do not comply with ENARGAS’s instructions, if any, in order to avoid future claims from our customers, Resolution No. 208/04 will require us to pay the price difference between natural gas and the alternative fuel used by power stations in order to offset the loss resulting from our failure to comply with the instructions.
At the end of May 2007, due to the rising demand for natural gas resulting from unusually low temperatures throughout the country, ENARGAS and the Federal Energy Bureau utilized their authority under Resolution 208/04 for the first time. ENARGAS honored our petition, and submitted written instructions to us. We complied with these instructions and do not believe that our compliance will result in legal action by any of our firm transportation clients, which legal action, if brought, could have a significant adverse economic and financial effect on us. As of the date of this Annual Report, only one client (Profertil S.A.) has brought legal actions against us, in respect of service interruptions that occurred in 2009, 2010 and 2011. In this action, ENARGAS ruled in our favor alleging that the interruptions were due to the shortage of natural gas.
In October 2010, ENARGAS issued Resolution No. 1,410/2010, which set new rules for natural gas dispatch applicable to all participants in the natural gas industry and imposed new and more severe priority demand gas restrictions on producers. Through this resolution, ENARGAS has the ability to redirect natural gas transportation in order to give priority to residential consumption.
33
Although the natural gas supply shortage did not create a bottleneck in the transportation capacity that prevented the system from meeting increasing demand since 2008, the Government continues to impose restrictions from time to time on the consumption of natural gas by certain customers that hold firm transportation contracts with us, in an effort to redirect and target the supply to the demand regarded as top priority, mainly residential users, CNG stations and industries connected to the distribution network. Such restrictions have affected direct shippers who have firm transportation contracts with us, as well as industries in different distribution areas of the country.
We do not believe that our compliance will result in legal action by any of our natural gas firm transportation clients. However, any legal action, if brought, could have a significant adverse economic and financial effect on us. See “Item 3 Key Information—D. Risk Factors.”
Our License. Our License authorizes us to provide the public service of natural gas transportation through the exclusive utilization of the southern natural gas transportation system. Our License does not grant us an exclusive right to transport natural gas in a specified geographical area and licenses may be granted to others for the provision of gas transportation services in the same geographical area. TGN’s natural gas transportation system is comprised of two transmission pipes, the North pipeline and Central western pipeline, and is operated under a license containing substantially similar terms to those described below and elsewhere herein.
Our License also places certain other rights and obligations on us relating to the services we provide. These include:
●
operating and safety standards;
●
terms of service, including general service conditions such as specifications regarding the quality of gas transported, major equipment requirements, invoicing and payment procedures, imbalances and penalties, and guidelines for dispatch management;
●
contract requirements, including the basis for the provision of service, e.g., “firm” or “interruptible”;
●
mandatory capital investments to be made over the first five years of the license term; and
●
applicable rates based on the type of transportation service and the area serviced.
Our License establishes a system of penalties in the event of a breach of our obligations thereunder, including warnings, fines and revocation of our License. These penalties may be assessed by ENARGAS based, among other considerations, upon the severity of the breach or its effect on the public interest. Fines of up to Ps. 500,000 may be levied for any breaches. Revocation of our License may only be declared by the Executive Branch upon the recommendation of ENARGAS. Our License specifies several grounds for revocation, including the following:
●
repeated failure to comply with the obligations of our License and failure to remedy a significant breach of an obligation in accordance with specified procedures;
●
total or partial interruption of the service for reasons attributable to us, affecting completely or partially transportation capacity during the periods stipulated in our License;
●
sale, assignment or transfer of our essential assets or otherwise encumbering such assets without ENARGAS’s prior authorization, unless such encumbrances serve to finance expansions and improvements to the gas pipeline system;
●
bankruptcy, dissolution or liquidation; and
●
ceasing and abandoning the provision of the licensed service, attempting to assign or unilaterally transfer our License in full or in part without the prior authorization of ENARGAS, or giving up our License, other than in the cases permitted therein.
Our License also prohibits us from assuming debt of, or granting credit to, CIESA, and creating security interests in favor of, or granting any other benefit to, creditors of CIESA.
34
Generally, our License may not be amended without our consent. As part of the renegotiation of our license under the Public Emergency Law, however, the terms of our License may be changed or our License may be revoked. In addition, ENARGAS may alter the terms of service annexed to our License. If any such alteration were to have an economic effect on us, ENARGAS should modify our rates to compensate for such effect or we could request a change in the applicable rates.
Regulation of Transportation Rates—Actual Rates. The natural gas transportation rates established for each transportation company must be calculated in U.S. dollars and converted into pesos at the time of billing. However, the Public Emergency Law eliminated tariff indexing covenants based on U.S. dollar exchange rate fluctuations and established a conversion rate of one peso equal to one U.S. dollar for tariffs.
The rate for natural gas firm transportation services consists of a capacity reservation charge and is expressed as a maximum monthly charge based on the cubic meters per day of reserved transportation capacity. The rate for natural gas interruptible transportation service, which is expressed as a minimum (from which no discounts are permitted) and a maximum rate per 1,000 m3 of natural gas transported, is equivalent to the unit rate of the reservation charge for the firm service based on a load factor of 100%. For both firm and interruptible transportation services, customers are obligated to provide a natural gas in-kind allowance, expressed as a maximum percentage of gas received, equivalent to the natural gas consumed or lost in rendering the transportation service. The rates for all services reflect the rate zone(s) traversed from the point of receipt to the point of delivery.
The tables below shows our local natural gas firm and interruptible rates by pipeline and zones, in effect between May 1, 2015 and March 31, 2016 after the issuance of Resolution No. 3347/15 and since April 1, 2016 (applicable for all kind users except for residential) and October 7, 2016 (applicable for all of our customers) after the issuance of Resolution 3724 and No. 4054/2016 (“Resolution 4054”):

From May 1, 2015 to March 31, 2016
| Firm | Interruptible |
Rate Zones | Reservation Charge(1) (Ps.m3/d) | Minimum Charge(2) (Ps.1,000 m3) | Compression Fuel and Losses(3) (%)
Receipt | Delivery |  |  |
From Tierra del Fuego to: | Tierra del Fuego | 0.131975 | 4.399134 | 0.49
| Santa Cruz Sur | 0.266133 | 8.871204 | 0.98
| Chubut Sur | 0.678868 | 22.628940 | 3.38
| Buenos Aires Sur | 0.799800 | 26.659990 | 5.60
| Bahía Blanca | 1.225104 | 40.836798 | 8.40
| La Pampa Norte | 1.220760 | 40.691977 | 8.60
| Buenos Aires | 1.433385 | 47.779485 | 10.35
| Greater Buenos Aires | 1.608257 | 53.608587 | 11.27
From Santa Cruz Sur to: | Santa Cruz Sur | 0.133755 | 4.458469 | 0.49
| Chubut Sur | 0.545894 | 18.196467 | 2.89
| Buenos Aires Sur | 0.667085 | 22.236149 | 5.11
| Bahía Blanca | 1.094595 | 36.486487 | 7.91
| La Pampa Norte | 1.094399 | 36.479918 | 8.11
| Buenos Aires | 1.303557 | 43.451887 | 9.86
| Greater Buenos Aires | 1.478968 | 49.298969 | 10.78
From Chubut to: | Chubut Sur | 0.132655 | 4.421810 | 0.49
| Buenos Aires Sur | 0.248731 | 8.290891 | 2.71
| Bahía Blanca | 0.663275 | 22.109043 | 5.51
| La Pampa Norte | 0.696439 | 23.214493 | 5.71
| Buenos Aires | 0.862256 | 28.741753 | 7.46
| Greater Buenos Aires | 1.028073 | 34.269013 | 8.38
From Neuquén to: | Neuquén | 0.117873 | 4.041345 | 0.49
| Bahía Blanca | 0.572524 | 19.078504 | 2.80
| La Pampa Norte | 0.616671 | 20.550184 | 3.15
| Buenos Aires | 0.775363 | 25.839833 | 3.91
| Greater Buenos Aires | 0.949709 | 31.713533 | 4.86
From Bahía Blanca to: | Bahía Blanca | 0.132654 | 4.421810 | 0.49
| La Pampa Norte | 0.033164 | 1.105450 | 0.20
| Buenos Aires | 0.198980 | 6.632710 | 1.95
| Greater Buenos Aires | 0.364798 | 12.159971 | 2.87

(1) Monthly charge for every cubic meter per day of reserved transportation capacity.
(2) Minimum charge equal to the unit rate of the firm reservation charge at a 100% load factor.
35
(3)
Maximum percentage of total transported gas which customers are required to replace in-kind to make up for gas used by us for compressor fuel or losses in rendering transportation services.
Note: The gross receipts tax is not included in such transportation rates
Source: ENARGAS Resolution No. 3347

Since April 1, 2016
| Firm | Interruptible |
Rate Zones | Reservation Charge(1) (Ps.m3/d) | Minimum Charge(2) (Ps.1,000 m3) | Compression Fuel and Losses(3) (%)
Receipt | Delivery |  |  |
From Tierra del Fuego to: | Tierra del Fuego | 0.396058 | 13.201800 | 0.49
| Santa Cruz Sur | 0.798666 | 26.622484 | 0.98
| Chubut Sur | 2.037282 | 67.909449 | 3.38
| Buenos Aires Sur | 2.400200 | 80.006630 | 5.60
| Bahía Blanca | 3.676537 | 122.551231 | 8.40
| La Pampa Norte | 3.663501 | 122.116622 | 8.60
| Buenos Aires | 4.301588 | 143.386234 | 10.35
| Greater Buenos Aires | 4.826380 | 160.879368 | 11.27
From Santa Cruz Sur to: | Santa Cruz Sur | 0.401399 | 13.379866 | 0.49
| Chubut Sur | 1.638228 | 54.607597 | 2.89
| Buenos Aires Sur | 2.001922 | 66.730682 | 5.11
| Bahía Blanca | 3.284880 | 109.495948 | 7.91
| La Pampa Norte | 3.284290 | 109.476235 | 8.11
| Buenos Aires | 3.911976 | 130.399113 | 9.86
| Greater Buenos Aires | 4.438382 | 147.946205 | 10.78
From Chubut to: | Chubut Sur | 0.398098 | 13.269851 | 0.49
| Buenos Aires Sur | 0.746441 | 24.880963 | 2.71
| Bahía Blanca | 1.990488 | 66.349237 | 5.51
| La Pampa Norte | 2.090013 | 69.666693 | 5.71
| Buenos Aires | 2.587629 | 86.254000 | 7.46
| Greater Buenos Aires | 3.085246 | 102.841307 | 8.38
From Neuquén to: | Neuquén | 0.353737 | 12.128076 | 0.49
| Bahía Blanca | 1.718143 | 57.254592 | 2.80
| La Pampa Norte | 1.850629 | 61.671103 | 3.15
| Buenos Aires | 2.326864 | 77.545340 | 3.91
| Greater Buenos Aires | 2.850076 | 95.172312 | 4.86
From Bahía Blanca to: | Bahía Blanca | 0.398096 | 13.269853 | 0.49
| La Pampa Norte | 0.099524 | 3.317455 | 0.20
| Buenos Aires | 0.597139 | 19.904763 | 1.95
| Greater Buenos Aires | 1.094759 | 36.492072 | 2.87

(1) Monthly charge for every cubic meter per day of reserved transportation capacity.
(2) Minimum charge equal to the unit rate of the firm reservation charge at a 100% load factor.
(3)
Maximum percentage of total transported gas which customers are required to replace in-kind to make up for gas used by us for compressor fuel or losses in rendering transportation services.
Note: The gross receipts tax is not included in such transportation rates
Source: ENARGAS Resolution. 3724
36
The table below shows our local natural gas firm and interruptible rates by pipeline and zones, in effect since April 1, 2017 following the issuance of Resolution 4362:

Since April 1, 2017
| Firm | Interruptible |
Rate Zones | Reservation Charge(1) (Ps.m3/d) | Minimum Charge(2) (Ps.1,000 m3) | Compression Fuel and Losses(3) (%)
Receipt | Delivery |  |  |
From Tierra del Fuego to: | Tierra del Fuego | 0.650525 | 21.683927 | 0.49
| Santa Cruz Sur | 1.311808 | 43.727372 | 0.98
| Chubut Sur | 3.346231 | 111.541121 | 3.38
| Buenos Aires Sur | 3.942323 | 131.410716 | 5.60
| Bahía Blanca | 6.038705 | 201.290128 | 8.40
| La Pampa Norte | 6.017293 | 200.576284 | 8.60
| Buenos Aires | 7.065348 | 235.511576 | 10.35
| Greater Buenos Aires | 7.927318 | 264.244011 | 11.27
From Santa Cruz Sur to: | Santa Cruz Sur | 0.659297 | 21.976401 | 0.49
| Chubut Sur | 2.690787 | 89.692859 | 2.89
| Buenos Aires Sur | 3.288153 | 109.605000 | 5.11
| Bahía Blanca | 5.395408 | 179,846855 | 7.91
| La Pampa Norte | 5.394439 | 179.814476 | 8.11
| Buenos Aires | 6.425412 | 214.180259 | 9.86
| Greater Buenos Aires | 7.290033 | 243.001319 | 10.78
From Chubut to: | Chubut Sur | 0.653875 | 21.795701 | 0.49
| Buenos Aires Sur | 1.226027 | 40.866927 | 2.71
| Bahía Blanca | 3.269373 | 108.978477 | 5.51
| La Pampa Norte | 3.432841 | 114.427392 | 5.71
| Buenos Aires | 4.250176 | 141.672007 | 7.46
| Greater Buenos Aires | 5.067510 | 168.916622 | 8.38
From Neuquén to: | Neuquén | 0.581012 | 19.920338 | 0.49
| Bahía Blanca | 2.822047 | 94.040542 | 2.80
| La Pampa Norte | 3.039654 | 101.294653 | 3.15
| Buenos Aires | 3.821870 | 127.368051 | 3.91
| Greater Buenos Aires | 4.681244 | 156.320314 | 4.86
From Bahía Blanca to: | Bahía Blanca | 0.653875 | 21.795701 | 0.49
| La Pampa Norte | 0.163469 | 5.448915 | 0.20
| Buenos Aires | 0.980803 | 32.693530 | 1.95
| Greater Buenos Aires | 1.798138 | 59.938145 | 2.87

(1) Monthly charge for every cubic meter per day of reserved transportation capacity.
(2) Minimum charge equal to the unit rate of the firm reservation charge at a 100% load factor.
(3)
Maximum percentage of total transported gas which customers are required to replace in-kind to make up for gas used by us for compressor fuel or losses in rendering transportation services.
Note: The gross receipts tax is not included in such transportation rates
Source: ENARGAS Resolution. 4362
In addition to the tariffs above, we are entitled to a CAU. Since its inception in 2005, the CAU was increased, by 73.2% as from May 1, 2015, and by 200.1% as from April 1, 2016 by ENARGAS. The CAU represented approximately 58% of the tariff in force until March 31, 2017 and will represent 25% of the tariff in force since December 1, 2017, is paid by clients that required the additional transportation capacity or who financed their expansions by means of advance payments, and is set by ENARGAS. In 2016, we recognized revenues of Ps. 215.8 as a result of the CAU. The first installment of the tariff increase granted by Resolution 4362 did not include any adjustment of the CAU. Given the permanent increase of operational and maintenance costs throughout the years, which now exceed the amount of the CAU, we filed a claim against the National Government to obtain the adjustment of the values and ensure a fair compensation for the service it renders. We expect to receive two increases in the CAU, in December 2017 and April 2018, for an aggregate increase equivalent to an increase of 37% effective in full as from April 1, 2017. See Item 4. “Our Information—B. Business Overview—Natural Gas Transportation—Pipeline Operations—Pipeline Expansions.”
We expect that once the renegotiation of our License is concluded, we, CIESA and its former and current shareholders, will be required to withdraw all the legal claims filed against the Argentine Government in order to obtain the adjustment of the CAU.
37
The Public Emergency Law and Renegotiation Agreement. The Public Emergency Law granted the Executive Branch power to renegotiate contracts entered into with private utility companies, pursuant to the framework included in the Public Emergency Law. The Public Emergency Law has been extended until December 31, 2017.
In July 2003, UNIREN was created under the joint jurisdiction of the MEF and MPFIPyS. This unit was empowered to reach total or partial agreements with the licensees and submit proposals regulating the transitory adjustment of tariffs and prices, among other things. No progress was made in our renegotiation process until December 2003.
Since 2003, multiple proposals from UNIREN, with varying levels of tariff increase, have been discussed. On October 9, 2008, we signed the 2008 Transitional Agreement with UNIREN that contemplated a tariff increase of 20%, which would be retroactively applicable to September 1, 2008. For additional information regarding the tariff Renegotiation Process, see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business— Our License has been subject to renegotiation pursuant to the Public Emergency Law. Failure or delay to negotiate further improvements to our tariff structure, and/or to have our tariffs adjusted to reflect increases in our costs in a timely manner or at all, has affected our financial condition and results of operations and could also have a material adverse effect on them.”
On December 19, 2014 due to the delay in implementing the provisions of Decree No. 1918/09, we filed administrative claims under the terms of Article 30 of the National Administrative Procedures Act to the Government, claiming damages for the failure to implement the retroactive increase provisions of the 2008 Transitional Agreement for the period between September 1, 2008 and March 31, 2014 and the lack of adjustment of the CAU. This process is still ongoing.
Under the framework of the Public Emergency Law and 2008 Transitional Agreement, ENARGAS issued Resolutions No. I-2852 and No. 3347 containing new tariff schedules that increase the tariff applicable to natural gas firm and interruptible transportation. This transitional tariff increase represents the first increase that we have received since 1999. Resolutions No. I-2852 and 3347 include the following increases, respectively:
●
A stepped increase of 8% as from April 1, 2014, 14% accumulated since June 1, 2014 and 20% accumulated since August 1, 2014.
●
As from May 1, 2015, a transitional increase of 44.3% in the price of the natural gas transportation service and 73.2% in the CAU.
In October 2011, we received from UNIREN a proposal for the 2011 Integral Renegotiation Agreement, which we accepted and signed after approval by our Board of Directors. However, because we did not receive response from UNIREN, on December 29, 2014 we filed a preliminary administrative appeal to the Government under the terms of section 30 of the National Administrative Procedures Act seeking damages for the failure to implement the Integral Renegotiation Agreement. This procedure is still ongoing.
In October 2015, we signed the 2015 Integral Renegotiation Agreement with UNIREN to incorporate Resolution No. 3347.
On February 16, 2016, the Executive Branch issued Decree No. 367/2016, establishing the dissolution of UNIREN and transferring to each ministry the responsibility to renegotiate public service agreements. In addition, it sets the guidelines to complete the process of renegotiating those contracts for which no integral renegotiation agreements have been reached. In our case, the assumption of UNIREN duties will be by the Ministry of Energy together with the MH.
For this purpose, relevant ministries are empowered jointly with the MH to conclude integral renegotiation agreements to rebuild the financial economic equation of the contracts, ending the process of contract renegotiation initiated in 2002.
Decree No. 367/2016 also states that the new tariff scheme provided in the respective Integral Renegotiation Agreement approved by the Executive Branch will only be finalized once the RTI is completed, and provides that transitional adjustment of prices and tariffs are necessary to ensure the continuity of the normal provision of services. These transitional adjustments have been made in advance of future increases allowed by the integral renegotiation agreements.
38
Under the framework of the 2016 Transitional Agreement on March 31, 2016 ENARGAS issued Resolution 3724, which approved revised tariffs as of April 1, 2016, including the CAU, for the Natural Gas Transportation business segment, providing for a 200.1 % increase. The increase was granted to cover costs and investments associated with the regular provision of the public service of natural gas transportation until the Integral Renegotiation Agreements are finalized, and must be considered on account of the tariffs that will be in effect once the RTI is concluded.
As several legal proceedings were initiated against Resolution 31, we were not able to bill the 200.1% increase in full (for more information, see Item 3. “C. Risk Factors—Risks Relating to Argentina—Our License has been subject to renegotiation pursuant to the Public Emergency Law. Failure or delay to negotiate further improvements to our tariff structure, and/or to have our tariffs adjusted to reflect increases in our costs in a timely manner or at all, has affected our financial condition and results of operations and could also have a material adverse effect on them.”) In 2016, the negative effect of this delay in adjustments was estimated at Ps. 423 million.
Moreover, the Increase was also associated with the implementation of the Investment Plan, which is overseen by the ENARGAS. The Investment Plan was being carried out with certain delays due to the impossibility on our part to timely invoice the entire Increase in accordance with the provisions of Resolution 3724.
Several legal proceedings were initiated to obtain the annulment of the increase of the PIST and the tariff increases for the natural gas transportation and distribution licensees decided by the ENARGAS. On August 18, 2016, the Supreme Court order issued its final decision mandating the Government to: (i) compulsory implement public hearings prior to the establishment of natural gas transportation and distribution tariffs, (ii) compulsory implement public hearings prior to the establishment of the point-of-injection gas price, and (iii) the invalidity of Resolutions 28 and 31 with respect to residential users, for whom tariffs had to be taken back to values effective as of March 31, 2016.
On the other hand, on August 19, 2016 ENARGAS issued Resolution No. 3953/2016, which implemented the decisions arising out of the Public Hearing with the Supreme Court. For additional information regarding the Public Hearing’s agenda, see “Item 4. Our Company—B. Business Overview—Natural Gas Transportation—The Argentine Natural Gas Industry.”
As a result of this hearing, since October 7, 2016, we were able to collect the revised tariffs at the levels provided for in Resolution 3724.
On March 30, 2017, we entered into the 2017 Transitional Agreement. On the same day and consistent with the 2017 Transitional Agreement, ENARGAS issued Resolution 4362 by which:
●
The RTI process , which will culminate in the signing of the integral agreement, was approved. As a result of this RTI, a new tariff schedule was also approved. However, according to the provisions of Resolution 74, the Ministry of Energy has limited the tariff increase arising from the RTI process. Accordingly, a new transitional tariff schedule in force as of April 1, 2017, which contemplates a rate increase of 64.2%, has been approved, but no increases for the CAU have been approved at this stage.
Resolution 74 provides that the remaining tariff increases resulting from the RTI will be granted as from December 1, 2017 (40% of the total increase) and April 1, 2018 (30% of the total increase). According to said resolution, the ENARGAS should consider the corresponding financial impact of the delay in the implementation of the tariff increase.
●
A staged tariff increase of 214.2% and 37% in the transportation tariffs and CAU (which will be structured to provide the same economic benefits to us as if the increases had been fully effective April 1, 2017), respectively, was approved.
●
We are bound to comply with the Five-Year Plan.
●
Prior to the approval of the 2017 Integral Renegotiation Agreement signed by us on March 30, 2017, expenditures to be made pursuant to the Five-Years Plan shall reach 10% of the Five-Years Plan total amount.
39
●
A non-automatic six-month adjustment mechanism for the natural gas transportation tariff was approved. This adjustment must be approved by ENARGAS and for its calculation, the evolution of the WPI published by INDEC will be considered.
As a consequence of the delay in the implementation of the Increase, as mentioned above, we were unable to comply with the Investment Plan in accordance with Resolution 3724. A portion of the investments corresponding to the Investment Plan will be made simultaneously with investments required to be made pursuant to the Five-Year Plan. At the date of this Annual Report, we are in the process of obtaining ENARGAS’s approval of the works already executed pursuant to the Investment Plan.
In addition to the conclusion of the 2017 Transitional Agreement, we have signed the 2017 Integral Renegotiation Agreement pursuant to which the RTI process will conclude. The 2017 Integral Renegotiation Agreement is pending approval by the Ministry of Energy, MH, The Office of the Attorney for the National Treasury, The General Office of the Comptroller and the Argentine Congress. Once these governmental approvals are obtained, the Executive Branch must issue a decree to make the agreement effective.
The Government has conditioned its approval of the 2017 Integral Renegotiation Agreement, to the abandonment by us and by our present and former shareholders of any claims resulting from the Public Emergency Law against the Government related to our business, including the ICSID Claim (as such term is defined below).
In 2003, Enron Corp. (“Enron”), a former indirect shareholder of Compañía de Inversiones de Energía S.A. (“CIESA”), which is our controlling shareholder, and Ponderosa Assets L.P. (“Ponderosa” and, together with Enron, the “Claimants”) filed a claim with the ICSID against the Government under the Bilateral Investment Treaty between the United States and Argentina (the “ICSID Claim”). The ICSID Claim argues that the pesification of tariffs and other unilateral changes to our regulatory structure affected by the Public Emergency Law and related laws and decrees violate the requirement of fair and equitable treatment under the treaty. On May 22, 2007, ICSID decided in favor of Enron and ordered the Government to pay US$ 106.2 million to the Claimants. In July 2010, an ICSID committee annulled the award rendered in 2007 and ordered the Claimants to reimburse the Government the total amount of the annulment award costs. This annulment does not prevent the plaintiff from filing a new claim before the ICSID. On October 18, 2010, Enron Creditors Recovery Corp. (Enron’s new corporate name) and Ponderosa filed a new claim against the Government before the ICSID. In June 2011, a tribunal to hear the case was constituted. The continued pursuit of the ICSID Claim, among other things, can adversely affect the timing and/or terms of any renegotiated tariff structure applicable to our natural gas transportation activities. By agreement of the disputing parties, the ICSID Claim has been suspended until July 15, 2017.
In January 2011, Pampa Energía S.A. acquired, among other assets: (i) PEPCA S.A., (formerly EPCA S.A.) (“PEPCA”) along with Enron’s and Ponderosa’s economic rights to monitor, suspend and withdraw the ICSID Claim and (ii) from Ashmore Energy International Limited (“AEI”), the CIESA Notes and the two derivative transactions originally executed between CIESA and J. Aron & Company on August 3, 2000 and between CIESA and Morgan Guaranty Trust Company of New York on August 4, 2000.
On March 11, 2011, Pampa entered into a call option agreement with the Claimants in order to acquire the rights to monitor, suspend and withdraw the ICSID Claim. On October 6, 2011, we granted a loan for US$26 million to Pampa to enable it to purchase the rights to monitor, suspend and withdraw the ICSID Claim. In 2015, we acquired Pampa’s rights over the ICSID Claim (the “Rights of the Arbitration Proceeding”) from Pampa after certain conditions set forth in the loan agreement were met.
We acquired rights over the ICSID Claim pursuant to a provision in our loan agreement with Pampa, which entitled us to receive the rights as prepayment of the loan if we verified that the 2008 Transitional Agreement had been adequately put into effect. This condition was met with the enactment of Resolutions No. I-2852 and No. 3347. Our rights over the ICSID Claim include the powers to suspend, monitor and withdraw from arbitration proceedings.
The acquisition of the Rights of the Arbitration Proceeding was implemented through the transfer to a trust established abroad, of which we are the beneficiary.
At the date of issuance of this Annual Report, as agreed with the Government, the Arbitration Proceeding is suspended until July 15, 2017.
40
For more information, see “Item 3.D. Risk Factors – Our License has been subject to renegotiation pursuant to the Public Emergency Law. Failure or delay to negotiate further improvements to our tariff structure, and/or to have our tariffs adjusted to reflect increases in our costs in a timely manner or at all, has affected our financial condition and results of operations and could also have a material adverse effect on them.”
Adjustment of Tariffs. Under our License, we may be permitted to adjust tariffs semi-annually to reflect changes in PPI and every five years in accordance with efficiency and investment factors to be determined by ENARGAS and, subject to ENARGAS’ approval, from time to time to reflect cost variations resulting from changes in the tax regulations (other than income tax) applicable to us, and for objective, justifiable and non-recurring circumstances.
The Natural Gas Law requires that in formulating the rules that apply to the setting of future tariffs, ENARGAS must provide the transportation companies with (i) an opportunity to collect revenues sufficient to recover all future proper operating costs reasonably applicable to service, as well as future taxes and depreciation, and (ii) a reasonable rate of return, determined in relation to the rate of return of businesses having comparable risk and taking into account the degree of efficiency achieved and the performance of the company in providing the service. No assurances can be given that the rules to be promulgated by ENARGAS will result in rates that will enable us to achieve specific earnings levels in the future.
However, since January 1, 2000, adjustments to tariffs to reflect PPI variations were suspended, first through an agreement with the Executive Branch and later by a court decision arising from a lawsuit to determine the legality of tariff adjustments through indexes.
Resolution 4362 provides for a semiannual adjustment mechanism based on changes in the WPI. The increase is not automatic, however, as it requires the prior approval of the ENARGAS.
Certain Restrictions with Respect to Essential Assets. A substantial portion of the assets transferred by GdE were defined in our License as essential to the performance of the licensed natural gas transportation service. Pursuant to our License, we are required to segregate and maintain the essential assets, together with any future improvements thereon, in accordance with certain standards defined in our License.
We may not for any reason dispose of, encumber, lease, sublease or lend essential assets for purposes other than the provision of the licensed service without ENARGAS’s prior authorization. Any extensions or improvements that we make to the natural gas pipeline system may only be encumbered to secure loans that have a term of more than one year to finance such extensions or improvements.
Upon expiration of our License, we will be required to transfer to the Government or its designee the essential assets specified in our License as of the expiration date, free of any debt, encumbrance or attachment, receiving compensation equal to the lower of the following two amounts:
●
the net book value of the essential assets determined on the basis of the price paid by CIESA for shares of our common stock plus the original cost of subsequent investments carried in U.S. dollars in each case adjusted by the PPI, net of accumulated depreciation in accordance with the calculation rules to be determined by ENARGAS (since the enactment of the Public Emergency Law, this provision may no longer be valid); or
●
the net proceeds of a new competitive bidding (the “New Bidding”).
Once the period of the extension of the License expires, we will be entitled to participate in the New Bidding, and thus, we shall be entitled to:
●
submit a bid computed at an equal and not lower price than the appraisal value determined by an investment bank selected by ENARGAS, which represents the value of the business providing the licensed service at the valuation date, as a going concern and without regard to the debts;
●
obtain a new license, without payment, in the event that any bid submitted in the New Bidding exceeds the appraisal value;
●
match the best bid submitted by third parties in the New Bidding, if it would be higher than our bid mentioned above, paying the difference between both values to obtain a new license;
41
●
if we have participated in the New Bidding but are unwilling to match the best bid made by a third party, receive the appraisal value as compensation for the transfer of the essential assets to the new licensee, with any excess paid by the third party remaining for the grantor.
Under Argentine law, an Argentine court will not permit the enforcement of a judgment on any of our property located in Argentina which is determined by the courts to provide essential public services. This may adversely affect the ability of a creditor to realize a judgment against our assets.
Under a transfer agreement we entered into in connection with the privatization of GdE in the 1990s (the “Transfer Agreement”), liabilities for damages caused by or arising from the GdE assets are allocated to either GdE or us depending on whether any such damage arose or arises from the operation of the assets prior to or following the commencement of our operations. Also, pursuant to the Transfer Agreement, we are responsible for any defects in title to such assets, although any such defects are not expected to be material. The Transfer Agreement further provided that GdE was responsible for five years until December 1997 for the registration of easements related to the system, which were not properly recorded, and for the payment to property owners of any royalties or fees in respect thereof. Since 1998, we have been responsible for properly recording any remaining easement agreements and for making payments of royalties or fees related to such easements. See “Item 8. Financial Information.”
Competition
Our natural gas transportation business faces only limited direct competition. Although there are no regulatory limitations on entry into the business of providing natural gas transportation services in Argentina, the construction of a competing pipeline system would require substantial capital investment and the approval of ENARGAS. Moreover, as a practical matter, a direct competitor would have to enter into agreements with natural gas distribution companies or end-users to transport a sufficient quantity of gas to justify the capital investment. In view of our current firm transportation contracts with our distribution company customers, and the other characteristics of the markets in which we operate, management believes that it would be very difficult for a new entrant to the natural gas transportation market to pose a significant competitive threat to us, at least in the short to intermediate term. In the longer term, the ability of new entrants to successfully penetrate our market would depend on a favorable regulatory environment, an increasing and unsatisfied demand for gas by end-users, sufficient investment in downstream facilities to accommodate increased delivery capacity from the natural gas transportation systems and the finding of significant natural gas reserves.
To a limited extent, we compete with TGN on a day-to-day basis for natural gas interruptible transportation services and from time-to-time for new natural gas firm transportation services made available as a result of expansion projects to the natural gas distribution companies to whom both we and TGN are either directly or indirectly connected (Camuzzi Pampeana, MetroGAS and BAN). We compete directly with TGN for the transportation of natural gas from the Neuquén basin to the greater Buenos Aires area.
The cost of natural gas relative to competing fuels may also affect the demand for transportation services in the long term. The delivered cost of gas to end-users in Argentina, based on energy content, is currently significantly lower than other alternative fuels, except for hydroelectric power.
In addition, the Government has implemented a number of projects to encourage the exploration and development of new natural gas reserves, or secure alternative supplies of natural gas, in recent years. See “Item 4. Our Information—B. Business Overview—Natural Gas Transportation—the Argentine Natural Gas Industry.” For example, the Northeast pipeline is a project, led by the Government, which will connect the Bolivian natural gas basins with the northeastern region of Argentina and the greater Buenos Aires region. In recent years, the Government has carried out, albeit with some delays, the development of the expansion works.
In 2008 and 2010, the Government, through ENARSA, finalized the construction of liquefied natural gas regasification ports in Bahía Blanca and Escobar, respectively, which are intended to supplement the natural gas supply deficit.
In March 2010, the governments of Argentina and Bolivia signed an addendum to the agreement entered into by both countries in 2006, with the purpose of achieving a 706 MMcf/d increase in natural gas imports, which has been implemented in stages since 2010. This agreement is expected to expire in 2026.
42
LIQUIDS PRODUCTION AND COMMERCIALIZATION
Our Liquids production and commercialization activities are conducted at our Cerri Complex, which is located near the city of Bahía Blanca in the Province of Buenos Aires. In the Cerri Complex, ethane, LPG and natural gasoline are extracted from natural gas, which arrives through our three main pipelines from the Neuquina and Austral natural gas basins. The owners of the extracted Liquids are required to make in-kind deliveries of additional natural gas to replace their attributable share of natural gas shrinkage, fuel and losses associated with the extraction of liquids from natural gas. The results of our Liquids production and commercialization segment are subject to risks associated with commodity price changes. We do not currently hedge against commodity price risk.
Historically, we have operated our Liquids business under two different types of contractual arrangements:
●
Liquids production and commercialization for our own account: Under this type of arrangement, we own the Liquids products obtained at our Cerri Complex. We purchase natural gas in order to replace thermal units consumed in the liquids production process. These natural gas purchases are negotiated with certain natural gas distributors, traders and producers. This category of our liquids business is most important in terms of revenue, percentage of transactions and profit.
●
Liquids production and commercialization on behalf of third parties: We also process natural gas and market the Liquids products in exchange for a commission based on a percentage of the sale price. In some cases, we process the natural gas and deliver the Liquids products to the natural gas producers who pay us a percentage of the average monthly sale price obtained from our sales in the domestic and/or international markets (depending on the contract).
During 2016 we sold approximately 96.4% of the total volume of Liquids for our own account.
Our sales of liquids in the domestic market are regulated until April 1, 2015 by the Stabilization Agreement and the export parity prices set monthly by the Ministry of Energy pursuant to Law No. 26,020 and related regulations. The Stabilization Agreement was replaced by a new framework for selling LPG bottles (the “New Program”). As was the case under the Stabilization Agreement, under the New Program the Federal Energy Bureau regulates the price and the quantity of LPG sold in the domestic market by each LPG producer. For more information, see “Regulation—Domestic Market” below.
We sell our LPG exports to Geogas Trading (“Geogas”), under an export agreement entered into on October 1, 2016, following a private bidding process. The contract provides for monthly sales of approximately 25,353 short tons of propane and 11,023 short tons of butane at the price quoted in Mont Belvieu, Texas, plus a fixed charge per metric ton. The contract expires on April 30, 2017. For the period October 2017 through April 2018, we will submit a new bid with customers for a new agreement to replace the existing one. For the period from May through September of each year, our sales will take place mainly in the domestic market, due to restrictions on natural gas processing and to governmental requirements to supply the domestic market.
In January 2016, we reached a one-year agreement with Petróleo Brasileiro S.A. for the delivery of 110,230 short tons at international prices minus a discount per sold ton. Selling prices are set taking into consideration the NWE ARA price, less a fixed discount per metric ton.
As of the date of this Annual Report, we are negotiating with Shell Trading US Company to reach an agreement, expected to be in effect until January 2018, for sale of natural gasoline. For the period January – April 2017, we have made spot sales to this client, also at a price based on an international reference price less a fixed discount per metric ton.
Truck exports to neighboring countries have also grown. The countries with which we operate under this scheme are Chile, Paraguay and Brazil. Although volumes exported using this modality are lower than exports by sea, they allow us to obtain a larger profit margin.
43
Regarding ethane sales, in spite of unfavorable international prices and higher competition to sell the product, in 2016 we managed to close an agreement with PBB for a one-year term from May 1, 2016 to May 1, 2017, after having operated under short- term agreements from January to April at the beginning of the year. The new agreement creates a certainty scenario during its term of effectiveness, as PBB is the only ethane client. The current agreement includes, among other conditions, TOP and DOP commitments for minimum annual quantities of 308,644 short tons per year, which is a lower than the TOP quantities included in the 2015 ethane agreement with PBB. If either of the parties does not comply with the TOP or DOP conditions, as applicable, that party is required to compensate the other party for the breach of the minimum annual quantities commitment. During 2016 and 2015, PBB did not comply with its TOP commitments and compensated us for such breach.
Our Liquids production and commercialization segment also comprises storage and dispatch by truck and subsequent shipment of the liquids extracted at the Cerri Complex to facilities located in Puerto Galván. LPG and natural gasoline are transported via two eight-inch pipelines to the loading terminal at Puerto Galván. Ethane is piped via an eight-inch pipeline to the PBB olefins plant, which is the sole outlet for ethane from the Cerri Complex. Any ethane extracted at the Cerri Complex that cannot be sold to PBB is reinjected into the pipeline.
Our Liquids production and commercialization segment has increased as a percentage of our total revenues from 19.0% in 2001 to 64.7% in 2016, as a consequence of the adverse change in the regulated natural gas transportation segment, and the increases in the international prices of LPG and natural gasoline, which generated higher revenues principally from exports. Since the last quarter of 2014, international prices of LPG have declined significantly, in tandem with the decline in oil prices. However, as mentioned below, in December 2014 and February 2015, the export tax regime was modified to mitigate such decline in international prices. Since January 7, 2017, due to the fact that the Argentine government did not extend the validity of the retentions tax regime, the exports we make are not subject to any retention.
On the other hand, average propane and butane international prices recorded an inter-annual increase of 6.6% and 7.4%, respectively, whereas natural gas prices recorded a 16.5% drop, showing progress throughout the year. The above is a result of the regularization of inventories and the improvement in oil prices by the end of the year (as a result of the decisions adopted by the OPEC countries and other producing countries to decrease production to recover prices). Thus, average international prices variations between December 2016 and December 2015 were of 65.7%, 72.4% and 19.6% for propane, butane and natural gas, respectively.
In 2016, our export revenues from the Liquids production and commercialization segment were Ps. 1,437.9 million and represented 19.4% (22.2% for 2015) of our total net revenues and 30.1% (32.3% for 2015) of our liquids production and commercialization revenues. Additionally, the total volume of sales from Liquids was 1,004,993 short tons, and the volume of sales from Liquids exports was 348,842 short tons, representing 34.7% of our total liquids sales volumes. These export volume also include sales made on behalf of third parties. Export revenues from our liquids production and commercialization segment command a price premium, which has declined after the decrease in international prices, as compared to our domestic market sales, primarily as a result of government regulation of domestic prices and high prices and demand for Liquids on the international markets.
The annual sales of the Cerri Complex for 2016, 2015 and 2014 in short tons were as follows:

| 2016 | 2015 | 2014
Ethane | 305,861 | 306,097 | 330,960
Propane | 345,577 | 346,910 | 355,524
Butane | 244,814 | 261,872 | 254,307
Natural Gasoline | 108,741 | 118,229 | 97,196
Total | 1,004,992 | 1,033,109 | 1,037,987

Our management anticipates that new oil and natural gas developments in Argentina will provide new opportunities in the liquids production and commercialization business and lead to related increases in revenues from our natural gas transportation and Liquids production and commercialization businesses.
Regulation
Liquids production and commercialization activities are not subject to regulation by ENARGAS. However, in recent years, the Government has enacted regulations that significantly affect our Liquids production activities.
44
Domestic market
We are not able to freely select the markets to which we will allocate LPG production. As we are effectively required to meet the minimum domestic demand before exporting significant amounts of LPG, we forego sales to foreign markets, where the prices for some products are higher than those established for local consumers in Argentina.
As noted above, our sales of LPG in the domestic market were regulated until April 1, 2015 by the Stabilization Agreement and related regulations. Under this framework, the Ministry of Energy caused LPG suppliers to guarantee sufficient supply of LPG in the domestic market. Law No. 26,020 creates a price regime pursuant to which the Ministry of Energy periodically publishes reference prices for LPG sold in the domestic market. It also sets forth LPG volumes to be sold in the domestic market.
The Stabilization Agreement was initially intended to expire on December 1, 2009. However, since that date, there have been several annual amendments to the agreement. The last amendment signed on April 29, 2014 and ratified through Resolution No. 532/2014 of the Federal Energy Bureau, provided that the Stabilization Agreement remained in force until March 31, 2015.
Under the Stabilization Agreement, butane bottles were sold at a fixed price below the market price, with a quota assigned to each producer. The lower price was partially offset by a subsidy paid to producers by a trust fund created for this purpose by Law No. 26,020. The trust fund was funded by: (i) penalties established by Law No. 26,020; (ii) assignments from the General State Budget; and (iii) funds that may be assessed by the Federal Energy Bureau.
On April 7, 2015, Resolution No. 73 of the Federal Energy Bureau terminated the trust fund. As a result, on March 30, 2015, the Executive Branch issued Decree No. 470/2015, regulated by Resolution No. 49/2015 issued by the Federal Energy Bureau. Both replaced Stabilization Agreement, creating the New Program. As was the case under the Stabilization Agreement, under the New Program the Ministry of Energy regulates the price and the quantity of LPG sold in the domestic market by each LPG producer. On April 3, 2017, the SRH issued Resolution No. 56-E/2017, which sets the new reference prices and the compensation received by us to sell LPG under the New Program. Under the New Program, we are required to supply certain volumes of butane to LPG bottlers, designated by the Ministry of Energy, at a price lower than the market price, and we are later compensated by the Government. For the period between 2011 and April 2015, the specified price was Ps. 570 per ton; for the period between April 2015 and March 2017, Ps. 650 per ton; and since April 2017, Ps. 2,568 per ton. The compensation received from the Ministry of Energy is currently set at Ps. 550 per ton, which has been the compensation amount since April 2015.
Participation in the New Program requires us to produce and market the LPG volumes required by the Ministry of Energy at prices significantly below the market. This requirement prevents us from covering production costs, even after giving effect to the subsidy payments that we receive under the agreement, creating a negative operating margin. We have initiated several actions with the Government in order to prevent the current situation of selling products with negative operating margins from continuing for an extended period. On June 3, 2015, we filed a motion for reconsideration against the provisions of the Federal Energy Bureau regarding volumes of LPG that must be provided in 2015 under the New Program. In addition, on August 18, 2015 we filed a lawsuit to overturn resolutions No. 49/15 and 70/15. In March 2016, we filed a petition to request that the Government decide on its jurisdiction on this issue.
Since the Propane Networks Agreement was signed between the Government and producers of LPG, including us, in 2003, we have complied with our commitments under this agreement. Pursuant to the Propane Networks Agreement, which has undergone several extensions, the Ministry of Energy fixed prices and procedures by which it compensates participating companies. The compensation received is calculated as the difference between the sales price established for the domestic market and the GLP-export parity price published monthly by the Ministry of Energy. The compensation is calculated on a monthly basis.
On March 16, 2015, the Federal Energy Bureau replaced the method for calculating the propane and butane export parity price applicable to propane and butane sales not included in the New Program and the Propane for Networks Agreement, through Resolution No. 36/2015. The previous method had been in place since June 28, 2005 pursuant to Resolution No. 792/05. The new calculation method came into effect on April 1, 2015.
45
On October 6, 2016, the Ministry of Energy enacted resolution 212 which establishes the new propane prices for the distribution under the Propane for Networks Agreement, settling at Ps. 800/Tn for Residential Users and General Service P1 and P2, and Ps. 2,100/Tn for General Service P3 users. On March 30, 2017, Resolution 74 set propane prices as follows: Ps. 1,267/Tn for Residential Users and General Service P1 and P2 users, and Ps. 2,832/Tn for General Service P3 users.
As payment of certain outstanding receivables related to the Propane for Networks Agreement as of December 31, 2015, on October 5, 2016 we received Argentine National Bonds denominated in U.S. dollars at an 8% annual interest rate, with maturity in 2020 (“BONAR 2020”). As of the date of the issuance of this Annual Report, we are conducting the necessary proceedings to collect the Propane for Networks Agreement compensations that have not been paid by the Argentine government, yet.
On March 14, 2017, the Ministry of Energy issued Resolution No. 34/2017 authorizing the payment of Ps. 91.6 million for our participation in the Propane for Networks Agreement, corresponding to the compensation owed from January to March and May to October 2016. At the date of issuance of this Annual Report, we have not received such payment. The unpaid amount of compensation related to the Propane Networks Agreement and the New Program totaled Ps. 178.5 million as of March 31, 2017.
On December 3, 2008, through Decree No. 2,067/08, the Executive Branch created a trust to finance natural gas imports to be injected into the natural gas pipeline system. The trust is funded, among other means, through the creation of a charge to be paid by (i) the users of the transportation and/or distribution regulated services; (ii) natural gas consumers receiving gas directly from producers without using natural gas transportation or distribution systems; and (iii) the natural gas processing companies. Certain entities, including us, were selected to receive a subsidy for the payment of the charge starting in December 2008. However, in November 2011, ENARGAS issued the Gas Charge Resolutions that modified the list of the subsidy beneficiaries, and thus, involved a charge increase for many of our clients, and specifically for our consumption for our own account. The charge increased from Ps. 0.049 to Ps. 0.405 per cubic meter of natural gas effective from December 1, 2011, representing a significant rise of the variable costs of natural gas processing. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Discussion of Results of Operations for the Two Years Ended December 31, 2015 and 2014.”
In order to avoid the damage that would result from the implementation of this effective 727% increase in the cost for natural gas consumption for liquids producers, including us, we initiated legal actions challenging the application of the Executive Branch decree and the Gas Charge Resolutions against the Government, ENARGAS and MPFIPyS as defendants, and have obtained a preliminary injunction stopping the implementation of the charge against us pending a determination on the merits of the case. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal and Regulatory Proceedings.”
On March 28, 2016, the Ministry of Energy issued Resolution 28, which instructs ENARGAS to take all the necessary measures to reduce to zero the tariff charge created by Decree No. 2,067/08.
International market
Disposition 168/05 of the former Undersecretary of Fuels requires companies intending to export LPG to first obtain an authorization from the Ministry of Energy. Companies seeking to export LPG must first demonstrate that the local demand is satisfied or that an offer to sell LPG to local demand has been made and rejected.
Since 2002, LPG and natural gasoline exports have been subject to a withholding tax on exports. In May 2004, the effective tax rate for LPG exports was increased from 4.76% to 16.67%. On May 24, 2007, it was increased to 20%.
Since the issuance of Resolution No. 127/08 by the MEF, in March 2008, a variable export tax regime has been in force for natural gasoline, propane and butane, respectively. During 2014, until the enactment of Resolutions No. 1,077/2014 and 60/2015, the minimum effective tax rate was 31.03% when international prices were lower than US$1,028, US$663 and US$678 per metric ton (or US$932, US$601 and US$615 per short ton, respectively). If international prices exceed these amounts, the marginal tax rate applicable to the excess is 100%. Because of this export tax regime, we were unable to obtain post-tax prices of more than US$709, US$457 and US$468 per metric ton (or US$643, US$415 and US$424 per short ton, respectively) of natural gasoline, propane and butane, respectively. Due to international prices, the average effective tax rate for 2014 was 33.7%, 32.8% and 31.5% for natural gasoline, propane and butane, respectively.
46
On December 30, 2014, the MEF issued Resolution No. 1,077/2014, which modified the nominal rates applicable for the export of oil and oil by-products, including natural gasoline. The withholding tax on exports regime is based on the price of Brent crude oil less 8 US$/bbl (“IP”) as a reference price that is used to determine the applicable rate. When the IP is less than 71 US$/bbl the nominal rate of the withholding tax on export of natural gasoline will be 1%. When the IP is greater than 71 US$/bbl, the rate will be (IP- 70) / 70 x 100. IP was below US$ 71/bbl throughout 2015 and 2016, and continues to be below that level as of the date of this Annual Report, so the applicable nominal rate for the exports of natural gasoline has been 1%.
In addition, on February 25, 2015, the MEF issued Resolution No. 60/2015, which entered into force on the same date. This resolution modified the variable export tax regime established under Resolution No. 127/08. According to the new methodology, the minimum tax rate is 1% if the international prices for propane and butane are lower than US$ 464 and US$ 478 (the “reference value”) per metric ton, respectively. If the propane and butane international prices are higher than the reference value, the tax rate applicable to the selling price is calculated on a sliding scale according to the amount by which the selling price exceeds the cut-off value of US$ 460 and US$ 473 per metric ton, respectively. As the international prices remained below the reference value, the applicable nominal rate for the exports of propane and butane has been 1%.
Beginning on January 7, 2017, natural gasoline, propane and butane exports will not be subject to hydrocarbons withholding. This is because the hydrocarbon export rights scheme created by Law 25,561 and its amendments was not renewed upon its expiration date. For the year ended December 31, 2016, when the average applicable withholding rates were of 1%, the total accrued exports withholding amounted to Ps. 11.1 million.
Competition
At the end of 2000, MEGA finished building and began operation of a gas processing plant with a capacity of approximately 1.3 Bcf/d, located in the Province of Neuquén. Although the construction of this gas processing plant initially resulted in lower volumes of gas arriving at the Cerri Complex, we have been able to undertake measures to substantially mitigate any negative impact of MEGA. However, there is a risk that additional gas processing at the MEGA plant could result in lower volumes or lesser quality gas (i.e., gas with lower liquids content) arriving at the Cerri Complex in the future, or that other projects that may be developed upstream of the Cerri Complex could adversely affect our revenues from Liquids production and commercialization services.
Since summer 2014, our sole purchaser of ethane, PBB, decided, for commercial reasons, to give priority to the product provided by MEGA. If PBB continues with its policy to take increased volumes of ethane from our competitors, this situation could adversely affect our revenues from Liquids production and commercialization services, if we are unable to sell the ethane and must reinject it into the gas stream.
In order to guarantee access to natural gas to be processed in the Cerri Complex, in the past, we obtained the commitment of natural gas producers to not build natural gas processing plants upstream of the Cerri Complex during the term of such long-term agreements. From time to time, and as these contracts expire, we renew and sign new agreements with them to replace expiring contracts. The agreements reached in more recent years, have had shorter durations. All of these recent agreements contain commitments of such natural gas producers not to reduce the quality of the natural gas that they sell to us. Nevertheless, any decision by such natural gas producers to make modifications to the methodology for injecting natural gas into the pipeline system could result in the receipt of lower quality natural gas, thereby reducing the amount of the Liquids available for extraction and processing in the Cerri Complex.
OTHER SERVICES
Other services activities are not subject to regulation by ENARGAS.
Midstream Services
Through midstream services, we provide integral solutions related to natural gas from the wellhead up to the transportation systems. The services are comprised of gas gathering, compression and treatment, as well as construction, operation and maintenance of pipelines, which are generally rendered to natural gas and oil producers at the wellhead. Our portfolio of midstream customers also includes distribution companies, big industrial users, power plants and refineries. Our midstream activities include the separation and removal of impurities such as water, carbon dioxide and sulfur from the natural gas stream. Small diameter pipes from the wellheads form a network, or gathering system, carrying the gas stream to larger pipelines where field compression is sometimes needed to inject the gas into our large diameter gas pipelines. The services are tailored to fit the particular needs of each customer in technical, economic and financial matters.
47
In addition, we provide operation and maintenance of pipelines services to our affiliates Gas Link S.A. (“Link”).
In October 2012, ENARGAS issued Resolution No. 3,952/12 which authorized our affiliate Emprendimientos de Gas del Sur S.A. (“EGS”) to transfer its connection pipeline and service offerings in operation to us. The transfer was executed on December 17, 2013.
In recent years, we provided advisory services for the construction of natural gas and, more specifically, LNG infrastructure. We rendered these services in connection with an extension of inflow facilities for regasified LNG from ships at Puerto de Ingeniero White near city of the Bahía Blanca. In 2016, in addition to treatment and compression services rendered to several producers, such as Pluspetrol Energy S.A., YPF, and Pampa Energía, we provided a range of technical services related to connection to the natural gas transportation system, engineering inspection, project management, works inspection audits, dispatch management, professional technical counseling and instrument gauging tasks. Our customers for these services include, among others, Aluar Aluminio Argentino S.A.C.I., ENARSA and YPF. Moreover, in 2016, we continued our steam production in the co-generation energy unit located at the Cerri Complex.
In August 2016, we agreed on the terms for a twenty-year agreement for the renewal, expansion and extension of the natural gas compression and conditioning service we provide in the Rio Neuquen hydrocarbon field, which is operated by YPF jointly with Petrobras Operaciones S.A. and Pampa Energía. Besides, on September 27, 2016, we entered into a new agreement with the field operator (at that moment Pampa Energía, formerly Petrobras Argentina) for the expansion of the plant compressor capacity, which will generate additional revenues beginning in the second quarter of 2017.
Telcosur (Telecommunications System)
We own 99.98% of Telcosur, a telecommunications company created in September 1998 to provide value-added and data transportation services using our modern digital land radio telecommunications system with Synchronous Digital Hierarchy (“SDH”) technology (which was installed for purposes relating to our gas transportation system).
In 2016, agreements were made that allowed to increase the capacity sold and strengthen the operations of the Company. It is important to note that during 2016 negotiations were concluded for the refinancing of unpaid debts that Sílica Networks Argentina S.A. and Silica Networks Chile S.A. maintained with Telcosur, improving in this way the management of collections of this important client.
Telcosur reached agreements with new clients (Camuzzi Sur and Cerro Vanguardia S.A.) and managed to expand or renew agreements in force (British Telecom, Level 3 Argentina SA, Silica Networks Argentina SA, Silica Networks Chile SA, Pan American Energy, Transener and Total Austral S.A.).
C.
Organizational Structure
The following is a summary diagram of our subsidiaries and affiliates as of the date of this Annual Report, including information about ownership and location:
48
(1) Incorporated in Argentina.
(2) Incorporated in Uruguay.
As of the date of issuance of this Annual Report, we are performing the formal steps to liquidate EGS.
D.
Property, Plant and Equipment
Gas Transportation
The principal components of the pipeline system we operate are as follows:
Pipelines. We render natural gas transportation service through a pipeline system that is 5,706 miles long, of which 4,745 miles are our property. We manage the transportation of natural gas over the remainder of the system under management agreements with the Gas Trust, which owns the remaining portions of the pipeline. The system consists primarily of large diameter, high pressure pipelines intended for the transportation of large volumes of gas at a pressure of approximately 853-996 pound/inch2. Line valves are installed on the pipeline at regular intervals, permitting sections of the pipeline to be isolated for maintenance and repair work. Gas flow regulating and measurement facilities are also located at various points on the system to regulate gas pressures and volumes. In addition, a cathodic protection system has been installed to protect the pipeline from corrosion and significantly reduce metal loss. All of the pipelines are located underground or underwater.
Maintenance bases. Maintenance bases are located adjacent to the natural gas pipeline system in order to maintain the pipeline and related surface facilities and to handle any emergency situations which may arise. Personnel at these bases periodically examine the pipelines to verify their condition and inspect and lubricate pipeline valves. Personnel at the bases also carry out a cathodic protection system to ensure that adequate anti-corrosion systems are in place and functioning properly. They also maintain and verify the accuracy of measurement instruments to ensure that these are functioning within appropriate industry standards and in accordance with the specifications contained in our service regulations.
49
Compressor plants. Compressor plants along the pipelines recompress the natural gas volumes transported in order to restore pressure to optimal operational levels, thereby ensuring maximum use of capacity as well as efficient and safe delivery. Compressor plants are spaced along the pipelines at various points (between 62 and 124 miles) depending upon certain technical characteristics of the pipelines and the required pressure for transport. Compressor plants include mainly turbine-driven compressors and, to a lesser extent, motor-driven compressors which use natural gas as fuel, together with electric power generators to supply the complementary electrical equipment (control and measurement devices, pumping, lighting, communications equipment, etc.).
We transport natural gas through four major pipeline segments: General San Martín, Neuba I, Neuba II and Loop Sur, as well as several smaller natural gas pipelines. Information with respect to certain aspects of our main natural gas pipelines as of December 31, 2016, is set out in the table below:

Major Pipeline | Length (miles) | Diameter (inches) | Maximum Pressure (pound/inch) | Compressor Units | Operative Compressor Plants | HP Output
General San Martín | 2,939 | 30(2) | 853/995 | 62 | 17 | 515,800
Neuba I/Loop Sur | 732 | 24/30 | 853 | 15 | 5 | 61,300
Neuba II | 1,307 | 30/36 | 975/995 | 21 | 7 | 194,000
Other (1) | 728 | Various | Various | 6 | 3 | 7,500
Total | 5,706 |  |  | 104 | 32 | 778,600

(1)
Includes 247 miles of transfer pipelines throughout the pipeline system, as well as the Cordillerano pipeline, with a length of 239 miles, and the Chelforó-Conesa pipeline and other minor pipelines.
(2)
Includes two tranches of 24 inches, which correspond to the “Estrecho de Magallanes” natural gas pipeline.
General San Martín. This pipeline was built in three stages, completed in 1965, 1973 and 1978, and transports natural gas from the extreme southern portion of Argentina to the greater Buenos Aires area in east-central Argentina. It originates in San Sebastián (Tierra del Fuego), passes through the Straits of Magellan and the Provinces of Santa Cruz, Chubut, Río Negro and Buenos Aires (including the Cerri Complex located near the city of Bahía Blanca in central Argentina), and terminates at the high pressure transmission ring around the city of Buenos Aires. The pipeline receives natural gas from the Austral basin at the extreme south in the province of Tierra del Fuego, from the same basin further north at El Cóndor and Cerro Redondo, in the Province of Santa Cruz and from the San Jorge basin in northern Santa Cruz and southern Chubut provinces. The natural gas pipeline principally serves the districts and cities of Buenos Aires, La Plata, Mar del Plata, Bahía Blanca, Puerto Madryn and Comodoro Rivadavia. This pipeline was expanded in 2005 by the Gas Trust in order to satisfy the growing natural gas demand in the Argentine economy. This expansion resulted in the construction of 458 miles of pipeline and the installation of new compressor units. See “Item 4. Our Information—B. Business Overview—Natural Gas Transportation—Pipeline Operations—Pipeline Expansions.”
Neuba I (Sierra Barrosa-Bahía Blanca). Neuba I was built in 1970 and was expanded by us in 1996. It is one of our two main pipelines serving our principal source of gas supply, the Neuquina basin. The pipeline originates in west-central Argentina at Sierra Barrosa (Province of Neuquén), passes through the provinces of Río Negro, La Pampa and Buenos Aires, and terminates at the Cerri Complex. This pipeline transports the natural gas received from the Neuquina basin, particularly from the Sierra Barrosa, Charco Bayo, El Medanito, Fernández Oro, Lindero Atravesado, Centenario, Río Neuquén and Loma de la Lata natural gas fields. The gas delivered from Neuba I is subsequently compressed and injected into the Loop Sur and the General San Martín pipelines for transportation north to the greater Buenos Aires area.
Loop Sur. This gas pipeline was built in 1972 as an extension of Neuba I and runs parallel to a portion of the General San Martín gas pipeline. Located in the province of Buenos Aires, it transports natural gas from the Neuba I at the Cerri Complex in Bahía Blanca and terminates at the high pressure transmission ring around Buenos Aires, which we also operate. The natural gas delivered by this gas pipeline constitutes a portion of the natural gas supply for the greater Buenos Aires area. Loop Sur is also connected to the TGN system and allows us to deliver natural gas to or receive natural gas from TGN. Such transfers occur occasionally during periods of high demand for natural gas.
50
Neuba II. Our newest natural gas pipeline, Neuba II, was built in 1988 and is our second pipeline serving the Neuquina basin. Neuba II was expanded four times between 1996 and 2000, and again in 2008. Neuba II begins at Repsol YPF’s Loma de la Lata gas treatment plant in the western portion of the basin and runs through the provinces of Neuquén, Río Negro, La Pampa and Buenos Aires (through the Cerri Complex), up to its terminal station located at Ezeiza just outside of Buenos Aires. Neuba II is a principal source of natural gas for the Federal District and the greater Buenos Aires area. In 2008, this pipeline was expanded as a part of the Second Expansion, resulting in the construction of 153 miles of natural gas pipeline.
Other Pipelines. We also operate the Cordillerano natural gas pipeline, built in 1984, which receives gas from the Neuquina basin and supplies it mainly to three tourist centers in southern Argentina. In addition, we operate other minor pipelines, the high pressure transmission ring around Buenos Aires, the Chelforó-Conesa natural gas pipeline and other natural gas pipelines known as natural gas transfer pipelines.
Additional information regarding the expansion of our gas transportation system is included in “Item 4. Our Information—B. Business Overview—Natural Gas Transportation—Pipeline Operations—Pipeline Expansions.”
Ancillary Facilities
Cathodic Protection System
Currently, we operate more than 280 cathodic protection devices, which are located along our main pipelines. The objective of this system is to prevent the corrosion process. The corrosion process causes metal loss, which, depending on the severity of the damage, may cause pipeline ruptures. Cathodic protection equipment includes DC rectifiers, and generators powered by thermic, turbine natural gas engines in locations where no electric lines are available. The system also includes an impressed current anode, which facilitates circulation of electricity through the circuit formed by the generator, the anode itself, the pipe and the land.
Natural Gas Control System
Located at our Buenos Aires headquarters, the gas control system controls scheduled gas injections and deliveries and allows us to follow gas flows in real time. Data is received from compressor stations by phone and automatically from remote terminal units (“RTUs”) installed in the receipt and delivery points equipped with the electronic flow management (EFM) system. The information is normally collected by the Supervisory Control and Data Acquisition system (which has an ad-hoc database that is updated every 30 seconds on average) and is then consolidated into other databases. In order to control gas injection and deliveries, we have developed a software system called Solicitud, Programación, Asignación y Control, which, among other things, allows us to control actual volumes and projected future injections to determine producer deviations. As part of this system, we operate meteorological equipment and receive daily weather information from various sources, which is used for the purpose of forecasting natural gas demand.
Natural Gas Measurement
Shipped and delivered natural gas is measured through primary field facilities that are connected with RTUs. Such RTUs transmit the data to the Buenos Aires headquarters. This data is utilized to prepare reports for clients, shippers, producers and ENARGAS. Energy balances are also prepared in order to control our system efficiency.
Liquids Production and Commercialization
Our Liquids production and commercialization activities are conducted at our Cerri Complex. It is located near the city of Bahía Blanca and is connected to each of our main pipelines. The Cerri Complex consists of an ethane extraction cryogenic plant to recover ethane, LPG and natural gasoline, together with a lean oil absorption plant to recover LPG and natural gasoline. The facility also includes compression, power generation and storage facilities. The Cerri Complex processing capacity is approximately 1.6 Bcf/d.
As part of the Cerri Complex, we also maintain at Puerto Galván a storage and loading facility for the natural gas liquids extracted at the Cerri Complex. The Cerri Complex, including the Puerto Galván facility, is currently capable of storing 60,450 short tons of liquids. See “—Item 4. Our information. —B. Business Overview—Liquids Production and Commercialization” above.
51
Other Services
Midstream
As part of this business segment, we provide services related to natural gas including treatment, gathering and gas compression, which are rendered at two treatment plants and four gas compression plants with a total treatment capacity of 113 MMcf/d and a total compression capacity of 29,960 HP, respectively. The following chart shows summary information regarding the treatment and compression plants’ capacities as of December 31, 2016:

| Treatment capacity (in MMcf/d) | Compression capacity (in HP)
Río Neuquén | 105 | 25850
Plaza Huincul | 28 | 2,950
Total | 113 | 23,950

Telecommunication
We own two interconnected networks beginning in the Buenos Aires Province, which consist of (i) a flexible and modern microwave digital network with SDH technology over more than 2,859 miles, which covers the routes: Buenos Aires – Bahía Blanca – Neuquén to the West, Buenos Aires – Bahía Blanca – Comodoro Rivadavia – Río Grande to the South, and (ii) a dark fiber optic network of approximately 1,056 miles, which covers the route La Plata – Buenos Aires – Rosario – Córdoba – San Luis – Mendoza. There is also a network in the Patagonia region, which consists of a “lit” fiber optic network of approximately 374 miles, which covers the route Puerto Madryn – Pico Truncado.
In addition, the following networks were installed in 2010, 2011 or 2012: (i) a high capacity fiber optic network of approximately 745 miles, which links Buenos Aires – Bahía Blanca – Neuquén; (ii) a fiber optic network of approximately 497 miles, which covers the route Bahía Blanca – Puerto Madryn; and (iii) a high capacity fiber optic network of approximately 497 miles, which links Pico Truncado – Río Gallegos. In 2013, we installed 81 miles of fiber optics to connect the city of Río Gallegos and the radio station “El Cóndor” which is the southernmost continental radio station in South America.
Environment and Quality
Federal and provincial laws and regulations relating to environmental quality in Argentina affect our operations. These laws and regulations set standards for certain aspects of environmental quality, provide for penalties and other liabilities for the violation of such standards, and establish remedial obligations in certain circumstances.
In general, we are subject to the requirements of the following environmental regulations:
●
the National Constitution;
●
Law No. 25,675 on National Environmental Policy;
●
Law No. 24,051 on Hazardous Waste;
●
Law No. 25,688 on Environmental Management of Waters;
●
the Criminal Code;
●
the Civil and Commercial Code; and
●
provincial legislation on the hazardous waste management, control of water resources, emission of gases and environmental compliance.
52
The principal environmental issues arising from our operations are related to the release of natural and combustion gases into the atmosphere, emergencies and damages by third parties, environmental noise, generation of waste, and impact on the soil and watercourses. We monitor all of these issues through a measurement and follow-up program. We also have an annual program of emergency drills to test our response capacity in the event of security or environmental emergencies.
The above description of the material Argentine environmental regulations is only a summary and should not be taken as a comprehensive description of the Argentine environmental regulatory framework.
Our management is responsible for compliance with environmental issues. Management works with the Sustainability Committee in order to ensure compliance with existing legislation and ensure compliance with our policy and strategy.
All issues related to Safety, Occupational Health, Environment and Quality are documented and monitored as part of our Integrated Management System. This system has been certified in accordance with ISO standards 14,001 and 9001 and OHSAS 18001.
We have established an environmental and industrial safety investment plan for the period of 2017-2021 with a budget of approximately US$43.0 million.
Safety
In 2016, we completed the practical and educational training to the new staff on Road Safety as part of our Preventive Management Program. We engaged a consultant to start a new cycle of this program in 2017, with adjustments and improvements to be implemented based on our experience over the last five years.
Through the implementation of Safe and Healthy Work workshops, we aim to reinforce the value of Human and Organizational factors in the prevention of incidents. During 2017 and 2018, we will continue with such implementation i by developing an activity program targeted at the whole company, with focus on the high and middle management and employees.
Within the framework of Assets Management, we developed Policies of Maintenance and Spare Parts and we surveyed critical assets and processes, among them the “Change Management” process.
We are also conducting a review of the Response to Emergencies and Crises Plans to adjust them to international best practices standards, focusing on safety emergencies and the mitigation of the likely scenarios that might impact on the environment and the community. During 2016, we continued training our brigade volunteers through activities in an external training center using model scenarios.
Insurance
We maintain insurance, subject to deductibles, against third-party liability, damage to our pipeline assets that pass under rivers or other bodies of water and the Straits of Magellan and business interruption. We believe this coverage is consistent with standards for international natural gas transportation companies. The terms of the policies related to the regulated assets have been approved by ENARGAS. In addition, we have obtained insurance coverage for our directors and officers pursuant a standard D&O insurance. For additional information, see “Item 3. Key Information.—D. Risk Factors.—Risks Relating to Our Business—Our insurance policies may not fully cover damage or we may not be able to obtain insurance against certain risks.”
Item 4A. Unresolved Staff Comments
We do not have any unresolved staff comments.
53
Item 5. Operating and Financial Review and Prospects
A. Operating Results
The following Operating and Financial Review and Prospects should be read in conjunction with “Item 3. Key Information—A. Selected Financial Data” and our Financial Statements included elsewhere herein.
This Operating and Financial Review and Prospects discussion contains forward-looking statements that involve certain risks, uncertainties and assumptions. These forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “will likely result,” “intend,” “projection,” “should,” “believe,” “expect,” “anticipate,” “estimate,” “continue,” “plan” or other similar words. Our actual results may differ materially from those identified in these forward-looking statements. For more information on forward-looking statements, see “Cautionary Statement Regarding Forward-Looking Statements.” In addition, for a discussion of important factors, including, but not limited to, the pesification of our tariffs and other factors that could cause actual results to differ materially from the results referred to in the forward-looking statements, see “Item 3. Key Information—D. Risk Factors.”
For purposes of the following discussion and analysis, unless otherwise specified, references to fiscal years 2016, 2015 and 2014 relate to the fiscal years ended December 31, 2016, 2015 and 2014, respectively.
We maintain our accounting books and records in Pesos. Our Financial Statements as of December 31, 2016, 2015 and 2014 have been prepared in accordance with the accounting policies based on the IFRS issued by the IASB and the interpretations issued by the IFRIC applicable as of such date.
For information relating to the presentation of financial information, see “Presentation of Financial and Other Information.”
Critical Accounting Policies and Estimates
In connection with the preparation of our Financial Statements included in this Annual Report, we have relied on assumptions derived from historical experience and various other factors that we deemed reasonable and relevant. Although we review these assumptions in the ordinary course of our business, the presentation of our financial condition and results of operations often requires management to make judgments regarding the effects of matters that are inherently uncertain. Actual results may differ from those estimated as a result of these different assumptions. We have described each of the following critical accounting policies and estimates in order to provide an understanding about how our management forms judgments and views with respect to such policies and estimates, as well as the sensitivity of such policies and estimates:
●
impairment of property, plant and equipment;
●
allowances for doubtful accounts and provisions for legal claims and others; and
●
income tax – deferred tax and tax credits.
Impairment of property, plant and equipment
We consider each of our business segments to be a single cash generating unit. Accordingly, we evaluate the carrying value of our property, plant and equipment on a segment-by-segment basis at the end of each fiscal year. In addition, we periodically evaluate the carrying value of our property, plant and equipment for impairment on a segment-by-segment basis when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
We base our evaluations of property, plant and equipment on the assets’ value in use. The value in use is calculated on the basis of discounted future cash flows. The projected cash flows are prepared taking into account: (i) for assets associated with the Liquids and Commercialization segment, projections of the prices of liquids and purchase cost of natural gas used as raw material (ii) for assets associated with the Natural Gas Transportation segment, estimates of future tariff adjustments and the recognition of cost adjustments (iii) projections of the future costs to be incurred, (iv) expected macroeconomic variables such as interest rates, inflation, foreign exchange rates. The discount rate is our weighted average cost of capital (“WACC”).
54
We recorded no impairment losses of components of property, plant and equipment at December 31, 2016 and 2015.
During 2016, we received a limited transitional increase of 200.1% in our tariffs and the RTI was initiated. Due to the uncertainties surrounding the tariff renegotiation process, estimates of future tariff adjustments are highly uncertain and there is a substantial risk that these estimates could prove to be materially different from actual future tariffs.
In performing the impairment analysis for assets associated with our Natural Gas Transportation segment, we considered: (i) the status of the negotiations with the Argentine government and the impact of the tariff increases received, (ii) the current regulatory framework, (iii) recent experiences and renegotiation agreements signed by other natural gas and electricity utility peers, (iv) management’s expectations regarding other measures that management believes are likely to be taken by the Argentine government to deal with the present economic situation of gas and electricity utilities, and (v) our expectations regarding the conculsion of the RTI process, including our expectations regarding tariff increases beginning in 2017 and the impact of a cost monitoring scheme that would provide for the semiannual adjustments of tariffs.
We have prepared three different estimates of expected cash flows as of December 31, 2016, to which the following percentages of probability of occurrence have been assigned: optimistic: 20%, base: 70% and pessimistic: 10%. Each of the projected cash flows contains assumptions regarding the implementation of an Integral Renegotiation Agreement, and different scenarios of future tariff adjustments for the Natural Gas Transportation segment.
Based on those estimations, the estimated discounted cash flows were higher than the carrying amount of such assets as of December 31, 2016.
The three different estimates of cash flows assumed that we will obtain a new tariff scheme that will enable us to recover the value of property, plant and equipment used for the provision of the natural gas transportation public service, even an increase to 100% (from 10%) in the weighted probability of the pessimistic case and a reduction from 20% to 0% in the probability of occurrence of the optimistic case, and a reduction from 70% to 0% in the base case would not generate an adjustment for impairment. As of December 31, 2016, there are no impairment balances subject to reversal.
As mentioned in “Item 4. Our Information—B. Business Overview. Regulatory Framework. —Adjustment of Rates”, on March 30, 2017 we entered into the 2017 Transitional Agreement, ratified by Resolution 4362, by which the ENARGAS established increases of 214.2% and 37% in the transportation tariffs and CAU, respectively. However, Resolution 74 established that such increases will be granted in three stages effective from April 1, 2017, December 1, 2017 and April 1, 2018, but will be structured to provide the same economic benefits to us as if the increases had been fully effective on April 1, 2017. On March 30, 2017, we also signed the 2017 Integral Renegotiation Agreement, which is still pending approval by the different governmental authorities. All these steps are necessary for the conclusion of the renegotiation of our License.
Considering the terms contained in Resolution 4362, and following the execution of the 2017 Integral Renegotiation Agreement, we re-estimated the different cash flows used to evaluate the impairment of the property, plant and equipment associated with our Natural Gas Transportation business segment. Management considers that it is not necessary to estimate three different cash flows applicable for this business segment. In this case, a single cash flow was prepared which considers: (i) the amount of the first installment of the tariff increase, (ii) the timing of the remaining rate increases obtained, (iii) an estimation of the amount of the remaining tariff increases, (iv) the six-month adjustment mechanism provided by Resolution 4362, (v) the Five-Year Plan, and (vi) the macroeconomic variables that will impact our business.
Thus, considering the above mentioned assumptions as of December 31, 2016 no impairment losses should be recognized.
Allowances for doubtful accounts and provisions for legal claims and others
We provide for doubtful accounts relating to accounts receivables. The allowance for doubtful accounts is based on the evaluation of various factors, including the credit risk of customers, historical trends and other information. While we use the information available to make evaluations, future adjustments to the allowance may be necessary if future economic conditions differ substantially from the assumptions used in making the evaluations. We have considered all events and/or transactions that are subject to reasonable and normal methods of estimation, and our Financial Statements reflect that consideration.
55
We have certain contingent liabilities with respect to legal and regulatory proceedings. We accrue liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Such accruals are based on developments as of the time the accruals are made, estimates of the outcomes of these matters and our lawyers’ experience in contesting, litigating and settling other matters. As the scope of the liabilities becomes better defined, there may be changes in estimates of future costs, which could have a material effect on our future results of operations and financial condition or liquidity.
We believe that our accounting policies relating to the allowances for doubtful accounts and provision for legal and other claims are “critical accounting policies” because:
●
It requires our management to make estimates and assumptions that are highly susceptible to change from period to period.
●
The impact that recognizing or reversing allowances for doubtful accounts and provisions for legal claims and others would have on our consolidated balance sheet as well as on the results of our operations could be material.
Income tax – deferred tax assets and tax credits
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. Determining the amount of deferred tax assets that can be registered requires the exercise of considerable judgment on the part of management, based on the probable term and level of future taxable profits together with future tax planning strategies and variables macroeconomic affecting the business.
Entities in Argentina are subject to the Asset Tax. Pursuant to this tax regime, an entity is required to pay the greater of the income tax or the Asset Tax. The Asset provision is calculated on an individual entity basis at the statutory asset tax rate of 1% and is based upon our taxable assets as of the end of the year. Any excess of the Assets Tax over the income tax may be carried forward and recognized as a tax credit against future income taxes payable over a 10-year period. When we assess that it is probable that we will use the Asset Tax payment against future taxable income tax charges, we recognize the Asset Tax as a current or non-current receivable, as applicable, within “Trade and other receivables” in the Consolidated Statement of Financial Position.
As of December 31, 2016 and 2015, we maintain a deferred tax asset tax amounting to nil and Ps. 58.9 million, respectively.
Factors Affecting Our Consolidated Results of Operations
As we are an Argentine sociedad anónima and all of our operations and operating assets are located in Argentina, we are affected by general economic conditions in the country, such as demand for natural gas, inflation and fluctuations in currency exchange rates. In particular, these factors affect our operating costs and revenues.
Since the onset of the severe economic crisis in Argentina in late 2001, our revenue composition has changed significantly, mainly as a consequence of (i) the substantial devaluation of the peso as compared to the U.S. dollar; (ii) high inflation since 2002, and (iii) the suspension, pursuant to the Public Emergency Law, of adjustments of the tariff for the transportation and distribution of natural gas. Regarding our Liquids Production and Commercialization business segment, in the past the Government has intervened in the market to implement measures to limit exports and limit selling prices. In addition, LPG and natural gasoline prices are set by reference to international prices, which suffered sharp decreases in 2014 and 2015, but recovered somewhat at the end of 2016.
For the year ended December 31, 2016, approximately, 64.4% and 28.2% of our net revenues were attributable to our Liquids production and commercialization segment and to our natural gas transportation business, respectively.
The following table sets forth, for the years indicated, the variation of key economic indicators in Argentina during the years indicated, as reported by official sources.
56
Source: INDEC, Banco Nación Argentina, Stattiscal Agencies for the Province of San Luis and CABA.
The lack of adjustments to our natural gas transportation tariffs and sustained cost increases over the years have resulted in a substantial deterioration in the operating results of the natural gas transportation segment.
Year to year fluctuations in our net income are a result of a combination of factors, including principally:
●
The volume of liquids products we produce and sell;
●
Changes in international prices of LPG and natural gasoline;
●
Regulation affecting our liquids business, including Law No. 26,020 (which requires us to meet domestic demand before exporting LPG);
●
Changes in the input costs related to the liquids production and commercialization segment, including the Gas Charge Resolutions;
●
The availability of natural gas and its richness;
●
Fluctuation in the Argentine peso / U.S. dollar exchange rate;
●
The tariffs we are permitted to charge in our Natural Gas Transportation business segment;
●
Local inflation and its impact on costs expressed in Argentine pesos; and
●
Other changes in laws or regulations affecting our operations, including tax matters.
Consideration of the effects of inflation
IAS 29 “Financial reporting in hyperinflationary economies” requires that the financial statements of an entity whose functional currency is that of a hyperinflationary economy, regardless of whether they are based on the historical cost method or the current cost method, be expressed in terms of the current unit of measure at the reporting date of the reporting period. IAS standard lists a series of factors that should be considered in determining whether an economy is hyperinflationary, including whether the cumulative rate of inflation over in three years approaches or exceeds 100%.
In January 2007, the INDEC modified its methodology for calculating the CPI in order to reflect the CPI for the Great Buenos Aires Area (CPI-GBA). Some private analysts have suggested that the change was driven by Argentina’s policy to control inflation and reduce payments on its inflation-linked bonds and have materially disagreed, and continue to disagree, with INDEC’s official inflation data (as well as other economic data affected by inflation data. In January 2014, the Government established the IPCNu, which more broadly reflects consumer prices by considering price information from the 23 provinces of the country and the City of Buenos Aires. The methodological and geographic differences in the calculation of the CPI-GBA and the IPCNu caused the Argentine government to decide to discontinue its publication.
57
On January 7, 2016, the new leadership of the INDEC declared a “national statistical emergency” and implemented several reforms in order to reorganize the INDEC. As a result, the INDEC did not publish CPI data until June 2016, with information from April 2016. During the implementation of these reforms, the INDEC used the figures for CPI and other official statistics published by the Province of San Luis and the Autonomous City of Buenos Aires. As of the date of issuance of this Annual Report the CPI for the first four months of 2016 and November and December 2015 has not been published. Further, there are no communications from the INDEC expressing their intention to re-calculate CPI for those months.
Moreover, as a result of the slowdown in inflation in the second half of 2016 and the expectations of the Argentine Government to continue programs designed to reduce inflation(for the months of January, February and March 2017, the increase in the CPI as reported by the INDEC was 1.3%, 2.5% and 2.4%, respectively), the Argentine peso does not meet the characteristics to qualify as the currency of a hyperinflationary economy according to the guidelines established in IAS 29. Even so, many of our operating costs such as wage costs and prices for inputs and services, have increased materially in recent years.
Argentine Macroeconomic Outlook for 2017
Since the current administration took office on December 10, 2015, the new authorities have been taking different measures to enable Argentina to begin a path of sustainable growth, lower inflation and correct imbalances in the relative prices of certain goods and services in the economy. These measures have included: (i) the issuance of Decree No. 55/2016, which declared an national statistic emergency and granted INDEC the necessary tools to restore international credibility regarding the indexes that it publishes; (ii) relaxation of foreign exchange controls, (iii) the settlement of claims by holdout bondholders; (iv) the elimination or reduction of taxes on exports in order to improve the situation of regional economies; and (v) the process of adjustment of public services rates, including those collected by the Natural Gas Transportation business segment.
At the date of issuance of this annual report there is uncertainty regarding the impact that these and other measures that the Government can take will have on key macroeconomic variables and particularly on the energy sector.
Discussion of Results of Operations for the Two Years Ended December 31, 2016 and 2015
The following table presents a summary of our consolidated results of operations for the years ended December 31, 2016 and 2015, stated in millions of pesos, and the increase or decrease and percentage of change between the periods presented:

| Year ended December 31, | Year ended December 31, 2016 compared to year ended December 31, 2015
| 2016 | 2015 | Variation | Percentage change
Revenues from sales | 7,402.2 | 4,226.6 | 3,175.6 | 75.1%
Operating costs | (4,198.0) | (2,508.9) | (1,689.0) | 67.3%
Depreciation | (238.0) | (251.0) | (13.0) | (5.2%)
Costs of sales | (4,435.9) | (2,759.9) | (1,676.0) | 60.7%
Gross profit | 2,966.2 | 1,466.7 | 1,499.6 | 102.2%
Administrative and selling expenses | (668.9) | (443.0) | (225.9) | 51.0
Other operating (loss) / income | (65.5) | (335.4) | 269.9 | (80.5%)
Operating profit | 2,231.8 | 688.2 | 1,543.6 | 224.3%
Net financial results | (813.4) | (974.2) | 160.8 | (16.5%)
Share of profit from associates | 1.5 | 0.2 | 1.3 | 499.2%
Income tax income / (expense) | (489.3) | 113.5 | (602.9) | (530.9%)
Total comprehensive income / (loss) | 930.7 | (172.1) | 1,102.8 | 640.7%

58
Year 2016 Compared to Year 2015
Total comprehensive income
For the year ended December 31, 2016, we reported total comprehensive income of Ps. 930.7 million, in comparison to the total comprehensive loss of Ps. 172.1 million reported 2015.
The positive variation in the comprehensive net results for fiscal year ended December 31, 2016, was mainly attributed to the increase of the operating profit of Ps. 1.543,6 million and a decrease of Ps. 160.8 million in net financial expense.
The material factors affecting consolidated operating were as follows:
●
Liquids Production and Commercialization net revenues increased by Ps. 1.860,6 million principally because of the effect that the increase in the exchange rate (Ps. 1,539.7 million) had on sales denominated in US dollars.
●
Other operating income improved from a loss position in 2015, when we recognized a loss of Ps. 324.4 million on the acquisition from Pampa of the Rights of the Arbitration Proceeding, which we received as repayment of a loan granted to Pampa in October 2011. The exercise of the Rights of the Arbitration Proceedings will enable us to conclude the final steps of the 2017 Integral Renegotiation Agreement.
●
The implementation of the tariff increase approved by Resolutions 3724 and 4054, which resulted in an increase of Ps. 1,033.4 million in net revenues from the Natural Gas Transportation business segment.
●
These positive effects were partially offset by the increase in variable production costs in the Liquids Production and Commercialization segment, as well as increases in other operating costs.
Since the onset of the economic crisis in Argentina in ate 2001, the Natural Gas Transportation segment has suffered a significant deterioration in its operating environment due to the lack of tariff increases and steady increases in operating costs resulting from inflation and the depreciation of the Peso against the U.S. dollar. Although the transitional rate increase we have received represent a partial recognition of the difficult economic conditions in which we continued providing the public natural gas transportation service, the start of the RTI process in April 2016 was of vital importance. The beginning of the RTI will enable the Company to move toward the normalization of the tariff regime which we hope will permit us to obtain a tariff scheme that will permit a sustainable recovery of this business segment.
Cost of sales, administrative and selling expenses
Cost of sales for the years ended on December 31, 2016 and 2015 represented 59.9% and 65.3%, respectively, of net revenues reported in these years. This decrease in the cost of sales as a percentage of revenues is due to an increase in net revenues (75%) higher than the increase in costs of sales (61%).
Administrative and selling expenses for the years ended on December 31, 2016 and 2015 represented 9.0% and 10.5%, respectively, of net revenues reported in both of these years.
See. “—Analysis of Operating Profit by Business Segment for the years ended December 31, 2016 and 2015.”
Share of profit from associates
For the year ended December 31, 2016, we recorded a profit from our investment in associates of Ps. 1.5 million, compared to the profit of Ps. 0.2 million recorded for 2015.
59
Net Financial Results
Net financial results for the years ended December 31, 2016 and 2015 are as follows:

| 2016 | 2015
| (in millions of pesos)
Financial income |  |
Derivative financial instruments results | - | 128.5
Interest income | 100.4 | 79.4
Fair value gains on financial instruments through profit and loss | 169.9 | 55.9
Foreign exchange gain | 135.0 | 288.8
Subtotal | 405.3 | 552.6
Financial expenses |  |
Interest expense | (470.7) | (343.1)
Foreign exchange loss | (712.5) | (1,165.8)
Derivative financial instruments results | (8.9) | -
Other financial charges | (66.4) | (41.7)
Less: Amounts capitalized on qualifying assets | 39.7 | 23.9
Subtotal | (1,218.7) | (1,526.7)
Total | (813.4) | (974.2)

Negative financial expenses for the year ended December 31, 2016, amounted to Ps. 813.4 million, compared to Ps. 974.2 million reported during the year 2015. This decrease of Ps. 160.8 million is mainly due to lower losses generated by the impact in the variation of the Argentine peso exchange rate against the U.S. dollar during 2015 of Ps. 298.9 million. In addition, the net negative financial results suffered a slight positive variation as a consequence of the higher return from the financial investments. This effect was partially offset by the higher interest charge on financial liabilities due to the exchange rate effect.
Finally, these effects were partially offset by the decrease of Ps. 137.4 million (loss of Ps. 8.9 million for the year 2016 vs. profit of Ps. 128.5 million for the year 2015) in the income generated by derivative financial instruments.
60
Analysis of Operating Profit by Business Segment for the Two Years Ended December 31, 2016 and 2015
The following table sets forth revenues and operating income for each of our business segments for the years ended December 31, 2016 and 2015:

| Year ended December 31, | Year ended December 31, 2016 compared to year ended December 31, 2015
| 2016 | 2015 | Variation | Percentage Change
Natural Gas Transportation |  |  |  |
Revenues from sales | 2,087.2 | 1,014.0 | 1,073.2 | 105.8%
Cost of sales | (997.6) | (758.5) | (239.1) | (31.5%)
Gross profit | 1,089.6 | 255.5 | 834.0 | 326.4%
Administrative and selling expenses | (386.0) | (220.7) | (165.3) | (74.9%)
Other operating expense | (44.7) | (333.0) | 288.3 | 86.6%
Operating profit / (loss) | 658.9 | (298.2) | 957.1 | 320.9%
Liquids Production and Commercialization |  |  |  |
Revenues from sales | 4,768.3 | 2,907.8 | 1,860.6 | 64.0%
Cost of sales | (3,218.9) | (1,869.4) | (1,349.5) | (72.2%)
Gross profit | 1,549.4 | 1,038.4 | 511.0 | 49.2%
Administrative and selling expenses | (213.0) | (172.3) | (40.8) | (23.7%)
Other operating expense | (19.1) | (2.7) | (16.5) | (619.0%)
Operating profit | 1,317.2 | 863.4 | 453.8 | 43.4%
Other services |  |  |  |
Revenues from sales | 485.8 | 260.6 | 225.2 | 86.4%
Cost of sales | (187.8) | (108.6) | (79.2) | (72.9%)
Gross profit | 298.0 | 152.0 | 146.1 | 96.1%
Administrative and selling expenses | (59.0) | (42.9) | (16.1) | (37.7%)
Other operating (expense) / income | (1.3) | 0.2 | (1.4) | (760.2%)
Operating profit | 237.8 | 109.3 | 128.5 | 117.6%
Telecommunications |  |  |  |
Revenues from sales | 60.8 | 44.2 | 16.6 | 37.5%
Cost of sales | (31.5) | (23.4) | (8.1) | (34.6%)
Gross profit | 29.3 | 20.8 | 8.5 | 40.7%
Administrative and selling expenses | (10.8) | (7.1) | (3.7) | (52.9%)
Other operating expense | (0.5) | - | (0.5) | (100.0%)
Operating profit | 18.0 | 13.7 | 4.2 | 31.0%

Regulated Natural Gas Transportation Segment
The Natural Gas Transportation business segment represented 28.2% and 24.0% of our total revenues during the years 2016 and 2015, respectively. Natural Gas Transportation revenues are derived mainly from firm contracts, under which pipeline capacity is reserved and paid for regardless of actual usage by the shipper. We also provide interruptible natural gas transportation services subject to availability of the pipeline capacity. In addition, we render operation and maintenance services for the Natural Gas Transportation facilities, which belong to certain gas trusts created by the Government to expand the capacity of the Argentine natural gas transportation pipeline system. This business segment is subject to ENARGAS regulation. As discussed above, since 2002, significant inflation and depreciation of the Peso, combined with a lack of compensating tariff increases, has resulted in a deterioration of the results of operations in this segment.
For additional information regarding the history of our discussions with various Argentine governmental authorities in relation to the adjustment of our gas transportation tariffs see “Item 4. Our Information—B. Business Overview—Natural Gas Transportation—Regulatory Framework
61
During 2016, the Natural Gas Transportation business segment recorded an operating income of Ps. 658.9 million, compared to the operating loss of Ps. 298.2 million in 2015. The main factors that affected the results of operations of this segment during 2015 are the following:
●
Revenues from the Natural Gas Transportation business segment increased by Ps. 1,073.2 million for the year 2016 compared to 2015. The increase was mainly due to: (i) the impact of the new rate schedules of natural gas transportation tariffs approved by Resolutions 3724 and 4122, necessary to achieve the temporary stabilization of the net revenues for this business segment until the Integral Renegotiation Agreement is signed, and (ii) the full effect of the implementation in May 2015 of the tariff increase approved by Resolution No. 3347.
●
Revenues related to natural gas firm transportation contracts for the years ended December 31, 2016 and 2015, respectively, amounted to Ps. 1,485.1 million and Ps. 801.2 million, and revenues related to interruptible natural gas transportation service amounted to Ps. 313.7 million and Ps. 103.5 million, respectively. The increase resulted from the tariff increase discussed above.
●
Revenues relating to the CAU amounted to Ps. 215.8 million and Ps. 72.4 million for the years ended December 31, 2016 and 2015, respectively. We have faced increasing operation and maintenance costs throughout the years. The CAU was increased by 73.2% in May 2015 and by 200.1% in April 2016; however, these increases were insufficient to offset the increased operating costs during that period. The value of the CAU is much less than the transportation tariff we are permitted to charge for our natural gas transportation services, because we were not required to make any investment in the construction and expansion of the assets to which the CAU relates. See “Item 4. Our Information—B. Business Overview—Natural Gas Transportation—Pipeline Operations—Pipeline Expansions” for additional information regarding the CAU.
●
Costs of sales and administrative and selling expenses for the year ended December 31, 2016 increased by Ps. 404.4 million, from Ps. 979.2 million to Ps. 1,383.6 million, as compared to the year ended December 31, 2015. This increase was mainly attributable to: (i) higher labor costs relating to the joint negotiations with trade unions during 2016, amounting to Ps. 181.7 million, (ii) an increase of Ps. 62.1 million in the turnover tax, (iii) higher management fee accrued of Ps. 51.1 million, and (iv) an increase of Ps. 78.7 million in maintenance expenses for the pipeline and other fixed assets.
●
The positive variation in other operating expenses was mainly due to the charge of Ps. 324.4 million recorded in 2015 for the acquisition of the Rights of the Arbitration Proceedings from Pampa, as mentioned above. This effect was partially offset by higher provision for contingencies in 2016 of Ps. 61.7 million.
As mentioned in “Item 4. Our Information—B. Business Overview—Natural Gas Transportation—Adjustment of Tariffs”, from April 1, 2017 we received a tariff increase of 64.2%. This tariff increase was granted under the RTI process, which will culminate when the Argentine government approves the terms of the 2017 Integral Renegotiation Agreement signed by us on March 30, 2017. According to the regulations issued by ENARGAS and Resolution 74, the tariff increase arising from the RTI process is granted in three stages (April 1 and December 1 2017 and April 1, 2018), that are designed to provide the same economic benefit to us as an increase of 214.2% for the natural gas transportation service and 37.0% for the CAU, if such increases had been fully effective as from April 1, 2017.
Based on the volume of natural gas transported during the year 2016, the positive effect in net revenues for fiscal year 2017 of the first tranche of the tariff increase would be approximately Ps. 1,300.3 million.
Liquids Production and Commercialization Segment.
Unlike the natural gas transportation segment, revenues of the Liquids production and commercialization segment are not subject to full regulation by ENARGAS and the Federal Energy Bureau. However, in recent years, the Government has enacted a number of laws and regulations that have limited our ability to receive the full international market prices for all of the liquids that the Cerri Complex produces. In addition, ENARGAS has the ability to redirect the volumes of natural gas in the system to cover certain uses and that may result in lower volumes of natural gas to be processed in the Cerri Complex. See “Item 4. Our Information. B—Business Overview—Liquids Production and Commercialization—Regulation” for more information.
62
The Liquids production and commercialization segment represented 64.4% and 68.8% of our total net revenues during the years ended December 31, 2016 and 2015, respectively. Production and Commercialization of Liquids activities are conducted at the Cerri Complex, which is located near Bahía Blanca and connected to each of our main pipelines. At the Cerri Complex, we recover ethane, LPG and natural gasoline for our own account, on behalf of our customers and on a fee basis, collecting a commission for the extracted Liquids delivered to our customers.
During 2016 we processed on behalf of our customers only 3.7% of the volume sold, compared with approximately 20.2% of the volume sold in 2015.
All ethane produced by our Liquids segment in the year ended December 31, 2016 was sold locally to PBB. Our long-term contract with PBB expired on December 31, 2015. Sales to PBB from January to April 2016 were made on a month-to-month basis for January-April 2016, and we reached a new agreement for the period May 1, 2016 - May 1, 2017. This agreement provides for the delivery of all of our ethane to PBB and also allows us to obtain profit margins in line with those obtained in recent years. However, this contract provides for delivery of lower annual volumes than the expired contract did.
Our ethane sales for the years 2016 and 2015 represented 38.7% and 42.7% of our Liquids Production and Commercialization net revenues. For this reason, any decrease in the volumes of ethane sold to PBB may have a negative impact on our net revenues.
In 2016, we sold 59.3% of our production of LPG in the local market to LPG marketers (58.0% in 2015), with the remainder exported to LPG traders. In addition, all natural gasoline produced during 2016 was exported to Petroleo Brasileiro. For more information about these contracts, see “Item 4. Our Information. B—Business Overview—Liquids Production and Commercialization.”
The total annual sales for the Cerri Complex for 2016 and 2015 in short tons, which include liquids sales made on behalf of third parties, from which we withhold fees for production and commercialization, were as follows:

| Years ended December 31, | Year ended December 31, 2016 compared to year ended December 31, 2015
| (volumes in short tons) | (volumes in short tons)
| 2016 | 2015 | Increase / (Decrease) | Percentage Change
Local Market |  |  |  |
Ethane | 305,861 | 306,097 | (236) | (0.1)
Propane | 194,447 | 190,530 | 3,918 | 2.1
Butane | 155,842 | 162,316 | (6,474) | (4.0)
Subtotal | 656,151 | 658,943 | (2,792) | (0.4)
Exports |  |  |  |
Propane | 151,129 | 156,380 | (5,251) | (3.4)
Butane | 88,972 | 99,556 | (10,584) | (10.6)
Natural Gasoline | 108,741 | 118,229 | (9,489) | (8.0)
Subtotal | 348,841 | 374,166 | (25,324) | (6.8)
Total Liquids | 1,004,992 | 1,033,109 | (28,116) | (2.7)

Export revenues from our Liquids production and commercialization segment command a price premium, as compared to our domestic market sales, primarily as a result of government regulation of domestic prices See “Item 8. Financial Information— A. Consolidated Statements and Other Financial Information—Exports.”
For several years, until the end of 2016, a variable export tax regime has been in force for natural gasoline, propane and butane, respectively. During 2015, to address declining international prices, the Government introduced several changes to the mechanism used to calculate the export taxes. These changes partially offset the impact of lower prices of propane, butane and natural gasoline during 2015 and 2016, compared with previous years. As of January 1, 2015 the nominal rate applicable to natural gasoline exports was reduced to 1% when the price of the Brent crude oil is less than 71 US$/bbl. In addition, as from February 25, 2015, the nominal export tax rate is 1% for propane and butane if the international prices are lower than US$ 464 and US$ 478 per metric ton, respectively. When the prices are higher, the applicable tax rate is calculated on a sliding scale according to the amount by which the actual price exceeds those prices.
63
The export tax regime expired at the end of 2016. During the year ended December 31, 2016, when the applicable average rates were 1%, the total withholdings on exports accrued was Ps. 11.1 million.
We cannot offer any assurance regarding the absence of withholding export taxes or the rate of any such taxes that may be reimposed.
In the domestic market, the Ministry of Energy has recently issued a series of measures that are expected to reduce the negative impact that the decrease in the international reference prices and the cost of natural gas have on our operating income. These measures include an increase in the sale price and the compensation from selling propane and butane bottles under the New Program, as well as the Ministry of Energy’s modification of the methodology for calculating the export parity price of the propane and butane sold in the domestic market.
In April 2017, the SRH issued Resolution 56 which increased the price of the butane sold under the New Program from Ps. 650/tn to Ps. 2,568/tn. However, the compensation to be collected was not changed. In addition, Resolution 74 increased the price of the propane sold under the Propane for Networks Agreement from Ps. 800/tn and Ps. 2,100/tn to Ps. 1,267/tn and Ps. 2,832/tn, depending on the customer class. Under this agreement, we still collect the compensation from the Government, which is calculated taking into consideration the export parity price published monthly by the Ministry of Energy.
See “Item 4. Our Information—B. Business Overview—Liquids Production and Commercialization—Regulation—International Market.” for additional information.
During 2016, the Liquids Production and Commercialization business segment recorded operating income of Ps. 1,238.7 million, compared to Ps. 863.5 million in 2015. The main factors that affected the results of operations for this segment during 2016 were the following:
●
Segment revenue increased by Ps. 1,860.5 million in 2016, compared with the previous year. This increase is mainly due to: (i) the increase of Ps. 1,539.5 million as a result of depreciation of the Argentine peso against the U.S. dollar, (ii) an increase of Ps. 354.2 million resulting from higher volumes sold for our own account, (iii) higher storage and dispatch fees of Ps. 134.8 million and (iv) higher subsidies received under the New Program of Ps. 56.9 million. All these effects were partially offset by the impact of the 2015 annual adjustment of the ethane price and lower international reference prices (a decrease of Ps. 381.2 million).
●
Average propane and butane international prices recorded an inter-annual increase of 6.6% and 7.4%, respectively, whereas natural gas prices decreased by 16.5%, although the pace of the decrease slowed as the year progress. Such decrease, which was smaller than in previous years, is a result of the regularization of inventories and the increase in oil prices by the end of 2016 (as a result of the decisions adopted by the OPEC countries and other producing countries to decrease production to recover prices). Average international prices as of December 2016 and as of December 2015 increased 65.7%, 72.4% and 19.6% for propane, butane and natural gas, respectively.
Notwithstanding the changes made to the the New Program to supply butane to the domestic market described above, our obligations under this program continues to have an adverse impact on this segment, resulting in a negative operating margin on domestic sales of LPG.
●
Costs of sales, administrative and selling expenses for the year ended December 31, 2016 increased by Ps. 1,390.3 million, from Ps. 2,041.7 million to Ps. 3,432.0 million, as compared to the year ended December 31, 2015. This increase was mainly due to: (i) the rise in the price of natural gas that we are required to purchase in replacement of the energy content we extract from the gas stream or (Replenishment Thermal Plant, or “RTP”) as part of the Liquids processing business of Ps. 1,164.1 million, (ii) higher management fee of Ps. 56.5 million, (iii) labor costs of Ps. 40.7 million, (iv) higher turnover tax of Ps. 32.4 million, (iv) the increase in the bad debts account of Ps. 20.4 million. These effects were partially offset by the decrease in the withholding tax on exports of Ps. 50.0 million.
In recent years, given the increase in the export capacity of the United States, we obtained lower fixed charges over Mont Belvieu prices per ton of volume sold. However, the sharp decline in international prices that began in 2014 and continued through 2015 began to reverse slightly in 2016 as a result of the normalization of inventory levels of NGL in the United States, and the impact of the recovery in the oil price toward the end of the year. Although prices at December 31, 2016 are well below the levels observed two years ago, in 2016, the international market began to show some signs of recovery.
64
In October 2016, we entered into a term agreement with Geogas Trading that will expire on April 30, 2017 for the sale of 25,353 short tons of propane and 11,023 short tons of butane per month. This agreement improves the charges obtained in spot sales and will provide some certainty for the trading of these products in the short term.
Regarding natural gasoline export agreements, in January 2016 we entered into a one-year agreement with Petróleo Brasileiro S.A. This agreement contemplates the delivery of 110,023 short tons at international prices minus a discount per sold ton. During 2017, we sold natural gasoline to Shell at spot prices minus a discount per sold ton. We are currently negotiating with Shell the terms of an agreement to for sales of natural gasoline until January 2018.
The decline in international reference prices could adversely affect the operating margins of our Liquids Production and Commercialization business segment. We cannot predict the level or the timing of fluctuations in prices for LPG and natural gasoline prices.
As described in “Item 4. Our Information— B. Business Overview—Liquids Production and Commercialization—Regulation,” in 2008, the Executive Branch created the gas charge through Decree No. 2,067/08. The gas processing charge increased from Ps. 0.049 to Ps. 0.405 per cubic meter of natural gas on December 1, 2011. This modification in the charge meant an increase of approximately 726.5% of the charge created by Decree No. 2,067/08 for the financing of natural gas imports. We are currently challenging the increased gas charge before the Court of Appeals in administrative federal matters based in the Autonomous City of Buenos Aires. In July 2012, this court issued a preliminary injunction, ordering the Executive Branch (the Federal Energy Bureau), ENARGAS and NAFISA, as collection agents, not to bill or attempt to collect from us the gas processing charge, and permitting us to continue the billing and collection of the amounts stated prior to the issuance of the Gas Charge Resolutions, pending resolution of the dispute. In October 2016, we obtained a new six-month extension of this injunction that suspends the effect of Gas Charge Resolutions issued by ENARGAS. Although, as of April 1, 2016, we are no longer required to pay the Gas Charge due to the enactment of Ministry of Energy Resolution 28, we are still requesting the extension of the precautionary measure since the aforementioned resolution leaves without effect the administrative acts that established the value of the Gas Charge as of was sanction, but nothing disposes with respect to the amounts accrued in the past that we did not pay as a consequence of having the precautionary measure. See “Item 8.—Financial Information—A. Consolidated Statements and Other Financial Information—Tax Claims.”
We have not recorded the increase of the charge for gas consumption since July 2012, when we obtained the injunction. If the injunction had not been obtained, the impact of the Gas Charge Resolutions, assuming that we were able to recover the charge in the sale price of our Liquids, would have had a significantly negative impact on our future results of operations. We estimate that the impact of the Gas Charge Resolutions for the year ended December 31, 2016, (from January 2016 until April 1, 2016, the effective date of Resolution 28), assuming that we were able to recover the charge to the sales price of the product, would have resulted in a pro forma net loss of Ps. 52.1 million and an operating loss for the segment for the year ended December 31, 2016.
The cumulative impact on retained earnings from 2012 to 2016 had we not obtained the injunctions would have been a reduction of Ps. 601.6 million.
The factors mentioned above have contributed to decreasing the operating margins that we are able to achieve in this segment. This situation was mitigated by internal factors such as the implementation of measures to improve performance in the recovery of natural gas liquids at Cerri Complex and the execution of natural gas supply agreements that ensured its provision at reasonable prices, and external factors such as the favorable weather conditions. These internal and external mitigating factors resulted in lower restrictions to the reception of natural gas for RTP.
Other Services
This segment includes midstream services. Midstream services include natural gas treatment, separation and removal of impurities from the natural gas stream and compression services, which are generally rendered to the natural gas producers at the wellhead, as well as activities related to construction, operation and maintenance of pipelines and compressor plants.
During 2016, the Other services business segment recorded an operating profit of Ps. 237.8 million, compared to Ps. 109.3 million in 2015. The main factors that affected the results of operations of this segment during 2016 are the following:
65
●
Net revenues increased by Ps. 225.2 million primarily due to the increase in the foreign exchange rate of the Argentine peso compared to the U.S. dollar (Ps. 150.9 million) and higher volume of natural gas compression services (Ps. 61.8 million).
●
Costs of sales, administrative and selling expenses increased by Ps. 95.3 million, mainly due to increases in: (i) labor costs (Ps. 35.4 million), (ii) costs of services rendered to third parties (Ps. 14.1 million), (iii) depreciations (Ps. 14.2 million), (iv) other operating costs (Ps. 12.5 million), (v) management fee (Ps. 7.9 million), and (vi) turnover tax (Ps. 6.9 million).
Telecommunications
Telecommunication services are rendered by our subsidiary, Telcosur.
During 2016, the Telecommunications business segment recorded an operating profit of Ps. 18.0 million, compared to Ps. 13.7 million in 2015. The main factors that affected the results of operations of this segment during 2016 are the following:
●
Net revenues increased by Ps. 16.6 million in the year ended December 31, 2016 when compared to 2015. The positive variation was mainly due to the increase in the foreign exchange rate of the Argentine peso compared to the U.S. dollar (Ps. 15.7 million).
●
Costs of sales, administrative and selling expenses increased by Ps. 11.8 million, due mainly to higher labor cost of Ps. 7.6 million and turnover tax of Ps. 1.9 million.
Discussion of Results of Operations for the Two Years Ended December 31, 2015 and 2014
The following table presents a summary of our consolidated results of operations for the years ended December 31, 2015 and 2014, stated in millions of pesos, and the increase or decrease and percentage of change between the periods presented:

| Year ended December 31, | Year ended December 31, 2015 compared to year ended December 31, 2014
| 2015 | 2014 | Variation | Percentage change
Revenues from sales | 4.226,7 | 4,304.0 | (77.4) | (1.8%)
Operating costs | (2.508,9) | (2,325.3) | (183.6) | 7.9%
Depreciation | (251.0) | (240.2) | (10.8) | 4.5%
Costs of sales | (2.759,9) | (2,565.5) | (194.4) | 7.6%
Gross profit | 1.466,7 | 1,738.4 | (271.8) | (15.6%)
Administrative and selling expenses | (443.0) | (810.8) | 367.9 | (45.4%)
Other operating (loss) / income | (335.4) | 4.9 | (340.4) | -
Operating profit | 688.2 | 932.5 | (244.3) | (26.2%)
Net financial results | (974.2) | (765.7) | (208.5) | 27.2%
Share of profit from associates | 0.2 | 2.9 | (2.6) | (89.7%)
Income tax income/ (expense) | 113.5 | (64.8) | 178.3 | (275.3%)
Total comprehensive (loss) / income | (172.1) | 105.0 | (277.1) | (263.9%)

Year 2015 Compared to Year 2014
Total comprehensive income
For the year ended December 31, 2015, we reported a total comprehensive loss of Ps. 172.1 million, in comparison to the total comprehensive income of Ps. 105.0 million reported in the year 2014.
66
The negative variation in the comprehensive net results for fiscal year ended December 31, 2015, was mainly attributed to the decrease of the operating (loss) / profit amounting to Ps. 244.3 million (26.2% below that of 2014) and the net financial results to Ps. 208.5 million (27.2% below that of 2014). To that extent, it is worth highlighting:
●
The acquisition from Pampa of the Rights of the Arbitration Proceedings received as payment of the loan granted to Pampa in October 2011 represented a loss of Ps. 324.4 million for the year ended December 31, 2015. The exercise of the Rights of the Arbitration Proceedings will enable us to fulfill the conditions set in the 2017 Integral Renegotiation Agreement.
●
Liquids Production and Commercialization net revenues decreased by Ps. 335.5 million (10.3% with respect to 2014) from 3,243.3 million to 2.907,8 million during the year 2015. This decrease was principally due to the significant drop by more than 50% in international reference prices.
●
These effects were partially offset by lower export taxes after changes to the calculation of export taxes that came into effect in the first quarter of 2015.
Net financial expenses rose to Ps. 974.2 million at the close of fiscal year ended December 31, 2015, compared to Ps. 765.7 million reported for previous year, representing a negative variation of Ps. 208.5 million, or 27.2%.
Cost of sales, administrative and selling expenses
Cost of sales for the years ended on December 31, 2015 and 2014 represented 65.3% and 59.6%, respectively, of net revenues reported in these years.
Administrative and selling expenses for the years ended on December 31, 2015 and 2014 represented 10.5% and 18.8%, respectively, of net revenues reported in both of these years. The reduction in administrative and selling expenses was mainly due to the decrease in the withholding tax on exports after the issuance of Resolutions No. 1,077/2014 and 60/2015, which reduced the applicable tax rate to 1%.
See. “—Analysis of Operating Profit by Business Segment for the years ended December 31, 2015 and 2014.”
Share of profit / (loss) from associates
In the year ended December 31, 2015, we recorded a share profit from associates of Ps. 0.2 million, compared to the loss of Ps. 2.9 million recorded in the year ended December 31, 2014.
Net Financial Results
Net financial results for the years ended December 31, 2015 and 2014 are as follows:

| 2015 | 2014
| (in millions of pesos)
Financial income |  |
Derivative financial instruments results | 128.5 | -
Interest income | 79.4 | 219.4
Fair value gains on financial instruments through profit and loss | 55.9 | 24.8
Foreign exchange gain | 288.8 | 218.9
Subtotal | 552.6 | 463.1
Financial expenses |  |
Interest expense | (343.1) | (310.5)
Foreign exchange loss | (1,165.8) | (777.8)
Derivative financial instruments results | - | (103.5)
Other financial charges | (41.7) | (47.4)
Less: Amounts capitalized on qualifying assets | 23.9 | 10.4
Subtotal | (1,526.7) | (1,228.8)
Total | (974.1) | (765.7)

67
Negative financial expenses for the year ended December 31, 2015, amounted to Ps. 974.2 million, compared to Ps. 765.7 million reported during the year 2014. This increase of Ps. 208.5 million is mainly due to higher losses generated by the impact in the variation of the Argentine peso exchange rate against the U.S. dollar during 2015 of Ps. 318.2 million and the lower interests on financial assets of Ps. 140.0 million. These negative effects were partially offset by the positive variation on the result of derivative instruments.
To partially offset the negative impact of the Argentine peso exchange rate variation against the U.S. dollar on our net monetary liability position, in 2015 we continued the mitigation actions we started in 2014, including currency forward agreements and investments in financial instruments that reflect the variation in the exchange rate. Currency forward agreements had a positive impact during 2015 of Ps. 128.5 million, against the loss recorded during 2014 of Ps. 103.5 million.
Analysis of Operating Profit by Business Segment for the Two Years Ended December 31, 2015 and 2014
The following table sets forth revenues and operating income for each of our business segments for the years ended December 31, 2015 and 2014:

| Year ended December 31, | Year ended December 31, 2015 compared to year ended December 31, 2014
| 2015 | 2014 | Variation | Percentage Change
Natural Gas Transportation |  |  |  |
Revenues from sales | 1,014.0 | 744.1 | 269.9 | 36.3%
Cost of sales | (758.5) | (626.7) | (131.8) | (21.0%)
Gross profit | 255.5 | 117.4 | 138.1 | 117.6%
Administrative and selling expenses | (220.7) | (157.3) | (63.4) | (40.3%)
Other operating expense | (333.0) | (2.5) | (330.5) | (13.172,1%)
Operating loss | (298.2) | (42.4) | (255.8) | (603.2%)
Liquids Production and Commercialization |  |  |  |
Revenues from sales | 2,907.8 | 3,243.3 | (335.5) | (10.3)%
Cost of sales | (1,869.4) | (1,828.3) | (41.1) | (2.2%)
Gross profit | 1,038.4 | 1,415.0 | (376.6) | (26.6%)
Administrative and selling expenses | (172.3) | (605.3) | 433.1 | 71.5%
Other operating (expense) / income | (2.7) | 7.2 | (9.9) | (137.0%)
Operating profit | 863.5 | 816.9 | 46.6 | 5.7%
Other services |  |  |  |
Revenues from sales | 260.6 | 256.7 | 3.9 | 1.5%
Cost of sales | (108.6) | (90.4) | (18.2) | (20.1%)
Gross profit | 152.0 | 166.3 | (14.3) | (8.6%)
Administrative and selling expenses | (42.9) | (40.7) | (2.2) | (5.4%)
Other operating income | 0.2 | 0.2 | - | (17,7%)
Operating profit | 109.3 | 125.8 | (16.5) | (13.1%)
Telecommunications |  |  |  |
Revenues from sales | 44.2 | 59.9 | (15.7) | (26.2%)
Cost of sales | (23.4) | (20.1) | (3.3) | (16.3%)
Gross profit | 20.8 | 39.7 | (18.9) | (47.7%)
Administrative and selling expenses | (7.1) | (7.5) | 0.4 | 5.7%
Operating profit | 13.7 | 32.2 | (18.5) | (57.4%)

Regulated Natural Gas Transportation Segment
The Natural Gas Transportation business segment represented 24.0% and 17.3% of our total revenues during the years 2015 and 2014, respectively.
Revenues relating to the CAU amounted to Ps. 72.4 million and Ps. 49.9 million for the years ended December 31, 2015 and 2014, respectively. See “Item 4. Our Information—B. Business Overview—Natural Gas Transportation—Pipeline Operations—Pipeline Expansions” for additional information regarding the CAU.
68
During 2015, the Natural Gas Transportation business segment recorded an operating loss of Ps. 298.2 million, compared to the operating loss of Ps. 42.4 million in 2014. The main factors that affected the results of operations of this segment during 2015 are the following:
●
Revenues from the Natural Gas Transportation business segment increased by Ps. 269.9 million for the year 2015 compared to 2014. The increase was mainly due to: (i) the impact of the new rate schedules of natural gas transportation tariffs approved by Resolutions I-2852 and I-3347, necessary to achieve the temporary stabilization of the net revenues for this business segment until the Integral Renegotiation Agreement is signed, and (ii) higher natural gas transportation services to export customers.
●
Revenues related to natural gas firm transportation contracts for the years ended December 31, 2015 and 2014, respectively, amounted to Ps. 801.5 million and Ps. 581.6 million, and revenues related to interruptible natural gas transportation service amounted to Ps. 103.5 million and Ps. 82.7 million, respectively.
●
Costs of sales and administrative and selling expenses for the year ended December 31, 2015 increased by Ps. 195.2 million, from Ps. 784.0 million to Ps. 979.2 million, as compared to the year ended December 31, 2014. This increase was mainly attributable to higher labor costs relating to the joint negotiations during 2015, amounting to Ps. 117.4 million and an increase of Ps. 25.1 million in maintenance expenses for the pipeline and other fixed assets.
●
The negative variation in other operating expense was mainly due to the charge of Ps. 324.4 million recorded by the acquisition of the Rights of the Arbitration Proceedings from Pampa, as mentioned above.
Liquids Production and Commercialization Segment.
The Liquids production and commercialization segment represented 68.8% and 75.4% of our total net revenues during the years ended December 31, 2015 and 2014, respectively.
All ethane produced by our Liquids segment in the year ended December 31, 2015 was sold locally under a long-term contract with PBB. During 2014, for commercial reasons, PBB decided to purchase a smaller volume of ethane from us, giving priority to the product provided by MEGA. Our ethane sales for the years 2015 and 2014 represented 42.7% and 29.7% of our Liquids Production and Commercialization net revenues. For this reason, any decrease in the volumes of ethane sold to PBB may have a negative impact on our net revenues.
In 2015, we sold 58.0% of our production of LPG in the local market to LPG marketers (59.3% in 2014), with the remainder exported to LPG traders such as Petredec and Geogas, among others. In addition, all natural gasoline produced during 2015 was exported to Petroleo Brasileiro, a related party, Braskem and Trafigura. For more information about these contracts, see “Item 4. Our Information. B—Business Overview—Liquids Production and Commercialization.”
69
The total annual sales for the Cerri Complex for 2015 and 2014 in short tons, which include liquids sales made on behalf of third parties, from which we withhold fees for production and commercialization, were as follows:

| Years ended December 31, | Year ended December 31, 2015 compared to year ended December 31, 2014
| (volumes in short tons) | (volumes in short tons)
| 2015 | 2014 | Increase / (Decrease) | Percentage Change
Local Market |  |  |  |
Ethane | 306,097 | 330,960 | (24,863) | (7.5%)
LPG | 352,846 | 361,711 | (8,865) | (2.5%)
Subtotal | 658,943 | 692,671 | 33,728 | (10.0%)
Exports |  |  |  |
LPG | 255,936 | 248,120 | 7,816 | 3.2%
Natural Gasoline | 118,229 | 97,196 | 21,033 | 21.6%
Subtotal | 374,166 | 345,316 | 28,849 | 24.8%
Total Liquids | 1,033,109 | 1,037,987 | (4,879) | (14.8%)

Export revenues from our Liquids production and commercialization segment command a price premium, as compared to our domestic market sales, primarily as a result of government regulation of domestic prices and high prices and demand for liquids on the international markets. See “Item 8. Financial Information— A. Consolidated Statements and Other Financial Information—Exports.” For several years now, a variable export tax regime has been in force for natural gasoline, propane and butane, respectively. During 2014, until the enactment of Resolutions No. 1,077/2014 and 60/2015, the minimum effective tax rate was 31.03% when international prices were lower than US$1,028, US$663 and US$678 per metric ton (or US$932, US$601 and US$615 per short ton). If international prices exceed these amounts, the marginal tax rate applicable to the excess is 100%. As a result of this export tax regime, we were unable to obtain post-tax prices of more than US$709, US$457 and US$468 per metric ton (or US$643, US$415 and US$424 per short ton, respectively) of natural gasoline, propane and butane, respectively. Due to international prices, the average effective tax rate for 2014 was 32.8%, 31.5% and 33.7% for propane, butane and natural gasoline, respectively.
To address declining international prices as from January 1, 2015, the Government reduced the withholding export taxes, so that we could partially compensate for the decrease in the price of propane, butane and natural gasoline. On December 29, 2014, the MEF issued Resolution No. 1,077/2014, which modified the rates applicable to the export of oil and oil by-products, including the natural gasoline sold by us. This resolution is effective as from January 1, 2015 and reduces the nominal rate applicable to natural gasoline exports to 1% when the price of the Brent crude oil is less than 71 US$/bbl. In addition, on February 25, 2015, the MEF issued Resolution No. 60/2015, which modified the variable export tax regime established under Resolution No. 127/08. According to the new methodology, the minimum nominal tax rate is 1% if the international prices for propane and butane are lower than US$ 464 and US$ 478 per metric ton, respectively. When the prices are higher, the applicable tax rate is calculated on a sliding scale according to the amount by which the actual price exceeds the cut-off prices.
During 2015, the Liquids Production and Commercialization business segment recorded an operating income of Ps. 863.5 million, compared to Ps. 816.9 million in 2014. The main factors that affected the results of operations for this segment during 2015 were the following:
●
The Liquids Production and Commercialization segment revenue decreased by Ps. 335.5 million in 2015, compared with the previous year. This decrease is mainly due to the reduction in sale prices for propane, butane and natural gasoline as a result of the decrease in the international reference prices since the second half of 2014, as well as lower fixed charges per metric ton obtained in export agreements during the year ended December 31, 2015 (a decrease of Ps. 979.5 million). This negative effect was partially offset by the increase: (i) in the foreign exchange rate of the Argentine peso compared to the U.S. dollar and the increase in the volumes sold by our own account (an increase of Ps. 389.5 million), (ii) the favorable weather conditions which increased the volume sold for our own account (an increase of Ps. 60.4 million, and (iii) the impact of the annual adjustment of the ethane price of Ps. 194.3 million, corresponding to the TOP clause included in the agreement with PBB.
70
Our average export sales prices in 2015 for LPG and natural gasoline were 53.2% and 55.6% lower than in 2014. International reference prices for propane, butane and natural gasoline decreased 56.5%, 50.1% and 42.2%, respectively, over the course of 2015, hitting their lowest levels in the last 12 years. The factors underlying this decrease are the weaker demand of emerging markets as wells as higher production levels and export capacity due to the development of shale gas fields in the United States of America. Low prices have continued thus far in 2016; for example, our average export sales prices for propane, butane and natural gasoline during the first quarter of 2016 decreased by 13.9%, 12.8% and 37.6% respectively, from the levels in the average selling price in 2015. If prices do not increase, the operating results for this segment in 2016 will be continue being adversely affected.
●
Costs of sales, administrative and selling expenses for the year ended December 31, 2015 decreased by Ps. 392.0 million, from Ps. 2,433.6 million to Ps. 2,041.7 million, as compared to the year ended December 31, 2014. This decrease was mainly due to reduction in the withholding export tax of Ps. 450.5 million as a consequence of the modifications introduced by the Government mentioned in Item 4 —B. Business description—Liquids Production and Commercialization.” This effect was partially offset by the increase in labor costs of Ps. 23.0 million and the variable production costs of liquids resulting from the rise in the price of natural gas that we are required to purchase in replacement of the energy content we extract from the gas stream or RTP as part of the Liquids processing business of Ps. 26.1 million.
In October 2015, we entered into a term agreement with Geogas Trading that will expire on April 30, 2016 for the sale of 25,353 short tons of propane and 11,023 short tons of butane per month. This agreement improves the charges obtained in spot sales and will provide some certainty for the trading of these products in the short term.
Regarding natural gasoline export agreements, in January 2016 we entered into a term agreement, for the term of one year, with Petróleo Brasileiro S.A. This agreement contemplates the delivery of 110,023 short tons at international prices minus a discount per sold ton.
As described in “Item 4. Our Information— B. Business Overview—Liquids Production and Commercialization—Regulation,” in 2008, the Executive Branch created the gas charge through Decree No. 2,067/08. The gas processing charge increased from Ps. 0.049 to Ps. 0.405 per cubic meter of natural gas effective from December 1, 2011. We are currently challenging the increased gas charge, before the Court of Appeals in administrative federal matters based in the Autonomous City of Buenos Aires. In July 2012, this court issued a preliminary injunction, ordering the Executive Branch (the Federal Energy Bureau), ENARGAS and NAFISA, as collection agents, not to bill or attempt to collect from us the gas processing charge, and permitting us to continue the billing and collection of the amounts stated prior to the issuance of the Gas Charge Resolutions, pending resolution of the dispute. See “Item 8.—Financial Information—A. Consolidated Statements and Other Financial Information—Tax Claims.”
We have not recorded the increase of the charge for gas consumption since July 2012, when we obtained the injunction. If the injunction had not been obtained, the impact of the Gas Charge Resolutions, assuming that we were able to recover the charge in the sale price of our Liquids, would have had a significantly negative impact on our future results of operations. We estimate that the impact of the Gas Charge Resolutions for the year ended December 31, 2015, assuming that we were able to recover the charge to the sales price of the product, would have resulted in an additional net expense of Ps. 177.3 million and an operating loss for the segment for the year ended December 31, 2015.
The cumulative impact on retained earnings from 2012 to 2015 had we not obtained the injunctions would have been a reduction of Ps. 549.5 million.
Other Services
During 2015, the Other services business segment recorded an operating profit of Ps. 109.3 million, compared to Ps. 125.8 million in 2014. The main factors that affected the results of operations of this segment during 2015 are the following:
●
Net revenues increased by Ps. 3.9 million in the year ended December 31, 2015, when compared to 2014 primarily due to: (i) higher revenues from steam generation services for electricity generation (an increase of Ps. 6.6 million), (ii) higher revenues from management services rendered to the Gas Trust for the realization of the expansions in the pipeline system (an increase of Ps. 5.6 million) and (iii) higher compression of natural gas services by Ps. 1.1 million. These increases were partially offset by new operation and maintenance contracts (an increase of Ps. 13.7 million)
71
●
Costs of sales, administrative and selling expenses for the year ended December 31, 2015 increased by Ps. 20.4 million, from Ps. 131.1 million to Ps. 151.5 million, as compared to the year ended December 31, 2014.
Telecommunications
During 2015, the Telecommunications business segment recorded an operating profit of Ps. 13.7 million, compared to Ps. 32.2 million in 2014. The main factors that affected the results of operations of this segment during 2015 are the following:
●
Net revenues decreased by Ps. 15.7 million in the year ended December 31, 2015 when compared to 2014. The negative variation was mainly due to lower telecommunication services amounting to a decrease of Ps. 18.2 million, principally as a consequence of the reduction in the services provided to Silica Networks in 2015. This effect was partially offset by the increase in the Argentina peso / U.S. dollar exchange rate (an increase of Ps. 2.4 million).
●
Costs of sales, administrative and selling expenses for the year ended December 31, 2015 increased by Ps. 2.8 million, from Ps. 27.6 million to Ps. 30.5 million, as compared to the year ended December 31, 2014. The increase was principally attributable to higher labor cost of Ps. 5.4 million, partially offset by the decrease in turnover tax of Ps. 2.5 million.
B. Liquidity and Capital Resources
In response to the limited availability of financing for Argentine companies, we closely monitor our liquidity levels in order to ensure compliance with our financial obligations and to achieve our objectives. Our cash flows from operations have been affected in recent years due to the lack of adjustment to our natural gas transportation tariffs to cover increases in our operating costs and capital expenditures. Along these lines, and as a guiding principle, financial solvency is our main objective.
To preserve cash surpluses, we invest in low risk and highly liquid financial assets offered by high quality financial institutions that are located in Argentina and the United States of America. Our policy is designed to diversify credit risk. We also prioritize investing our cash surpluses in U.S. dollar denominated financial assets as our debt is almost 100% U.S. dollar denominated.
In the short term, the most significant factors generally affecting our cash flow from operating activities are: (i) fluctuations in international prices for LPG products, (ii) fluctuations in production levels and demand for our products and services, (iii) changes in regulations, such as taxes, taxes on exports, tariff for our regulated business segment and price controls, (iv) fluctuations in the natural gas price used as RTP, and (iv) fluctuations in exchange rates.
The Investment Plan, which at Ps. 794.3 million represents capital expenditures of around 4 times our capital expenditures for 2015, is expected to be concluded in 2017. We to use cash generated by our operations to fund the capital expenditures under the Investment Plan.
Starting in the fourth quarter of 2014, the Liquids Production and Commercialization business segment, as it is mentioned in “Item 5—A. Operating results —Liquids Production and Commercialization”, began to be affected by the sharp decline in the reference international prices of the Liquids, which continued during 2015 and 2016. In 2016, we also continued participating in the Stabilization Agreement Program, through which butane is commercialized at subsidized sales prices, despite significantly higher production costs. For further information see “Item 4—A. Our Information—Liquids Production and Commercialization.”
The factors described above have changed our operating cash flow, especially the operating cash flow corresponding to the Liquids business segment that in prior years had mitigated the impact of continued low tariffs in the natural gas transportation business segment. Nonetheless, during 2016, our operating cash generation has been sufficient to meet our operating costs and capital expenditures.
72
On December 17, 2015, the new administration of the Executive Branch issued certain measures that involved the relaxation of foreign exchange controls in force over the last four years. As a result, the official exchange rate published by Banco de la Nación Argentina increased from Ps. 9.83 per U.S. dollar on December 16, 2015 to Ps. 13.95 per U.S. dollar on December 18, 2015. The new regulation modifies the existing regimes related to, among others, (i) the purchase of external assets by Argentine residents for investment purposes; (ii) arbitration and foreign currency swap; (iii) financial indebtedness (i.e., repatriation obligation, mandatory deposit, minimum waiting period; prepayment); and (iv) imports of goods and services. For additional information, see “Item 10 – Additional information—D. Exchange controls.”
A further devaluation of the peso or lower liquids prices could harm our cash-generating ability and materially adversely affect our liquidity, our ability to carry out mandatory capital investments and our ability to service our debt.
Our primary sources and uses of cash during the years ended December 31, 2016, 2015 and 2014 are shown in the table below:

| Years ended December 31,
| 2016 | 2015 | 2014
| (in millions of pesos)
Cash and cash equivalents at the beginning of the year | 872.5 | 789.4 | 893.8
Cash flows provided by operating activities | 2,137.5 | 467.0 | 993.1
Cash flows used in investing activities | (534.7) | (228.3) | (168.6)
Cash flows used in financing activities | (1,016.2) | (294.6) | (982.4)
Net increase / (decrease) in cash and cash equivalents | 586.6 | (55.8) | (157.9)
Foreign exchange gains on cash and cash equivalents | 95.9 | 138.9 | 53.5
Cash and cash equivalents at the end of the year | 1,555.1 | 872.5 | 789.4

Cash Flows Provided by Operating Activities
Cash flows provided by operating activities were Ps. 2,137.5 million and Ps. 467.0 million in 2016 and 2015, respectively. The increase of Ps. 1,670.5 million in 2016 against 2015 was mainly as a result of: the improvement in operating income and the higher income received (Ps. 162.5 million) from the liquidation of derivative financial instruments contracted in order to mitigate the risk of exchange rate variation on our financial debt.
Cash flows provided by operating activities were Ps. 467.0 million and Ps. 1,019.0 million in 2015 and 2014, respectively. The decrease of Ps. 552.0 million in 2015 against 2014 was mainly due to an increase in the payments for accounts payable for the acquisition of goods and services and the decrease in the collection of trade receivables, which were collected in January 2016.
Cash Flows Used in Investing Activities
Cash flows used for investing activities increased by Ps. 306.4 million in 2016 compared with 2015. This increase is mainly due to higher capital expenditures of Ps. 194.1 million due to higher costs incurred for carrying out repair and maintenance of the pipeline system operated by us. In addition, cash flow provided by sales of financial assets not considered cash equivalents fell by Ps. 112.3 million (Ps. 61.4 million for fiscal year 2016 vs Ps. 173.7 million for fiscal year 2015).
Cash flows used for investing activities increased by Ps. 33.9 million in 2015 compared with 2014. This increase is mainly due to higher capital expenditures of Ps. 51.4 million due to higher costs incurred for carrying out repair and maintenance of the pipeline system operated by us.
73
Cash Flows used in Financing Activities
Cash flows used in financing activities increased by Ps. 721.6 million in 2016 compared with 2015, mainly as a result of the following: (i) the prepayment in November 2016 of the remaining outstanding negotiable obligations issued under the 2007 global program, (ii) the higher cancellation of financial debt due to the impact of the higher exchange rate, and (iii ) the payment of dividends in January 13, 2016 in accordance with the delegations granted by the respective Shareholders' Meetings that approved our financial statements for the year ended December 31, 2014 and allocated income for the payment of dividends when determined by the Board.
Cash flows used in financing activities decreased by Ps. 687.8 million in 2015 compared with 2014 mainly due to the payment of U.S. dollar 94.7 million of scheduled principal amortization of our financial debt in May 2014. In May 2015 we paid U.S. dollar 30.4 million in scheduled principal amortization of our financial debt.
Description of Indebtedness
In December 2004, we restructured for the first time substantially all of our debt obligations by means of an exchange offer for new notes (the “Restructured Notes”), which was accepted by creditors holding 99.76% of the principal amount of the debt that we sought to restructure. Taking into account the governing law of the unrestructured amount, in July 2012 our Board of Directors has deemed claims of creditors barred pursuant to the statute of limitations.
Beginning in April 2007, we began a series of steps to refinance the Restructured Notes and the amended and restated loan agreements with Inter-American Development Bank (the “Amended Loans”). These steps included a tender offer and proxy solicitation with respect to all of the Restructured Notes (the “Tender Offer”), which was completed in May 2007 and accepted by 78.4% of the note holders; a new notes offering (described below); an optional prepayment of amounts outstanding under the Amended Loans; and the redemption of all of the Restructured Notes remaining after the completion of the Tender Offer. Concurrent with the Tender Offer, we commenced an offering of new notes in an aggregate principal amount of US$ 500 million (the “2007 Notes”) pursuant to our Medium Term Note Program (the “2007 Program”), which provides for the issuance of up to a maximum principal amount of US$ 650 million in notes. The interest rate for the 2007 Notes was fixed at 7.875%, and the maturity date was May 14, 2017.
Between August 2008 and August 2010, we cancelled the 2007 Notes with a nominal value of US$ 125,976,000, which were purchased by us on market, at prices lower than their nominal value. These purchases and cancellations helped us to reduce our finance costs.
In addition, and in order to optimize the use of our cash, the Board of Directors approved on October 14, 2016 the redemption of all outstanding 2007 Notes for a remaining amount of US$ 30.8 million. The redemption was carried out on November 14, 2016 in accordance with the terms of the Notes and the related indenture.
In order to improve the maturity profile of our financial debt, in January 2014 we launched an offer for a voluntary exchange of the 2007 Notes (the “Exchange Offer”). The Exchange Offer settled on February 11, 2014. Bondholders who had US$ 250,741,000 aggregate principal amount of the 2007 Notes accepted the exchange, and we delivered to them US$ 255,451,506 of new notes (the “2014 Notes”) pursuant to our Medium Term Note Program approved by the CNV on January 3, 2014 (the “2014 Program”). The 2014 Notes bear interest at a fixed rate of 9.625% per annum, and the principal will be amortized in four equal payments, the first one amortized in May 2014 while the remaining payments will mature on May 14, 2018, 2019 and 2020.
As of the date of this Annual Report, our total indebtedness under the 2014 Notes amounted to US$ 191,588,630. The scheduled amortization payments amount to US$ 63,862,876 payable in each of 2018, 2019 and 2020. See “Item 10. Additional Information – C. Material Contracts –Debt Obligations.”
Our Board of Directors has proposed that the 2017 Shareholders Meeting authorize an increase of up to US$700,000,000 (or its equivalent in other currencies) of the 2014 Program for the issue of short and medium term notes non-convertible into our Shares.
74
We are subject to several restrictive covenants under our 2014 Notes that limit our ability to obtain additional financing, including limitations on our ability to incur additional indebtedness to create liens on our property, assets or revenues. In addition to the required principal amortization payment obligations, we are also subject to other restrictive covenants that affect our use of cash on hand, such as limitations on our ability to pay dividends to our shareholders and limitations on our ability to sell our assets. See “Item 10. Additional Information—C. Material Contracts—Debt Obligations” for a detailed discussion of the terms of our financial debt, including the interest rates and material covenants applicable to such indebtedness.
We regularly implement actions aimed at minimizing the impact of the exchange rate variation on our financial indebtedness, including entering into currency forward agreements with major financial institutions for the purchase of U.S. dollars to cover exposure to the exchange rate risk derived from our financial indebtedness. In addition, we are able to invest in financial instruments, which reflect the variation of the exchange rate.
During the years 2016, 2015 and 2014 a financial (expense) / income of (Ps. 8.9 million), Ps. 128.5 million and Ps. 38.0 million was recognized as a result of currency forward agreements.
Future Capital Requirements
Details of our currently projected capital expenditures for the 2017-2019 periods, in millions of U.S. dollars, are set forth in the following table:

| 2017 | 2018 | 2019 | Total
Natural Gas transportation |  |  |  |
Reliability and others | 76.6 | 106.8 | 89.1 | 272.5
Expansions | - | - | - | -
Operational efficiencies | - | - | - | -
Total | 76.6 | 106.8 | 89.1 | 272.5
Liquids production and commercialization |  |  |  |
Reliability and others | 13.9 | 9.6 | 9.0 | 32.5
Expansions | 1.3 | - | - | 1.3
Operational efficiencies | 0.9 | - | - | 0.9
Total | 16.1 | 9.6 | 9.0 | 34.7
Other services | 4.1 | 1.1 | 0.8 | 6.0
Total Capital Expenditures | 96.8 | 117.5 | 98.9 | 313.3

The table above includes the capital works necessary to comply with the mandatory Five-Year Plan.
We currently expect continue to rely on cash flow from operations and short-term and long-term borrowings and other additional financing activities to finance capital expenditures in the near term.
Currency and Exchange Rates
Our primary market risk exposure is associated with changes in the foreign currency exchange rates because our debt obligations are denominated in U.S. dollars and more than Ps. 3,172.4 million (or 43.1%) of our annual revenues were peso-denominated in the fiscal year ended December 31, 2016. Contributing to this exposure are the measures taken by the Government since the repeal of the Convertibility Law and the pesification of our regulated tariffs described elsewhere in this Annual Report. This exposure is mitigated in part by our revenues from our Liquids Production and Commercialization business segment, 78.9% which are denominated in U.S. dollars for the year ended December 31, 2016. See “Item 3. Key Information—Exchange Rates Information.”
We place our cash and current investments in high quality financial institutions in Argentina and the United States of America. Our policy is to limit exposure with any financial institution. Our temporary investments primarily consist of money market mutual funds and fixed-term deposits. Also during 2016, we changed the fund investment policy in order to target cash investments in higher performance financial instruments, minimizing the credit risk and keeping a high liquidity level.
75
Our strategy will remain focused on mitigating both the exchange rate risk arising from our liabilities in dollars and the effect of inflation on our liquidity. Also given the anticipated finalization of the RTI process, we will analyze the financing sources for the implementation of the Five-Year Plan.
In addition, since 2014, we have entered into forward purchase transactions. For further information see “—Derivative Financial Instruments” below.
Our financial debt obligations denominated in foreign currency as of December 31, 2016, amounted to US$ 246.4 million (Ps. 3,915.5 million). As of December 31, 2016, we also had the equivalent of US$ 42.2 million (Ps. 671.0 million) of trade and other payables denominated in U.S. dollars. Finally, US$ 96.1 million (Ps. 1,516.9 million) of our assets are denominated in U.S. dollars. Therefore, our net liability position in U.S. dollars amounted to US$ 232.7 million as of December 31, 2016.
We estimate, based on the net liability financial position of our balance sheet as of December 31, 2016 that, other factors being constant, a 10% appreciation of the U.S. dollar against the Argentine Peso for the year ended December 31, 2016, would have decreased our income before tax for the year in approximately Ps. 307.0 million. A 10% depreciation of the U.S. dollar against the Argentine Peso would have an equal and opposite effect on the income statement. This sensitivity analysis provides only a limited view of the market risk sensitivity of certain of our financial instruments. The actual impact of market foreign exchange rate changes on our financial instruments may differ significantly from the impact shown in the sensitivity analysis.
Derivative Financial Instruments
Our Board of Directors has approved the terms for acquiring derivative financial instruments in order to hedge risks associated with the fluctuation of interest and exchange rates of our debt.
To mitigate foreign exchange risk, during 2015 and 2014 we entered into forward purchase transactions of U.S. dollars to cover the risk exposure associated with exchange rates derived from our U.S. dollar denominated financial position.
As of December 31, 2015, the net position was buying U.S. dollars amounting to US$ 52.5 million, at a weighted average exchange rate of Ps. 11.37 per $1, for settlement on May 2016. The fair value of outstanding derivative financial instruments as of December 31, 2015 amounted to a net asset position of Ps. 128.1 million. Such contracts were guaranteed by Ps. 29.9 million, which were disclosed under “Other Receivables.” During 2015 and 2016, we recognized a gain / (loss) of Ps. 128.5 million and (Ps. 8.9 million), respectively, because of our currency forward purchase transactions.
We do not enter into derivative financial instrument agreements for speculative purposes.
We do not believe that we are exposed to significant interest rate risk because the interest rates on our all of debt obligations are fixed.
C. Research and Development, Patents and Licenses, etc.
Not applicable.
D. Trend Information
See “A. Operating Results—Discussion of Results of Operations for the Two Years ended December 31, 2016 and 2015” and “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal and Regulatory Proceedings.”
E. Off-Balance Sheet Arrangements
We currently do not have any off-balance sheet arrangements or significant transactions with unconsolidated entities not reflected in our Financial Statements. All of our interests in and/or relationships with our subsidiaries are recorded in our Financial Statements. See “B. Liquidity and Capital Resources—Derivative Financial Instruments.”
76
F. Tabular Disclosure of Contractual Obligations
The following table represents a summary of our contractual obligations as of December 31, 2016:

| Payment due by period (in millions of argentine pesos)
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years
Long-Term Debt Obligations(1)(2) | 3,485.4 | 294.5 | 3,190.9 | - | -
Purchase Obligations (3) | 264.8 | 264.8 | - | - | -
Leasing(5) | 1,187.0 | 164.9 | 237.8 | 237.8 | 546.5
Other Long-Term Liabilities(4) | 467.2 | 467.2 | - | - | -
Total | 5,404.4 | 1,191.4 | 3,428.7 | 237.8 | 546.5

(1)
Refers to amortization and interest payments on the 2014 Notes as described in “Item 5. Operating and Financial Review of Prospects—Description of indebtedness” and “Item 10. Additional Information—C. Material Contracts”, respectively.
(2)
The total amount of interest payments includes Ps. 402.9 million of estimated interest payments not accrued according to the 2014 Notes as of December 31, 2016.
(3)
Refers to agreements for the purchase of natural gas used in our liquids production and commercialization activities.
(4)
Refers to the estimated technical assistance service agreement to be paid to Petrobras Argentina Group pursuant to Section 2.5 of the Technical Assistance Service Agreement. For more information see, “Item 4. Our Information—B. Business Overview— Gas Transportation—Pipeline Operations—Technical Assistance Service Agreement.”
(5)
Corresponds to the financial leasing arrangement entered with Pampa Energía. The total amount includes estimated interest payment not accrued as of December 31, 2016 for approximately Ps. 338.8 million. For additional information see “Item 5. Operating and Financial Review of Prospects – Description of indebtedness.”
Approximately 99.6% of the debt obligation amounts set forth in the table above are U.S. dollar-denominated and, therefore, principal and accrued interest included in the amounts presented have been converted to peso amounts using the selling exchange rate of US$1.00 = Ps. 15.89 as of December 31, 2016. Actual foreign currency debt payments may significantly differ from these estimates due to exchange rate fluctuations.
Item 6.
Directors, Senior Management and Employees
A.
Directors and Senior Management
General. Management of our business is vested in the Board of Directors. Our By-laws provide for a board of directors consisting of a minimum of nine directors and a maximum of 11 directors and 11 alternate directors. In the absence of one or more directors, alternate directors will attend meetings of the Board of Directors. Directors and alternate directors are elected at an ordinary meeting of shareholders and serve one- to three-year renewable terms, as decided by the shareholders.
Under our By-laws and Argentine law, the Board of Directors is required to meet at least once every three months. A majority of the members of the Board of Directors constitutes a quorum, and resolutions must be adopted by a majority of the directors present. In the case of a tie, the Chairman or the person replacing him at a particular meeting is entitled to cast the deciding vote. Upon motion by the Chairman our Board of Directors’ meetings may be held by video or telephone conference.
The 2017 Shareholders Meeting will consider the creation of an Executive Committee formed by the Chairman, the Vice-Chairman and two other members of our Board of Directors.
On July 27, 2016, GIP, WST and PCT collectively acquired shares and rights representing indirect control of fifty percent (50%) of the outstanding capital stock of CIESA. In addition, on that date, Pampa Energía acquired from Petrobras Internacional Braspetro B.V. all of the stock and voting rights of Petrobras Participaciones S.L., the holder of the 67.1933% of the capital stock and voting rights of Petrobras Argentina and, consequently, the indirect control of Petrobras Hispano Argentina S.A. We refer to these transactions as the “CIESA Acquisition”. For a detailed description of the CIESA Acquisition, see “Item 7. Major Shareholders and Related Party Transactions – A. Major Shareholders.”
77
in accordance with the General Companies Law and in view of the vacancies occurred in our Board of Directors, on July 27, 2016, the Supervisory Committee appointed the replacement Directors. Their terms of office lasted until the General Ordinary Meeting of Shareholders held on August 29, 2016, which appointed new directors and Syndics to fill the vacancies. The term of office of such directors and Syndics will end on the date of the Ordinary General Shareholders’ Meeting that considers the financial statements for the year ending December 31, 2016.
The Shareholders’ Agreement (as defined in “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders—Shareholders’ Agreement”) contains provisions governing the voting of our shares held by CIESA, the election of the members of our Board of Directors and certain other matters.
As mentioned above, in December 2008, as a consequence of the enactment of Law No. 26,425, the AFJPs transferred their share participation of our outstanding capital stock (which as of the date of this Annual Report represents 23.1% of our common stock) to the FGS managed by the ANSES. At our General Annual Shareholders’ Meeting held on April 20, 2016, the ANSES appointed Mauricio Edgardo Szmulewiez and Sergio Benito Patrón Costas as independent directors, Ignacio Gustavo Alvarez Pizzo, and Lourdes Armada as independent alternate directors. Pursuant to Decree No. 1,278/12, issued by the Executive Branch on July 25, 2012, these representatives are to report directly to the MEF and are subject to a mandatory information-sharing regime, under which, among other obligations, they must immediately inform the MEF of the agenda for each board of directors meeting and provide related documentation.
On February 2015, the Executive Branch enacted Decree No. 196/2015, which complements the provisions of Decree 1278/2012, mainly extending indemnity and legal assistance coverage to directors and statutory committee members appointed by the Government in companies in which it has stock participation.
Decree No. 894/2016, which created the Secretary of Economic Policy and Planning Development, established that directors appointed by the FGS shall have the functions, duties and powers established by the General Companies Law, the Capital Market Law and all the rules applicable to the company in which they act as directors, its bylaws and other internal regulations.
The General Companies Law governs the way directors are appointed. Directors are appointed by the General Annual Shareholders’ Meeting or by the Statutory Committee as the case may be, when authorized by the “By-Laws”. It is not mandatory to be a shareholder of the company to be eligible as director. Section 263 of the General Corporations Act mandates that up to one third of the members of the board can be appointed by the “cumulative vote system.” The vote of each shareholder who chooses to use the “cumulative vote system” shall be multiplied by the number of members to be appointed; the result may be partially or fully allocated to any of the candidates. All of the shareholders are entitled to choose the “cumulative vote system” in other words, not only ANSES has the right to appoint members to the Board of Directors through that system.
Duties and Liabilities of Directors. Under Argentine law, directors have the obligation to perform their duties with the loyalty and diligence of a prudent business person. Directors are jointly and severally liable to us, shareholders and third parties for the improper performance of their duties, for violating the law, our By-laws or regulations, if any, and for any damage caused by fraud, abuse of authority or gross negligence. Under Argentine law, specific duties may be assigned to a director by our By-laws or regulations or by a resolution of a shareholders’ meeting. In such cases, a director’s liability will be determined with reference to the performance of such duties, provided that certain recording requirements are met. Moreover, under Argentine law, directors are prohibited from engaging in activities in competition with us without express shareholder authorization. Certain transactions between us and directors are subject to ratification procedures established by Argentine law.
A director who participates in the adoption of a resolution or who advises on or recognizes such resolution, will be exempted from liability if he leaves written evidence of his objection and notifies the Statutory Committee before his liability is reported to the board of directors, Statutory Committee, a shareholders’ meeting, or competent authority or before judicial action is exercised. Shareholder approval of a director’s performance terminates any liability of a director vis-à-vis us, provided that shareholders representing at least 5% of our capital stock do not object and that such liability does not result from a violation of the law or our By-laws or regulations.
Causes of action against directors may be initiated by us upon a majority vote of shareholders. If a cause of action has not been initiated within three months of a shareholders’ resolution approving its initiation, any shareholder may initiate the action on behalf of and for our account.
78
At the General Annual Shareholders’ Meeting held on March 6, 1996, our shareholders approved the acquisition of civil liability insurance coverage for directors, Syndics and officers. Such coverage is common practice among public companies who seek protection for such persons against shareholders’ and other parties’ claims.
Four of the members of our Board of Directors qualify as independent as defined in Section 301 of the Sarbanes Oxley Act and the CNV rules. Three of them are also members of our Audit Committee. The remaining members of the Board of Directors are not independent. Under the independence requirements, a director is not independent if any of the following apply:
●
is also a member of the administrative body or dependent on shareholders who hold “significant shareholding” of the issuer, or any corporation in which those shareholders hold directly or indirectly “significant shareholding,”
●
is engaged or was engaged during the last three years to the issuer under a contract of employment,
●
provides, or belongs to a professional corporation or association, which renders professional services to or receives any form of remuneration or fees (other than the corresponding remuneration for its position in the administration body) from the issuer, or those shareholders that have any direct or indirect “significant shareholding” in TGS or from corporations in which shareholders also have any direct or indirect “significant shareholding,”
●
directly or indirectly holds “significant shareholding” in the issuer or any corporation, which holds “significant shareholding” in the latter,
●
directly or indirectly sells or provides goods or services to the issuer or its shareholders, who hold direct or indirect “significant shareholding,” for an amount substantially higher than the compensation received for their position as members of the administration body, or
●
is a husband or wife, close relative up to fourth degree of kinship or second degree of relationship that, in case of being a member of the administration body, would not be independent as set forth in the CNV regulations.
In all cases, “significant shareholding” refers to those shareholders holding at least fifteen per cent (15%) of our common stock, or less in cases when they are entitled to appoint one or more directors per class of share, or have agreements with other shareholders relating to management and administration of any such companies, or its controlling entity.
79
The following table reflects the current members of our Board of Directors, their respective positions on the Board of Directors and the year they were appointed to such position.

Name | Year of Appointment | Term Expires | Position | Position in Other Company
Gustavo Mariani | 2011 | 2017 | Chairman | Vice Chairman and Co-Chief Executive Officer, Chief Generation Manager and Chief of New Business at Pampa
Luis A. Fallo | 2016 | 2017 | Vice Chairman | Public Accountant
Mariano Batistella | 2014 | 2017 | Director | New Business, Strategy and Planning Executive Director at Pampa
Gregorio Werthein | 2016 | 2017 | Director | Executive Director at Werthein Group
Sonia Fabiana Salvatierra | 2009 | 2017 | Director | Member of the law firm Salvatierra & Asociados Abogados
Diego Alberto Güerri | 2006 | 2017 | Independent Director | Member of the law firm Güerri & Asociados
Carlos Alberto Olivieri | 2010 | 2017 | Independent Director | Independent Consultant
Mauricio Edgardo Szmulewiez | 2016 | 2017 | Independent Director | Legal and accounting advisor
Sergio Benito Patrón Costas | 2016 | 2017 | Independent Director | Head in Labor Relations at Macro Bank
Diego Salaverri | 2016 | 2017 | Alternate Director | Legal Director at Pampa
Nicolás Mindlin | 2016 | 2017 | Alternate Director | New Business, Strategy and Planning Director at Pampa
Hugo N. Galluzo | 2016 | 2017 | Alternate Director | Lawyer
Mariano Osvaldo Ferrero | 2011 | 2017 | Alternate Director | Legal Counsel
Jorge Sampietro | 2016 | 2017 | Alternate Director | General Manager at Petroquímica Cuyo S.A.I.C.
Alejandro Candioti | 2011 | 2017 | Independent Alternate Director | Partner of Candioti Gatto Bicain & Ocantos S.C.
Diego Petrecolla | 2007 | 2017 | Independent Alternate Director | Chairman of GPR Economía S.A.
Ignacio Gustavo Álvarez Pizzo | 2016 | 2017 | Independent Alternate Director | Lawyer at the Directors and Corporate Affairs department in the FGS
Lourdes Armada | 2016 | 2017 | Independent Alternate Director | Risk analist at FGS

Additional information regarding the occupation and employment background of each of our regular directors is set forth below:
Gustavo Mariani holds a degree in Economics from the Universidad de Belgrano and a Master’s degree in Business Administration from the Universidad del CEMA (Center of Macroeconomic Studies) and also is a Chartered Financial Analyst (CFA) since 1998. He has been a member of board of directors of Pampa since November 2005 and serves as Vice-Chairman and co-CEO. Mr. Mariani joined Grupo Dolphin in 1993 as an analyst and served as an investment portfolio manager. He currently serves as Director of Bodega Loma la Lata S.A., CPB, CTG, Loma de La Lata, GMA Warrants S.A., Transener, CIESA, Citelec, Comunicaciones y Consumo S.A., Consultores Fund Management S.A., Dolphin Créditos S.A., Dolphin Créditos Holding S.A., Dolphin Finance S.A, Grupo Mtres S.A., Emes Inversora S.A., IEASA, EASA, Transba, Edenor, Grupo Emes S.A., Grupo Dolphin Holding S.A., HIDISA, HINISA, Nihuiles, Diamante, IPB, Orígenes Seguros de Vida S.A., Orígenes Seguros de Retiro S.A., Pampa Comercializadora S.A., Pampa Participaciones II, Pampa Participaciones, Transelec, Petrolera Pampa, Sitios Argentinos S.A, Greenwind S.A., Parques Eólicos del Fin del Mundo S.A., Parques Eólicos Argentinos S.A., Dolphin Fund Management S.A., and PELSA and as alternate liquidator of CAM Gerenciadora S.A. (company in liquidation). In addition, Mr. Mariani is the executive secretary of the management board of “Fundación Pampa Energía Comprometidos con la Educación.” He was born on September 9, 1970.
Luis A. Fallo holds a degree in Accounting from the Universidad de La Plata and a Master’s degree in Business Administration from the Universidad del CEMA. He currently serves as director of Simali S.A. Sagua Argentina S.A., Beau Lieu S.A., Petroquímica Cuyo S.A.I.C., Aguas de Santiago S.A., Petroken Petroquímica Ensenada S.A., PEPCA S.A. and CIESA. Since 1999 he has also acted as executive manager of Argentine Real Estate Investment Company S.A. He was born on January 29, 1960.
Mariano Batistella currently works as New Business, Strategy and Planning Director of Pampa Energía. Mr. Batistella previously worked in investment banking at Goldman Sachs. Mr. Batistella holds a degree in business administration from the Universidad de San Andres and a postgraduate degree in finance from the same institution. He currently serves as director of CIESA, IEASA S.A., Petrobras Bolivia Internacional S.A., Petrolera Entre Lomas S.A.. Oleoductos del Valle S.A., Hidroeléctrica Los Nihuiles S.A., Petrobras Hispano Argentina S.A., Refinería del Norte S.A., Pampa Participaciones S.A., Inversora Nihuiles S.A. and Inversora Diamante S.A. He also acts as alternate director of Bodega Loma la Lata S.A., Central Térmica Loma la Lata S.A., Electricidad Argentina S.A., EG3 Red S.A., ENECOR S.A., Pampa Comercializadora S.A., Pampa Energía, Parques Eolicos del Fin del Mundo S.A., Petrolera Pampa S.A., Petrobras Argentina S.A., Pampa Participaciones II S.A., Transelec Argentina S.A., World Energy Business S.A., Central Térmica Güemes S.A., Empresa Distribuidora y Comercializadora Norte S.A. and Hidroeléctrica Diamante S.A. He was born on July 31, 1982.
80
Gregorio Werthein has a degree in Economics from Universidad de Buenos Aires and a Master’s degree in Business Administration from Columbia Business School and participated in the Leadership Development Program of Harvard Business School. Since June 2011, he has served as Executive Director of Werthein Group. He also is the co-founder and Chairman of Shipeala. He was born on September 15, 1983.
Sonia Fabiana Salvatierra received a degree in Law from the Universidad de Buenos Aires. Between 1987 and 1996 she worked for the Caja de Valores S.A. Between 1996 and 2008 she acted as associate for Marval O’Farrell & Mairal. Currently, she is partner in the Salvatierra & Asociados law firm. In 2015 she co-founded V&S SRL, an integral foreign trade services company. She is member of many advisory boards in ONGs. She is also a member of the board of directors of CIESA and alternate syndic of Quirón Asset Management S.A. She was born on March 20, 1966.
Diego Alberto Güerri received a Law degree from the Universidad de Buenos Aires. He also obtained a Master’s Degree in Business Administration from IAE Business School, Universidad Austral. Between October 2002 and 2005, he acted as liquidator of Quilseg S.A., Quilburs S.A., Capi S.A., Cirqui S.A., Dispel S.A. and Faique S.A. He was partner of the Zarantonello & Güerri law firm between 1999 and 2007. Since 2007, he has been a partner of the law firm Güerri. He was born on January 8, 1969.
Carlos Alberto Olivieri holds a Public Accountant degree from the Universidad Nacional de Rosario and a postgraduate degree in Corporate Financial Management from the University of Michigan (USA) and Stanford. At present, Mr. Olivieri is professor of Finance of Di Tella University. Between 2008 and March 2010, Mr. Olivieri acted as a financial advisor at Raymond James and between 2002 and 2007 he worked for Repsol YPF S.A. as Chief Financial Officer (“CFO”) for Argentina, Brazil and Bolivia. Previously he acted as CFO of YPF S.A., Quilmes Industrial S.A. and Eaton S.A. and president of YPF GAS S.A. and Maxus Corporation (USA). He also had executive responsibilities in other industries, such as Aerolíneas Argentinas and Arthur Andersen & Co. and taught at the Universidad de Buenos Aires and Michigan Universities. Currently, Mr. Olivieri is also member of the board of directors of Provida AFP (Chile) and act as financial advisor. He was born on May 14, 1950.
Mauricio Edgardo Szmulewiez received Law and Accounting degrees, both from the Universidad de Buenos Aires. Between April 1982 and October 1989, he worked for Lisdero Law Firm as tax and foreign investments manager. Since 1989, he is the owner of Dr. Mauricio Edgardo Szmulewiez law and accounting firm. He was born on January 19, 1960.
Sergio Benito Patrón Costas received a law degree from Universidad de Buenos Aires. From 1994 to 2002, he held several positions in the Federal Criminal and Correctional Court of the City of Buenos Aires. Between 2002 and 2006, he acted as lawyer in Urtubey & Asociados Law firm and Group M Collection. He is currently the Head of Labor Relations in Macro Bank. He was born on December 31, 1975.
Executive Officers. The following is a list of our executive officers as of the date of this Annual Report, their respective positions with us and the year they were appointed to such position:

Name | Year of Appointment | Position
Javier Gremes Cordero | 2012 | CEO
Alejandro Basso | 2007 | CFO and Services Vice President
Rubén De Muria | 2016 | Institutional and Regulatory Affairs Executive Manager
Nicolás M. Mordeglia | 2010 | Legal Affairs Vice President
Carlos H. Sidero | 2013 | Human Resources Vice President
Oscar Sardi | 2005 | Operations Vice President
Néstor Hugo Martín | 2013 | Business Vice President

There is no expiration term defined for the executive officers.
Below is a description of the main activities currently carried out by each of our executive officers, together with the biographical information thereof:
81
Javier Gremes Cordero received a Public Accounting degree from the Universidad Católica Argentina, a Master’s in Science from the Université de Management, Switzerland and a MBA from the Universidad Francisco de Vitoria, Spain. He worked for Perez Companc from January 1993 to September 2002. Between October 2002 and February 2006, he worked for Petrobras Argentina in the Financial Department of the E&P business unit. Between March 2006 and February 2009, he served as CFO and from March 2009 to November 2012 as CEO of Petrobras Ecuador. He became our CEO in November 2012. He was born on January 11, 1962.
Alejandro Basso received a Public Accounting degree from the Universidad de Buenos Aires. He worked for Petrobras Argentina from 1987 to 1992 and for Quitral-Co S.A. from 1992 to 1994. From 1994 to 1998 he acted as our Planning and Corporate Control Manager and between September 1998 and March 2008 he was our Planning and Control Vice President. Between March 2008 and October 2016, he acted as our Management Control and Corporate Governance Vice President. In October 2016, he was designated as our CFO and Services Vice President. He also acts as alternate director of TGU, EGS and Telcosur. He was born on October 13, 1961.
Rubén De Muria received a Public Accountant degree from Universidad de Buenos Aires. He obtained a Master in Regulations of Gas and Electricity Industries from CEARE. He worked for Chase Manhattan Bank Argentina and Perez Companc SA between 1985 and December 1992. In December 1992, he joined us as member of the Regulatory Matters and Rates Department. In August 2006, he was promoted to Regulatory Matters and Rates Manager. Finally, in December 2015 he was appointed as Institutional and Regulatory Affairs Executive Manager. He was born on January 31, 1964.
Nicolás M. Mordeglia received a Law degree from Universidad de Buenos Aires in 1988 and a Master’s degree in Business Law and an Executive Business Program from Universidad Austral in 1994. During 2002, he attended an Executive Management Business Program at IAE. He worked for the Legal Affairs Department of SADE Ingeniería y Construcciones S.A. (f/k/a Sade S.A.C.C.I.F.I.M.) from 1990 to 1992, and for the Legal Affairs Department of Compañia Naviera Perez Companc S.A.C.F.I.M.F.A. from 1993 to 1995. He worked for the Legal Affairs Department of Cerro Vanguardia S.A. (f/k/a Minera Mincorp S.A.) from 1995 to 1999. From 1999 to 2010, he worked for the Legal Affairs Department of Petrobras Argentina S.A. (f/k/a Pecom Energia S.A.) and has been appointed to several boards of directors and Statutory Committees in corporations in Argentina and abroad where Petrobras Argentina has interests including TGS and CIESA. Since August 2010, he has served as our Legal Affairs Vice President. He was born on August 17, 1965.
Carlos H. Sidero graduated from Universidad de Buenos Aires as a Certified Public Accountant in Argentina. He worked with Isaura S.A. from 1981 through 1994. From 1994 he managed different areas within the Human Resources department at Eg3 SA and Petrobras Argentina S.A. He joined TGS in March 2013 as Vice President Human Resources. He was born on February 16, 1956.
Oscar Sardi received a Mechanical Engineering degree from the Universidad Nacional de Rosario and holds a major in Natural Gas from the Universidad de Buenos Aires. He also participated in a General Administration Program at the Universidad Austral. He worked for GdE between 1983 and 1992 and from that year he has held different positions in our operations area. In April 2005, he was designated as our Service Vice President, until October 2016 when he was named as our Operations Vice President. He also acts as alternate director of Link and Telcosur. He was born on September 1, 1955.
Néstor Hugo Martín obtained a degree in Chemical Engineering from the Universidad Nacional del Sur, Bahía Blanca. Mr. Martín has wide experience in the oil and gas industry. Between 1976 and 2002, he held different positions in companies such as ESSO S.A.P.A., YPF, Isaura S.A. and EG3. In 2002, he joined Petrobras Argentina where he served in many managerial positions especially related to planning, business, supply and trading. In 2013, he was designated as our Business Vice President. He was born on April 17, 1953.
For additional information regarding the provisions include in the Shareholders’ Agreement for the election of our CEO, see “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders—Shareholders’ Agreement.”
Indemnification of Officers and Directors. Under the Shareholders’ Agreement, the shareholders of CIESA require us to: (i) limit the liability of each of our officers, syndics and directors for all consequences of their acts or omissions, excluding acts or omissions where there is evidence of fraud or gross negligence and (ii) enter into agreements obligating us to defend, indemnify and hold harmless each of our officers, syndics and directors from and against all liabilities, losses, and other expenses incurred by each such officer, syndic or director in connection with a pending, threatened or completed civil, criminal, administrative or other proceeding, or any investigation that could lead to such a proceeding, by reason of the fact that such officer, syndic or director is or was one of our officers, syndics or directors, including claims alleged to be due to the negligence of such person, but excluding acts or omissions that involve fraud or gross negligence towards us.
82
B.
Compensation
The remuneration paid by us during the year 2016 to the members of our Board of Directors and executive officers amounted to Ps. 6.0 million and Ps. 33.0 million, respectively. We do not grant pension or retirement plans or other benefits to members of our Board of Directors or to our executive officers.
Executive officers are subject to a goal-directed management system with a variable remuneration program. Consensual objectives are in line with our global objectives, as the variable remuneration program links a portion of its compensation to the performance thereof and our performance. Total compensation of executive officers consists of a fixed portion (normal and usual remuneration) and a variable portion. The variable portion depends on the level of achievement of the “Outcome” objectives, which consist of economic and financial targets, and “Performance Results,” including business objectives that do not have an associated economic result. We measure achievement of these objectives annually, based on performance during the fiscal period.
C.
Board Practices
For information on the term of office of our directors and executive officers, see “A. Directors and Senior Management” above. The information in that section is incorporated herein by reference.
None of the members of our Board of Directors are party to any service contract with us or any of our subsidiaries providing for benefits upon termination of employment.
Audit Committee
According to the Capital Market Law, publicly listed companies must have an Audit Committee “that will function on a collegiate basis with three or more members of the Board of Directors, the majority of whom must be independent under CNV regulations.” The Audit Committee operates under its Rules of Procedure, which was approved in its meeting held in 2013 in accordance with the requirements of the Capital Market Law. The Rules of Procedure require that the majority of the members that form the Audit Committee must be independent according to the CNV’s standards. Committee members are designated by a simple majority of the Board of Directors, at the first meeting following designation of the members of the Board of Directors, and they hold office until their successors are designated. The Audit Committee adopts its own regulations and must prepare a working plan for each fiscal year. At the General Annual Shareholders’ Meeting held on April 20, 2016, Diego Alberto Güerri, Carlos Alberto Olivieri and Mauricio Mauricio Edgardo Szmulewiez were designated as independent members of the Board of Directors and Alejandro Candioti, Diego Petrecolla and Sergio Benito Patrón Costas were appointed as their alternates.
The Board of Directors meeting held on April 20, 2016 appointed the current members of the Audit Committee, who as of the date of this filing are Diego Alberto Güerri, Carlos Alberto Olivieri and Mauricio Edgardo Szmulewiez. All of the current members of our Audit Committee are independent under CNV and SEC regulations.
The Audit Committee’s mandatory periodic duties are to:
●
supervise the internal control and accounting systems as well as the reliability of the latter and all the financial information and other significant issues that are to be submitted to the SEC, CNV and BASE in compliance with the applicable disclosure policies;
●
supervise the application of information policies regarding our risk management;
●
ensure that the market is informed about those operations where there may be a conflict of interest with one or more members of the Board of Directors, controlling shareholders or other parties as defined by the applicable regulations;
●
express its view on the reasonableness of fees and stock option plans for directors submitted by the Board of Directors;
●
express its view as to compliance with laws and regulations and the reasonableness of the conditions of an issuance of shares (or convertible securities), in the case of a capital increase excluding or limiting preferential rights;
●
verify compliance with the Code of Ethics (see Item 16.B. “Code of Ethics”);
83
●
issue a well-founded opinion on whether the terms and conditions of relevant transactions with related parties are according to market practice, within five calendar days from the receipt of a petition issued by the Board of Directors, and at any other time at which a conflict of interest exists or might exist;
●
prepare an annual working plan for the fiscal year and notify the Board of Directors and the Statutory Committee within 60 days from the beginning of the period;
●
fulfill all the obligations stated in our By-laws and applicable laws and regulations;
●
express its view on the Board of Directors’ proposals appointing (or rejecting) the external auditors to be hired and monitor the auditors’ independence; and
●
establish procedures for: (i) the receipt, treatment, investigation and administration of the complaints received by us regarding accounting, internal accounting controls or internal auditing matters; and (ii) the confidential, anonymous submission by our employees of concerns regarding questionable accounting or internal auditing matters.
Also, regarding the internal and external auditors, the Audit Committee must:
●
review their plans; and
●
evaluate their performance, and give an opinion on their performance when issuing the annual Financial Statements.
In evaluating the external auditors’ performance, the Audit Committee must:
●
analyze the different services rendered by the external auditors as well as their independence, according to Technical Resolution (“TR”) No. 34 of the FACPCE, any other related regulations issued by professional councils and those regulations set by Title II, Chapter III, Article 21 of the rules of the CNV;
●
report separately the fees billed as follows: (i) fees for external audit and other related services meant to provide reliability to third parties (e.g., special reports about internal controls, shareholding prospectuses, certifications and special reports requested by regulators, etc.); and (ii) fees related to other special services different from those mentioned above, such as those associated with design and implementation of systems, laws and regulations, financial issues, etc.; and
●
verify the independence of the external auditors in accordance with internal policies.
Additionally, the Audit Committee must perform the following mandatory duties contained in the regulatory framework:
●
give a prior assessment, within five days of notification, that shall be used by the CNV to require us to designate an external auditor as requested by minority shareholders, as long as such shareholders represent at least 5% of our common stock (in those cases in which the minority shareholders’ rights might be affected), in order to carry out one or more specific revisions. The charges of such revisions shall be paid by the petitioning shareholders (Law No. 26,381, article 108.e);
●
provide a well-founded assessment about an acquiring tender offer if by withdrawing the public offering we would cease to be a public company or our stock cease to be traded (Law No. 26,381, article 98); and
●
issue a report supporting a Board of Directors’ resolution to buy back our shares (Law No. 26,381, article 64).
Once a year, the Audit Committee is required to prepare a plan for the fiscal year to be presented to the Board of Directors and to the Statutory Committee. The directors, members of the Statutory Committee, managers and external auditors must, when requested by the Audit Committee, attend its meetings, provide the Audit Committee with information and otherwise assist the Audit Committee in the performance of its functions. In order to better perform its functions, the Audit Committee may seek the advice of legal counsel and other independent professionals at our expense, pursuant to a budget approved by the shareholders, and we must provide the Audit Committee with access to the information and documents it may deem necessary to perform its duties.
According to CNV rules, at least once a year and upon the filing of the annual Financial Statements, the Audit Committee shall issue a report to the shareholders, addressing how the Committee performed its duties and the results of its work.
84
The aggregate remuneration paid by us during the year 2016 to the members of the Audit Committee was approximately Ps. 1.9 million. We do not provide pension, retirement or similar benefits to any member of the Audit Committee.
Statutory Committee
The Statutory Committee is our monitoring body as stipulated in Section No. 284 of the General Companies Law. Our By-laws provide for a Statutory Committee consisting of three syndics and three alternate members (“alternate syndics”). In accordance with our By-laws, two syndics and the corresponding alternate syndics are elected by a majority vote of the holders of our Class A Shares. The remaining syndic and corresponding alternate syndic are elected by the majority vote of the remaining holders of our common stock. Each member of the Statutory Committee is elected at the General Annual Shareholders’ Meeting and serves for a one-year renewable term. Members of the Statutory Committee must be lawyers or accountants qualified under Argentine law and, for the accountants, TR No. 15. Our directors, officers and employees may not be members of the Statutory Committee, all members must be independent. Our By-laws require the Statutory Committee to hold meetings at least once per month.
The primary responsibilities of the Statutory Committee consist of monitoring our management’s compliance with the General Companies Law, our By-laws and the shareholders’ resolutions, and without prejudice to the role of external auditors, reporting to the shareholders at the General Annual Shareholders’ Meeting regarding the reasonableness of our financial information. Furthermore, the members of the Statutory Committee are entitled to: (i) attend Board of Directors and shareholders’ meetings, (ii) call Extraordinary Shareholders’ Meetings when deemed necessary and General Annual Shareholders’ Meetings when the Board of Directors fails to do so, and (iii) investigate written inquires initiated by the shareholders. The Statutory Committee does not control our operations or evaluate management’s decisions, which are the exclusive responsibility of the Board of Directors.
The aggregate remuneration paid by us during 2016 to the members of the Statutory Committee was approximately Ps. 1.1 million. We do not provide pension, retirement or similar benefits for syndics and alternate syndics.
The following table sets out the current membership of our Statutory Committee, each of whom was appointed at the Ordinary General Shareholders’ Meeting held on August 29, 2016, the year when each member was initially appointed and the year when their term expires:

Name | Member since | Term Expires | Position
Carlos Alberto Di Brico | 2016 | 2017 | Syndic
José María Zuliani | 2015 | 2017 | Syndic
Hugo Alejandro Carcavallo | 2016 | 2017 | Syndic
Gerardo Prieto | 2016 | 2017 | Alternate Syndic
Alejandro Mario Roisentul Wuillams | 2014 | 2017 | Alternate Syndic

The present principal occupations and employment history of our syndics are set forth below:
Carlos Alberto Di Brico received Business and Public Accounting degrees, both from the Universidad de Buenos Aires. He currently is member of the board of directors of Pampeana, Aristocrat Argentina PTY Limited and Plant Impact Argentina S.A. He held several management positions in Eveready Argentina S.A. between 1975 and 1995. From 1995 and 1998 he served as CFO of Stafford Miller Argentina S.A.. Between 2001 and 2013 he served as Emerson Argentina CFO. He was born on August 8, 1952.
José María Zuliani received a Law degree and a Master’s Degree in International Private Law from the Universidad Nacional de Rosario. In January 1996, he joined Refinería San Lorenzo S.A. where he served as head of the Legal Department. In November 2000, he joined Petrobras Argentina, where he held several managing positions. He left Petrobras Argentina in February 2009 after serving as its Gas and Energy Legal Affairs Manager. Between 2009 and 2010, he was appointed as our Legal Affairs Vice President. Between December 2012 and December 2015, he acted as consulting partner in the law firm Salaverri, Dellatorre, Burgio & Wetzler Malbrán. At present, he works as Legal Vice President in Energía Argentina S.A.. He was born on December 13, 1961.
85
Hugo Alejandro Carcavallo received a Law degree from the Universidad de Buenos Aires. Between 1988 and 2016, he worked as syndic of the General Office of the Comptroller. He also serves as syndic of Servicio de Radio y Televisión de la Universidad de Córdoba SA; Sistema Nacional de Medios Públicos SA (en liquidación) and represents to the Goverment in Monitoring Body of the Limay, Neuquén y Negro rivers. Previously, he acted as syndic of Administración General de Puertos SE; Lotería Nacional SE; Interbaires SA; Radio y Televisión Argentina SE; Educ.ar SE. He was born on October 6, 1958.
Remuneration Committee
We do not have a remuneration committee. Compensation decisions are made by our senior management.
Corporate Governance Practices; NYSE Requirements
See Item 16.G. “Corporate Governance.”
86
D.
Employees
The following table sets out the number of employees per department as of December 31, 2016, 2015 and 2014:

| Number of Employees as of December 31,
Department | 2016 | 2015 | 2014
General | 2 | 2 | 2
Administration, Finance and Services | 98 | 47 | 47
Human Resources | 21 | 18 | 20
Control and Corporate Governance(1) | - | 10 | 10
Legal Affairs | 10 | 11 | 12
Public and Regulatory Affairs | 6 | 8 | 7
Services(2) | - | 139 | 136
Safety and Environmental | 26 | 12 | 12
Business | 40 | 40 | 40
Internal Audit | 4 | 3 | 3
Operations | 719 | 640 | 627
Total | 926 | 930 | 916

(1)
Since October 2016, these employees are part of the Administration, Finance and Services Department.
(2)
Since October 2016, its staff has been allocated to the Administration, Finance and Services Department.
The following table sets out the number of employees according to geographical location as of December 31, 2016, 2015 and 2014:

| Number of Employees as of December 31,
Location | 2016 | 2015 | 2014
City of Buenos Aires | 239 | 247 | 244
Province of Buenos Aires | 392 | 390 | 390
Province of Chubut | 59 | 58 | 58
Province of La Pampa | 13 | 13 | 13
Province of Neuquén | 90 | 83 | 73
Province of Río Negro | 49 | 56 | 54
Province of Santa Cruz | 82 | 81 | 82
Province of Tierra del Fuego | 2 | 2 | 2
Total | 926 | 930 | 916

As of December 31, 2016, 2015 and 2014 the number of temporary employees working for us was 25, 16 and 20, respectively.
Under Argentine law, in the event of an unjustified dismissal of an employee, the employer is required to pay the terminated employee severance, the amount of which is regulated by the Argentine Labor Law (Section 245). The severance consists of payment of one month’s wages for each year of employment. The Argentine Labor Law stipulates limits to the severance payment; these limits affect only employees who earn high wages. However, the Supreme Court has ruled this severance payment limitation unconstitutional when it results in a loss of more than 33% for a terminated employee as compared to the unlimited amount.
The Supreme Court held the Law of Occupational Hazard Prevention unconstitutional as applied to contractors whose employees are injured in the course of employment, extending liability to the company that contracted with the contractor for the services.
Some courts have held that a company that contracts with a contractor for services is jointly liable for a contractor’s obligations to provide its workers and third-party service providers with social security benefits, wages, insurance, etc., even if the service for which the company contracts is not part of the company’s usual business.
87
The year 2016 presented an inflationary scenario that required numerous meetings with union representatives. We maintain a positive relationship with each of the employee unions with representation before our company. The fruits of this work were the agreements reached with each such union, which have been submitted to the national labor authority for approval and inclusion in existing collective bargaining agreements. Those agreements effectively prevented trade union conflicts and work stoppages.
We have begun contract negotiations with our labor unions to avoid conflicts in 2017, but the status of these negotiations is uncertain.
Currently, 29.0% of our workforce is affiliated with one of three national unions, each of which has representation in each of the provinces in which we operate.
E.
Share Ownership
The total amount of our Class B Shares held by our directors, Syndics and executive officers as of the date of issuance of this Annual Report is 348,673 shares.
Our directors, Syndics and executive officers, individually and together, beneficially hold less than 1% of our Class B Shares.
Item 7. Major Shareholders and Related Party Transactions
A.
Major Shareholders
The following table sets forth certain information with respect to each shareholder known to us to own more than five percent of our common stock as of March 31, 2017:

Name of Beneficial Owner | Number of Shares | Percent of Total Common Shares | Class
CIESA | 405,192,594 | 51.0000% | A
FGS | 183,618,632 | 23.1113% | B

Our controlling shareholder is CIESA, which holds 51% of our common stock and all of our Class A shares. Local and foreign investors hold the remaining shares of our common stock. CIESA is under co-control of: (i) Pampa Energía, which holds 10% of CIESA’s common stock, (ii) the CIESA Trust, which has a trust shareholding of 40%, and (iii) GIP, WST and PCT, who in the aggregate hold a combined 50% indirect ownership interest in the outstanding capital stock of CIESA, as follows: GIP holds 27.1%, WST holds 4.58% and PCT holds 18.32%.
The current ownership of CIESA is the result of the CIESA Acquisition which encompassed the following steps:
●
On July 27, 2016, Pampa Energía S.A. acquired from Petrobras Internacional Braspetro B.V. all the stock and voting rights of Petrobras Participaciones S.L., the holder of the 67.1933% of the capital stock and voting rights of Petrobras Argentina and, consequently, the indirect control of Petrobras Hispano Argentina S.A.
●
On the same day, (i) Pampa Energía and its subsidiary Pampa Participaciones S.A. sold all of the capital stock and voting rights of PEPCA to GIP by 51%, WST by 45.8% and PCT L.L.C. by 3.2% and (ii) Pampa Inversiones S.A. transferred its status as beneficiary of the Trust to GIP and PCT, in a proportion of 55% and 45%, respectively.
●
On January 17, 2017, CIESA was informed of the exercise of the swap option agreed among Pampa Energía, GIP, WST and PCT. Pursuant to such option, (i) GIP and PCT transferred to Petrobras Hispano Argentina S.A. their position as beneficiary of the CIESA Trust owning of 40% of the stock and voting rights of CIESA; and (ii) Pampa Energía and Petrobras Hispano Argentina S.A. transferred to GIP and PCT shares representative of 40% of the capital and voting rights of CIESA, while Pampa Energía kept a direct participation in CIESA of 10% of its capital and voting rights.
88
Pursuant to the Pliego and the terms of the 2014 Notes, CIESA may not reduce its shareholding below 51% of our share capital.
FGS owns 23.1% of our common stock. According to applicable regulations, any transfer or other action that limits, alters, cancels or modifies the destination, ownership, possession or nature of the shares held by the FGS which results in a decrease the FGS’s holdings in a manner inconsistent with applicable law, shall not be conducted without prior express authorization of the Argentine Congress, with the following exceptions:
●
Public takeover bids addressed to all holders of such shares at a fair price authorized by the CNV, under the terms of Chapters II, III and IV of Title III of Law 26,831.
●
Exchange of shares for other shares of the same or another company in the context of a merger, split or corporate reorganization processes.
As of March 31, 2017 a total of 31,631,857 ADRs, representing 158,159,285 Class B Shares (40.63% of the total Class B Shares) were held by approximately 30 registered holders. Because certain of these ADRs are held by nominees, the number of record holders may not be representative of the number of beneficial owners.
Shareholders’ Agreement
As a result of changes in the shareholding of our controlling company, CIESA, a shareholders’ agreement was signed on August 29, 2005 (the “Shareholders’ Agreement”). This agreement governs certain matters relating to shareholder participation in CIESA and in us. This agreement divides the CIESA shares into five classes that grant the shareholders different rights and obligations with respect to us and CIESA, mainly regarding the designation of the members of our Board of Directors and our Statutory Committee.
Transfers of CIESA and Our Shares. The Shareholders’ Agreement provides certain rights of first refusal and “tag-along” or co-sale rights in favor of PEPCA, in the event of a proposed transfer of CIESA shares. In particular, before any sale of shares to outside parties, the selling shareholder must offer to sell such shares to PEPCA at the price agreed upon in a written purchase proposal from the outside party seeking to purchase such shares. In the event that PEPCA does not choose to purchase the shares, it can opt to have a portion of its own shares (the allotted portion is dependent on the number of shares being sold) additionally included in the shares to be sold by the selling shareholder to the third party.
Under the Shareholders’ Agreement, the sale or transfer of any of our shares held by CIESA requires an affirmative vote of at least 60% of CIESA’s issued and outstanding common voting shares.
Election of Our Directors and Officers; Voting. The Shareholders’ Agreement also contains provisions governing the voting of shares held by CIESA, the election of the members of the Board of Directors and our Statutory Committee, the appointment of certain officers and certain other matters.
Our current Board of Directors consists of nine directors (see “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management”). Under the Shareholders Agreement, the CIESA directors designated by each of the Class A1, Class A2, Class B1 and Class B3 shareholders shall cause CIESA to nominate directors, alternate directors and syndics pursuant to the instructions given by each of such class of shareholders. Thus, indirectly, the Class A1 shareholders nominate two regular directors, two alternate directors, one regular syndic and one alternate syndic, the Class A2 shareholders nominate two regular directors and two alternate directors, the Class B1 shareholders nominate one regular director, one alternate director, one regular syndic and one alternate syndic and the Class B3 shareholders nominate one regular director, one alternate director, one regular syndic and one alternate syndic. The three remaining independent directors must be unanimously approved by all shareholders of CIESA.
Under the terms of the Shareholders’ Agreement, but subject to the shareholders’ overriding duty to protect our corporate interest and the common interest of all our shareholders, the CIESA- nominated directors shall vote unanimously in favor of the candidates nominated by the Class A1 shareholders for Chairman of the Board of Directors and CEO. The Vice-Chairman of our Board of Directors is nominated by the Class B3 shareholders.
89
Regarding the designation of our Statutory Committee members, Petrobras Argentina Group appoints two syndics and the same number of alternate syndics. The position of Chairman of our Supervisory Committee is held by one of the two syndics appointed by the Class A1 shareholders. The remaining syndic and alternate syndic are appointed by the Class B3 shareholders.
Mandatory tender
In accordance with the provisions of the Capital Markets Law and the rules of the CNV on mandatory tender offers for change of control and acquisition of significant indirect interest, on July 27, 2016, we were notified by GIP, WST and PCT of their intention to launch a tender offer to purchase up to a total of 194,651,345 outstanding Class B Shares of common stock, including Class B Shares represented by American Depositary Shares, representing up to 24.5% of our common stock, in cash at a price of Ps. 18.39 per Class B Share (payable in U.S. dollars) and Ps. 91.95 per ADS (payable in U.S. dollars) (the “Offer”).
The Offer was authorized in Argentina by the CNV on December 22, 2016. Subsequently, on December 30, 2016, GIP, PCT and WST launched the Offer in the US. The Offer was made concurrently in both the Buenos Aires and US stock markets. Following a number of extensions, the Offer expired on March 15, 2017. On that date, GIP, PCT and WST informed us that a total of 4,003 Class B Shares had been validly tendered in Argentina (representing approximately 0.0005% of our capital stock). With respect to the US Offer, a total of (i) 42,117.542762 Class B Shares underlying ADSs were validly tendered and (ii) no Class B Shares were validly tendered, representing approximately 0.0053% of our share capital. All conditions to the Offer in the U.S. having been satisfied, including the completion of the Offer in Argentina, GIP, PCT and WST accepted for purchase all ADSs and Class B Shares validly tendered and not withdrawn pursuant to the Offer.
B.
Related Party Transactions
Transactions with related parties are carried out in the ordinary course of business according to common practices. The terms of these transactions are comparable to those offered by or obtained from unaffiliated parties.
Technical Assistance Service Agreement
Pampa Energía is our technical operator, according to the approval of ENARGAS in June 2004, and subject to the terms and conditions of the Technical Assistance Agreement which provides that Petrobras Argentina is in charge of providing services related to the operation and maintenance of the natural gas transportation system and related facilities and equipment, to ensure that the performance of the system is in conformity with international standards and in compliance with certain environmental standards. For these services, we pay a monthly fee based on a percentage of our operating income. With the prior approval of ENARGAS and our Board of Directors, in October 2014, we and Pampa Energía approved the renewal of the Technical Assistance Agreement for a three-year term, beginning on December 28, 2014. For additional information see “Item 4. Our Information—B. Business Overview—Gas Transportation—Pipeline Operations—Technical Assistance Service Agreement.”
Commercial transactions
In the normal course of business, we enter into agreements with Petrolera Pampa SA and Pampa Energía, to transfer natural gas and richness. The price, which is denominated in U.S. dollars, is determined according to common practices.
Moreover, we, under certain agreements, process the natural gas in Cerri Complex and commercialize the liquids, render natural gas transportation services and other services to our related companies.
On November 1, 2016, Pampa Energía assigned the operation of the Río Neuquén area and its related contracts to YPF. Until that date, our transactions under those contracts were reported as transactions with related parties of our Other Services business segment.
Financial transactions. Loan agreement with Pampa.
On October 5, 2011, we granted a US$26 million loan to Pampa Energía S.A. Proceeds from the loan were used by Pampa to exercise the option contained in the Call Option Agreement. Additionally, to guarantee compliance with its obligations, Pampa Energía S.A. created a pledge on the rights that correspond to the arbitration actions of Ponderosa Assets LP and Enron Creditors Recovery Corp. against the Government acquired upon exercise of the option mentioned above. For more information, see “Item 10—Additional Information.—C. Material Contracts.”
90
After several extensions of the maturity of the loan agreement, on May 7, 2013, the Board of Directors approved the amendments of certain terms and conditions of the loan granted to Pampa Energía S.A., including:
i.
Extension of the expiration date until October 6, 2014, with the option to automatically renew for one additional period of one year. Due to this term, the expiration date was extended to October 6, 2015.
ii.
Prior to the expiration date, the loan must be paid or prepaid compulsorily by the assignment of rights and obligations to us of the claim assigned to Pampa Energía, mentioned in Note 16.a, from Ponderosa Assets LP and Enron Creditors Recovery Corp against Argentina in the event that, on or before the due date: (a) the 20% effective increase on the tariff schedule has been granted to TGS, under the provisions of the Transitional Agreement approved by Presidential Decree No. 1918/09 or (b) we have received: (x) the tariff adjustment as provided by the Adjustment Agreement initialed by us approved by the Board of Directors Meeting held on October 5, 2011, or (y) any other compensatory arrangements implemented by any mechanism or system of tariff revision in the future to replace those currently in force under the Public Emergency Law with an equivalent economic effect on our Company.
iii.
An applicable annual interest rate of 6.8% plus VAT.
After verifying compliance with clause ii) mentioned above, on September 30, 2015, our Board of Directors approved the acquisition of the Rights of the arbitration proceedings. For further information, see Note 16.a to our Financial Statements “Regulatory Framework - General framework of the regulated segment. - Acquisition of the Rights of Arbitration Proceedings.” According to IFRS, the Rights of the arbitration proceeding do not qualify to be recognized as an asset in our financial statements. Consequently, they were recognized and classified under “Other Operating (loss) / Income” in the Statement of Comprehensive Income for the year ended December 31, 2015. The net loss recognized amounted to Ps. 324.4 million.
As of December 31, 2016, the loan to Pampa Energía S.A. had been fully repaid by Pampa Energía assigning to TGS Pampa’s rights over the ICSID Claim as described under Item 4. “Our information—B. Business Overview—The Argentine Natural Gas Industry—Regulatory Framework—The Public Emergency Law and Renegotiation Agreement.”
The details of significant outstanding balances (stated in thousands of pesos) for transactions with related parties as of December 31, 2016, are as follows:
91
For additional information regarding revenues, costs, and outstanding balances relating to transactions with related parties as of and for the year ended December 31, 2016, see Note 19 to our Financial Statements included in this Annual Report on Form 20-F.
C.
Interests of Experts and Counsel
Not applicable.
Item 8. Financial Information
A.
Consolidated Statements and Other Financial Information
Our Financial Statements, which are set forth in the Index to Financial Statements in Item 18, are filed as part of this Annual Report.
Exports
For additional information regarding our exports see “Item 4. Our Information—B. Business Overview—Liquids Production and Commercialization.”
Legal and Regulatory Proceedings
In addition to the matters discussed below, we are a party to certain lawsuits and administrative proceedings arising in the ordinary course of business. Although no assurances can be given, we believe we have meritorious defenses, which we will assert vigorously to challenge all claims, and that possible liabilities from these claims will not have a material adverse effect on our consolidated financial position or results of operations.
Tax Claims
a) Exemption of the sales of Liquids in Turnover Tax
In the framework of the Tax Agreement subscribed by the Argentine Government and the Provinces in 1993, and as from the enactment of provincial Law No. 11,490, we required the Tax Bureau of the Province of Buenos Aires (“ARBA”) to exempt the sales of liquids from the turnover tax in its jurisdiction. In September 2003, the Tax Bureau of the Province of Buenos Aires, through Resolution No. 4,560/03, denied the exemption. In October 2003, we filed an administrative appeal with the Tax Court of the Province of Buenos Aires.
In February 2007, the Tax Court partially upheld our complaint. In this ruling, the Tax Court determined that the sale of ethane is exempt from the payment of the turnover tax, but that the sale of propane and butane in the domestic market, where propane and butane are not intended to be a raw material for an industrial activity, is not exempted.
For the previously mentioned, We filed an appeal contesting the Tax Court’s decision in May 2007 before the Province of Buenos Aires Court, alleging that propane and butane sales might be utilized for other uses different from petrochemical industry. On December 14, 2014, we were notified of the decision on appeal, which was unfavorable to us. On December 15, 2014, we filed an appeal against such decision. This appeal was partially accepted in April 2016, as the Chamber of Appeals decided that the exemption applies to the production of propane, butane, ethane and natural gasoline, but not to LPG.
Subsequently, we and ARBA filed an Extraordinary Appeal of Inapplicability of the law before the Supreme Court of Justice of the Province of Buenos Aires. As of the date of this Annual Report, a resolution on such appeal is pending.
On February 19, 2008, we were notified with a formal assessment notice of Ps. 3.6 million (not including interest) regarding the payment of the turnover tax corresponding to the period ranging from August 2003 to December 2004. On March 11, 2008, we filed a discharge within the Tax Bureau of the Province of Buenos Aires which was rejected and thus, we filed an appeal with the Tax Court of this province in January 2009. On November 23, 2013 the Tax Court partially upheld our complaint, as of the date of issuance of this Annual Report, the settlement of the debt is pending of approval. On March 16, 2015, we proceeded to pay the sum of Ps. 3.3 million corresponding to the fiscal periods between August 2003 and December 2004 in accordance with ARBA’s claims under the pending procedure.
92
On December 4, 2012, we were notified with a new formal assessment notice of Ps. 0.8 million regarding the payment of the turnover tax corresponding to the fiscal year 2006 related to the production of liquefied gas, butane, propane and natural gasoline. We unsuccessfully argued that the claim was time barred. Subsequently, on August 5, 2015, the Court of First Instance upheld our statute of limitations exception. The decision was appealed by ARBA and confirmed by the Administrative Court of Appeals in La Plata. ARBA then filed an Extraordinary Appeal of Inapplicability of Law which is currently pending resolution by the Supreme Court of the Province of Buenos Aires.
As of December 31, 2016, we maintained no provision of for this concept because according to our legal advisors opinion and given the recent decision of the Chamber of Appeals, our management believes that we would not have to pay the tax.
b) Turnover tax calculated on the natural gas price used by us as fuel to render its transportation services
We have interpretative differences with several provinces regarding the liquidation of the turnover tax calculated on the natural gas price used by us as fuel to render our transportation services. Several lawsuits have been initiated against our Company, which were concluded in a manner adverse to us. In this respect, after having paid the amounts claimed in previous years, we have begun a tax recovery appeal process to claim from the provinces of Santa Cruz and Tierra del Fuego a total amount of Ps. 8.4 million and Ps. 11.2 million, respectively.
In January 2016, we were notified of a new claim initiated by the Tax Bureau of the Province of Santa Cruz for fiscal periods May 2011 to July 2014 for an amount of Ps. 5.0 million. In March 2016, we filed a reconsideration petition rejecting the request of the claimant, which was rejected. In April 2016, we filed a hierarchical appeal before the Ministry of Economy and Public Works, which was also rejected. On May 24, 2016, Ps. 9.0 million were paid in concept of principal and interest. To recover the amounts paid, we did not submit an appeal, but we requested the pass-through to the tariff instead.
On September 9, 2016, the Supreme Court of Justice of the Province of Tierra del Fuego rejected the recurring appeal initiated by us for the recovery of Ps. 11.2 million paid in 2013. Thereafter, the administrative procedure has extinguished, so we have initiated the corresponding administrative process before ENARGAS to obtain the transfer of said amount in order to maintain the tax neutrality guaranteed in the license.
On October 5, 2016, we proceeded to pay the settlement made for the period April 2013-June 2014 for the amount of Ps. 18.6 million (including fines and interest) corresponding to the Province of Tierra del Fuego. In addition, during 2016, the same tax bureau assessed on us new tax settlements for an aggregate amount of Ps. 34.9 million plus taxes. We contested these settlements and the resolution is still pending.
On April 18, 2017, we entered into an agreement with the Province of Tierra del Fuego for the payment of Ps. 110.1 million corresponding to the settlement of the turnover tax for the period January 2013 to September 2016. As of March 31, 2017, this amount was fully provisioned in our accounting records.
As of December 31, 2016 and 2015, we recorded a provision of Ps. 207.7 million and Ps. 127.8 million, respectively, in respect of this contingency under the line item “Provisions”, which amounts were determined in accordance with the estimations of tax and interests, that would be payable as of such date, in case this contingency turns out unfavorably for us.
If our position regarding the turnover tax claims mentioned above fails and the turnover tax has to be paid, we are entitled to recover this amount by a transportation tariff increase as set forth the License. However, there can be no guarantee that such tariff increase would be granted, notwithstanding the terms of the License.
c) Action for annulment of the ENARGAS Resolutions
On April 11, 2012, we filed a judicial action before the National Court of First Instance in Federal Administrative Litigation No. 1 (the “Court”) in order to obtain the declaration of invalidity of Decree No. 2,067/8 and the Gas Charge Resolutions as well as the declaration of unconstitutionality of the Natural Gas Processing Charge. The trial stage of these proceedings has concluded and the allegations stage is currently underway
93
On July 5, 2012, the Court issued in our favor a precautionary measure that suspended the Charge on the terms set forth in the Resolutions. This decision was appealed in different opportunities by the National Government and as a result the term of the precautionary measure was limited to six months. However, at the end of such term, we were entitled to obtain a new precautionary measure for a similar period.
As a result, on March 22, 2017, after successfully obtaining various six-month extensions in our favor, a new extension of the precautionary measure valid until September 2017 was obtained. This measure prevents the National Government from claiming payment from us of the amounts resulting from the new value of the Charge for the period between November 2011 and March 2016.
In addition, on September 21, 2015, the Court rejected the request by ENARGAS to declare the prosecution abstract and the injunction without effect, decision which was confirmed by the National Court of Appeals on March 30, 2016. The National Court of Appeals thereafter rejected the extraordinary appeal filed by the National Government against such decision. .
On March 28, 2016, the Ministry of Energy issued Resolution No. 28/2016, which instructs the ENARGAS to take all the necessary measures to reduce to zero the Natural Gas Processing Charge since April 1, 2016. Since that date, we have not been required to pay the Natural Gas Processing Charge.
Our Management believes we have sufficient valid arguments to defend our position, and thus, we have not recorded the increase of the charge for natural gas consumptions from the date of obtaining the injunction until April 1, 2016, effective date of Resolution No. 28/2016. In the event this injunction had not been obtained, the impact of the Resolutions for the year ended December 31, 2016 taking into account the possibility of carryforward of the charge to the sales price of the product, would have implied a net loss of Ps. 52.1 million. Meanwhile, the accumulated impact on the retained earnings since obtaining the injunction would have involved a reduction effect of Ps. 601.6 million.
d)
Recovery action of VAT and income tax
On October 9, 2008, we signed the 2008 Transitional Agreement with UNIREN that contemplated a tariff increase of 20%, which would be retroactively applicable to September 1, 2008. On December 3, 2009, the Executive Branch ratified this transitional agreement through the Presidential Decree No. 1,918/09. By means of this decree, we will be able to bill the tariff increase to our clients as soon as ENARGAS publishes the new tariffs schedule and sets the methodology to bill the retroactive effect. Finally, this administrative act did not become effective and therefore in September 2010, we filed an acción de amparo (a summary proceeding to guarantee constitutional rights). Due to the passage of time since the enactment of Decree No. 1918/09, on December 16, 2010 our Board of Directors resolved to discontinue the recognition of the tariff increase revenue and to reverse the credit provision of the tariff increase revenue already accrued in the year ended December 31, 2009. The reversal of the tariff increase does not imply any waiver of our rights resulting from Decree No. 1,918/09.
On May 24, 2013, we filed a tax recovery appeal with respect to the income tax and VAT credits generated by the reversal of the tariff increase credit mentioned above. Our claim was not heard after three months, so on October 9, 2013, we filed an appeal before the Federal Tax Bureau. As of the date of this Annual Report, the case is pending resolution.
The total amount claimed by us amounted to Ps. 69.4 million plus compensatory interests. The outstanding balance of this credit has been valued at its amortized cost and it has been included in “Other non-current receivables.”
e)
Turnover tax withholding in the Province of Buenos Aires
ARBA claims a total of Ps. 4.9 million (without fine or interest) for our alleged omissions as withholding and collection agent of the turnover tax corresponding to the period July 2009 - June 2011. We submitted to ARBA various elements of evidence that support our claim of reducing the amount claimed substantially. As of the date of this Annual Report, the Tax Court has not resolved the issue.
94
At As of December 31, 2016, we recorded a provision for these items of Ps. 6.9 million. The amount was determined based on the estimated tax and interest that would be payable at that date in the event that the final decision with respect to the claim is unfavorable to us.
Notwithstanding the foregoing, in March 2017, we partially canceled the debt claimed by ARBA as an agent of withholding and collection, through adherence to the payment plan offered by the Province of Buenos Aires through Law 14,890. Adherence to this payment plan allowed for the partial cancellation of compensatory interest and all of the fines and charges claimed by ARBA.
In light of this event, as of the date of issuance of this Annual Report there are only two claims pending in connection with our alleged failure to act as a collection agent during the years 2009 and 2010, in the amount of Ps. 2.1 million (without fines and interests).
Other Litigation
a)
Others
In addition to the matters discussed above, we are a party to certain lawsuits and administrative proceedings which involve taxation, labor claims, social security, administrative and others arising in the ordinary course of business. Our Management and our legal advisors estimate that the outcome of these differences will not have significant adverse effects on our financial position or results of operations. As of December 31, 2016 and 2015 the total amount of these provisions amounted to Ps. 6.5 million and Ps. 7.3 million, respectively.
b)
Environmental matters
We are subject to extensive environmental regulations in Argentina. Our management believes that our current operations are in material compliance with applicable environmental requirements, as currently interpreted and enforced. We have not incurred in any material environmental liabilities as a result of our operations to date. As of December 31, 2016 and 2015 the total amount of these provision amounted Ps. 0.1 million, respectively.
c)
Arbitral claim
On May 8, 2015, the Secretariat of the International Court of Arbitration of the International Chamber of Commerce notified TGS regarding the request for arbitration initiated by PAE and Pan American Sur SA (the "applicants") related to the execution of three natural gas processing contracts between the applicants and TGS (the “Agreements”). On April 4, 2016, we were notified of the beginning of the corresponding demand, to which we responded on August 17, 2016. On March 16, 2017 the applicants submitted their response to the arguments filed by us previously.
According to the demand, the applicants allege breach of contracts during the period between February 2006 and February 2016, that would have resulted in a lower allocation of the products obtained (the “Products”), which shortfall at March 31, 2017 is claimed to be equal to US$ 134 million without interest or US$ 306.3 million, including interest (the “Claim”).
We consider that the Claim contains inconsistencies resulting from misinterpretations of the contractual provisions and an incorrect application of the mechanisms for calculating the allocation of the Products, and therefore we believe that the amount claimed is not supportable. Thus, we, jointly with our legal counsel, believe we have defenses that will allow us to refute the Claim vigorously.
Given the complexity the Claim and the remaining stages of the arbitration process, as of the date of issuance of this Annual Report, we do not have sufficient elements to make an estimate regarding the outcome of this proceeding. We have not recorded any provision in respect of the Claim.
Dividend Distribution Policy
Our Board of Directors does not have a formal, written dividend distribution policy. Each year, our Board evaluates whether to submit a distribution proposal to the shareholders’ meeting. In making this evaluation, the Board of Directors considers our financial results, our liquidity, our future financing needs and other information, including economic and financial projections for both TGS and the economy as a whole. See “Item 3. Key Information—A. Selected Financial Data—Dividends.”
95
According to the 2017 Transitional Agreement, we cannot make any dividend payment without the prior authorization of the ENARGAS, until the final tariff schedule is in force or the 2017 Integral Renegotiation Agreement is ratified by the Executive Branch. See “Item 4. Our Information—B. Business Overview—Natural Gas Transportation.”
B.
Significant Changes
No undisclosed significant change has occurred since the date of our Financial Statements.
Item 9. The Offer and Listing
A.
Offer and Listing Details
The table below shows the high and low market prices of the Class B Shares on the BYMA (formerly Bolsa de Comercio de Buenos Aires or BASE), stated in historical Argentine pesos and of the ADRs on the NYSE, stated in U.S. dollars, for each of the last five fiscal years.

| NYSE (in US$) | BYMA (in Ps.)
Years | High | Low | High | Low
2012 | 3.08 | 1.23 | 3.02 | 1.80
2013 | 2.77 | 1.55 | 5.23 | 2.22
2014 | 3.80 | 1.83 | 10.40 | 3.65
2015 | 6.99 | 3.01 | 20.20 | 7.55
2016 | 9.02 | 5.33 | 29.60 | 13.90

The table below shows the high and low market prices of the Class B Shares on the BYMA, stated in historical Argentine pesos and of the ADRs on the NYSE, stated in U.S. dollars, for each full quarterly period within the two most recent fiscal years.

| 2016 | 2015
| NYSE (in US$) | BYMA (in Ps.) | NYSE (in US$) | BYMA (in Ps.)
Quarters | High | Low | High | Low | High | Low | High | Low
First Quarter | 6.79 | 5.33 | 21.20 | 13.90 | 5.94 | 3.01 | 14.10 | 7.55
Second Quarter | 6.82 | 6.04 | 20.00 | 16.60 | 5.62 | 4.25 | 13.45 | 10.40
Third Quarter | 6.87 | 5.93 | 21.50 | 17.60 | 4.75 | 3.82 | 12.85 | 10.10
Fourth Quarter | 9.02 | 6.70 | 29.60 | 20.60 | 6.99 | 4.03 | 20.20 | 11.00

The table below shows the high and low market prices of the Class B Shares on the BYMA, stated in historical Argentine pesos and of the ADRs on the NYSE, stated in U.S. dollars, within the six most recent months.

| NYSE (in US$) | BYMA (in Ps.)
Months | High | Low | High | Low
November 2016 | 8.07 | 6.70 | 25.60 | 20.60
December 2016 | 9.02 | 8.04 | 29.60 | 25.10
January 2017 | 10.46 | 9.02 | 32.40 | 29.60
February 2017 | 11.99 | 10.65 | 37.30 | 33.45
March 2017 | 14.22 | 11.73 | 44.00 | 36.90
April 2017 (through to April 21,2017) | 16.78 | 14.90 | 51.50 | 45.25

B.
Plan of Distribution
Not Applicable.
C.
Markets
The Argentine Securities Market. In Argentina, the oldest and largest exchange is the BASE, founded in 1854. The BASE was the exchange on which the majority of equity trades in Argentina were executed. BYMA is the result of an alliance between BASE and MERVAL, dated 2013. From April 17, 2017 all the shares previously listed in the MERVAL were transferred to BYMA without any further consequence for listed companies.
96
As of December 31, 2016, the market capitalization of shares of the 99 companies (excluding mutual funds) listed on the BASE was approximately US$282,930 billion. At the same time, the market capitalization of the domestic companies totaled US$63,400 billion.
Securities may also be listed and traded through over-the-counter market brokers who are linked to an electronic reporting system. The activities of such brokers are controlled and regulated by the Mercado Abierto Electrónico S.A. (the “MAE”), an electronic over-the-counter market reporting system that functions independently from the BYMA. Under an agreement between the BASE and the MAE, trading in equity and equity-related securities is conducted exclusively on the BASE (now BYMA) and trading in corporate debt securities is conducted on both the MERVAL/BASE (now BYMA) and the MAE. Trading in Government securities, which are not covered by the agreement, may be conducted on either or both of the BYMA and the MAE. The agreement does not extend to other Argentine exchanges.
Changes to the legal framework of securities trading have been introduced, permitting issuance and trading of new, non-bank financial products in the Argentine capital markets, including commercial paper, new types of corporate bonds, futures and options. The Government deregulated brokerage fees and eliminated transfer and stamp taxes on securities transactions in November 1991.
The Capital Market Law, enacted in December 2012, sets out the rules to govern capital markets, its players, and the securities traded therein subject to the CNV regulation and monitoring.
Almost all the provisions of the former Executive branch Decree No. 677/2011 have been incorporated in the Capital Market Law. The Capital Market Law provides rules and provisions guided by the following goals and principles:
●
Promoting the participation of small investors, union associations, industry groups and trade associations, professional associations and all public savings entities in the capital market, particularly encouraging mechanisms designed to promote domestic savings and channel such funds towards the development of production;
●
Strengthening mechanisms for the protection of and prevention of abuses against small investors and for the protection of consumers’ rights;
●
Promoting access of small and medium-sized companies to the capital market;
●
Fostering the creation of a federally integrated capital market through mechanisms designed to achieve an interconnection of computer systems from different trading markets, with the use of state-of-the-art technology;
●
Encouraging simpler trading procedures available to users to attain greater liquidity and competitiveness in order to provide the most favorable conditions for the implementation of transactions.
The CNV is a self-administered agency of the Government with jurisdiction covering the territory of Argentina, governed by the provisions contained in the Capital Market Law, and the CNV Regulations among other related statutory regulations. The relationship of the CNV and the Argentine Executive is maintained through the MEF, which shall hear any appeals filed against decisions made by the CNV, notwithstanding any other legal actions and remedies contemplated in the Capital Market Law.
The CNV supervises and regulates the authorized markets in which the securities and the collective investment products are traded, the corporations authorized in the public offer regime, and all the other players authorized to operate in the public offer regime, as the registered agents, the trading agents, the financial advisors, the underwriters and distributors, the brokers, the settlement and clearing agents, the managers of collective investment products, the custodians of collective investment products, the collective depositories, and the risk rating agencies, among others.
97
The BYMA Pursuant to the Capital Market Law, the CNV has authorized nine stock markets since September 2014. BYMA is a private entity whose stock capital is composed of publicly traded shares. On December 29, 2016, BYMA was authorized by CNV as a market, Registry No. 639. BYMA’s main functions comprise trading as well as performing as a Clearing House and Central Counterparty (CCP) in the settlement and monitoring of transactions carried out through its Trading Systems.
BYMA’s main functions under the Capital Market Law are as follows:
a)
issue regulations that allow stock brokers and brokerage firms authorized by the CNV to perform their duties;
b)
authorize, suspend and cancel the listing and/or trading of negotiable securities pursuant to the provisions set forth in its bylaws;
c)
issue regulations that ensure veracity in the record of prices and trades;
d)
issue the regulations and policies deemed necessary to ensure transparency in the trades conducted by member stock brokers;
e)
fix the margins that member brokers are to comply with for each type of trade BYMA guarantees; and
f)
set up Arbitration Tribunals.
These powers may be exercised by BYMA or delegated, in whole or in part, to other qualified entities. Accordingly, BYMA has entered into an agreement with BASE to enforce items b) and f), due to the fact that BASE has been authorized to operate as a qualified entity, pursuant to Capital Market Law.
Investors in the Argentine securities market are primarily individuals, companies and institutional investors consisting of a limited number of mutual funds. The last information available to us regarding the Argentine stock market is set forth in the table below:

| 2012 | 2013 | 2014 | 2015 | 2016
Market capitalization ($ in billions) | 2,314 | 3,356 | 3,893 | 3,292 | 4,495,8
Number of listed companies | 107 | 103 | 101 | 99 | 99

Source: Data published by the Instituto Argentino de Mercado de Capitales.
D.
Selling Shareholders
Not applicable.
E.
Dilution
Not applicable.
F.
Expenses of the Issue
Not applicable.
Item 10. Additional Information
A.
Share Capital
Not applicable.
B.
Memorandum and Articles of Association
Information contained in Item 14 of TGS’s Registration Statement on Form F-1 (Registration No. 33-85178) is hereby incorporated by reference.
2014 By-laws amendments
98
The Ordinary and Extraordinary Shareholders Meeting held on April 30, 2014 approved certain amendments of our by-laws. The purpose of these amendments was to provide our administration with greater flexibility to manage as well as adapt the By-laws to the requirements of the Capital Market Law. Below you will find a description of the amendments to our By-laws:
●
Subject to the approval of the Annual Shareholders Meeting, the number of members of the Board of Directors may vary between nine and eleven directors and an equal number of alternate directors.
●
The Board of Directors meetings may be held not only with the members present, but also with the members communicating remotely. Under our By-laws, all members will have the same power to vote on a proposal and will be considered to constitute a quorum.
●
The Au dit Committee duties, which are in line with those requirements stipulated in the Capital Market Law, were incorporated to our By-laws. For additional information regarding Audit Committee duties, see “Item 6. Directors, Senior Management and Employees—C. Board Practices.—Audit Committee.”
The amended By-laws approved by the 2014 Shareholders Meeting held on April 30, 2014 were filed with our Annual Report on Form 20-F for the fiscal year ended December 31, 2015 and are incorporated by reference in this Annual Report as Exhibit 1.2.
The 2017 Shareholders Meeting will consider amendments to article 4 (an extension of our Corporate Purpose, in order to allow us to act in the generation and commercialization of electric energy and render services to the hydrocarbon sector) and article 30 (constitution of an Executive Committee) of our By-laws.
C.
Material Contracts
Debt Obligations
2007 Notes
On May 14, 2007, we issued the 2007 Notes in aggregate principal amount of US$ 500,000,000 under our 2007 Program. The Program provides for the issuance of up to a maximum principal amount of US$ 650 million in notes, and was authorized by resolutions of an extraordinary meeting of shareholders dated December 21, 2006, and by resolutions of our Board of Directors adopted on January 4, 2007, March 30, 2007 and April 20, 2007. The program was also authorized by the CNV on January 18, 2007.
During 2016, we paid the principal amortization due on May 14, 2016, and on November 14, 2016, we redeemed the outstanding 2007 Notes in full, for total principal cancellations of US$ 123,283,000.
2014 Notes
On February 11, 2014, we issued the 2014 Notes in aggregate principal amount of US$255,451,506 under our 2014 Program in exchange for a portion of the outstanding 2007 Notes. The Program provides for the issuance of up to a maximum principal amount of US$ 400 million in notes, and was authorized by resolutions of an extraordinary meeting of shareholders dated April 25, 2013, and by resolutions of our Board of Directors adopted on July 23, 2013 and December 23, 2013. The program was also authorized by the CNV on January 3, 2014.
The scheduled maturity date of the 2014 Notes is May 14, 2020. The 2014 Notes accrue interest at an annual fixed rate of 9.625%, payable semi-annually. Principal amortization payments are required commencing on May 14, 2014 with the following schedule: 25% on May 14, 2014, 25% on May 14, 2018, 25% on May 14, 2019 and 25% on May 14, 2020.
We are also permitted to redeem the 2014 Notes in whole, but not in part, at a price equal to 100% of the principal amount outstanding if, as a result of any change in, or amendment to, the laws or regulations of Argentina or any governmental authority thereof or therein having power to tax or as a result of any change in the application or official interpretation of such laws or regulations, we become obligated to pay additional amounts with respect to the 2014 Notes and we cannot avoid such obligation by taking reasonable measures available to us.
99
In the event that the Republic of Argentina, directly or indirectly, through any one or more controlled entities, comes to own shares representing more than 50% of the voting power of all our shares, holders of the 2014 Notes are entitled to require us to purchase all or a portion of the 2014 Notes at a price in cash equal to 101% of the principal amount of the 2014 Notes so purchased. The 2014 Notes are general, direct, unsecured and unsubordinated obligations and rank at all times pari passu in all respects, without any preference among themselves, with all of our other present and future unsecured and unsubordinated obligations, other than obligations preferred by statute or by operation of law.
Covenants
We are subject to several restrictive covenants under the terms of the 2014 Notes, which include, among others, the following:
●
limitations on our ability to terminate our License or take any action that, in our reasonable opinion, would result in the termination of the License. We may not agree to amend or waive any terms of the License unless such amendment or waiver would not, in our reasonable opinion, adversely affect (i) our ability to meet our obligations under the 2014 Notes on a timely basis or (ii) any material rights or interest of the trustee or the holders under the indenture or the 2014 Notes;
●
a requirement that we not enter into or consent to any amendment, restatement or modification of the Technical Assistance Service Agreement or any successor agreement thereto, other than an amendment, restatement or modification that is not materially adverse to us and our subsidiaries, taken as a whole;
●
a limitation on our and our subsidiaries’ ability to create liens on our property, assets or revenues, other than certain permitted liens;
●
a limitation on our and our subsidiaries’ ability to incur additional indebtedness unless we meet certain financial ratios and no event of default exists, other than certain permitted indebtedness;
●
a limitation on our and our subsidiaries’ ability to pay dividends and make certain other restricted payments and investments with respect to any fiscal year or fiscal semester unless: (i) no event of default or potential event of default shall have occurred and be continuing and (ii) immediately after giving effect to such restricted payment, we would be able to incur at least US$1.00 of additional indebtedness pursuant to the limitation on indebtedness covenant;
●
limitations on our and our subsidiaries’ ability to enter into sale-leaseback transactions;
●
limitations on our and our subsidiaries’ ability to enter into a transaction with an affiliate, unless such transaction is on terms that are not materially less favorable to us or our subsidiary than we or such subsidiary would obtain in a comparable arm’s-length transaction with a non-affiliate;
●
a limitation on our and our subsidiaries’ ability to sell our assets; and
●
a limitation on our and our subsidiaries’ ability to enter into a merger, consolidation or similar transaction.
Events of Default
The 2014 Notes contain the following events of default, among others:
●
default in the payment of principal, interest or any other amount due under the terms of the 2007 Notes after a specified grace period;
●
breach of obligations contained in the 2007 Notes after a specified cure period;
●
the occurrence of an event of default under our other debt obligations;
100
●
the occurrence of certain bankruptcy events or enforcement proceedings;
●
enforcement by any creditor of any mortgage, charge, pledge, lien or other encumbrance created or assumed by us or one of our subsidiaries exceeding US$10 million;
●
failure to obtain certain required governmental authorizations when required or if any such authorizations are rescinded, terminated, lapse or cease to be in full force and effect; and
●
the occurrence of certain material adverse events with respect to our License, such as the revocation, suspension for a period of greater than 120 days or termination of the License.
Financial lease with Pampa Energía
On August 11, 2016, we entered into a financial lease agreement with Pampa Energía. Starting on such date and for a term of nine years and 11 months (the “Leasing Payment Term”), Pampa Energía is leasing to us certain assets for an aggregate value of Ps. 750.4 million, which we utilize in our Other Services business segment. Monthly lease payments to Pampa Energía amount to US$ 0.6 million, before taxes.
Within thirty days of the expiration date of the Leasing Payment Term, we may exercise the option to purchase the assets leased to us under the agreement. The purchase option price will be equivalent to US$ 0.6 million before taxes.
For additional information, see Note 12 to our Financial Statements included under “Item 18. Financial Statements.”
D.
Exchange Controls
On December 17, 2015, Argentina’s new government, which took office on December 10, 2015, announced important changes to the existing foreign exchange regulations. Its main objective was to relax several restrictions imposed on the foreign exchange market in recent years.
New measures were taken after the issuance of Communication “A” 5850 by the BCRA. The following new measures have been enacted through published rules:
●
Payments abroad for imports of goods and services can now be made without any limit through the foreign exchange market. This provision applies to new imports. For outstanding debts as of December 16, 2015, for imports of goods and services, the Government established a payment schedule, with certain restrictions until June 2016.
●
The purchase of foreign currency by individuals and companies for treasury purposes, including investments abroad (which had been significantly limited in recent years), was reinstated, with a cap of US$2 million per month.
●
The mandatory one-year deposit (30%) on the incoming currency into Argentina (applicable to loans granted by foreign parties, as well as other transactions) was eliminated.
●
Financial loans are not required to be settled in Argentina (the requirement to provide evidence showing the inflow of funds, however, remains in effect for the subsequent payment of principal and interest through the foreign exchange market); the minimum term for repayment was reduced from 365 to 120 days and advance payment will also be allowed (as long as the 120-day term is respected).
●
The regulations establishing controls on export prepayments and prefinancing transactions (such as providing evidence for outright purchases, shipment terms and indebtedness caps, among others) were eliminated.
In addition, the Argentine authorities enacted a local withholding tax system applicable to dollar future agreements arranged during the previous months in which restrictions on the foreign exchange market were in force. In this sense, a withholding of 35% (creditable against income tax) will apply on those earnings obtained by the buyers of U.S. dollar future contracts. This new withholding tax is applicable to the currency forward agreements hold by us in order to reduce our exposure to foreign currency as it has been explained previously.
101
On February 4, 2016, the BCRA issued Communication “A” 5899 relaxing certain rules related to the inflow and outflow of foreign currency, including the possibility of receiving foreign currency funds in a bank account in Argentina with no need to convert such foreign currency into Argentine Pesos in the Foreign Exchange Market, among other relevant changes.
Under Communication “A” 6037, dated August 8, 2016, no further authorization is required for residents and non-residents to have access to the local exchange market and there is no amount or matter that limits the access thereto. In addition, the term for exporters to repatriate funds collected abroad was increased to 10 years or 3650 days from collection of the funds.
Import of goods and services
On December 21, 2015, Argentina eased import licensing requirements through the issuance of the Comprehensive Import Monitoring System (Sistema Integral de Monitoreo de Importaciones (“SIMI”)) which replaced the (Declaración Jurada Anticipada de Importación, or sworn advance import declaration (“DJAI”)) system for managing and processing import licences. Through SIMI, the government will issue automatic licenses for imports for consumption within Argentina of products under virtually all tariff lines.
The AFIP is the responsible agency for controlling these declarations and must render its decision in connection with their approval within 10 days. Once approved, the declarations are effective for 180 days.
In addition to the newly implemented SIMI, the National Government has replaced the repealed DJAI system with a system of LAPIs (prior automatic import licenses) and LNAs (prior non-automatic import licenses).
Imports for consumption of goods from every tariff heading (i.e., the number used to identify goods imported or exported) of the Mercosur’s common nomenclature (NCM) is subject, under the new regulation, to the approval of prior automatic import licenses, except for those headings established therein.
Permanent imports of the goods included in Exhibits II to XVII of resolution No. 5/2015 are subject to the prior non-automatic import licenses system. Such goods include toys, thread, woven clothes, motorcycles, tires, paper, metalwork, textile and chemical products, as well as optics, photography, filmmaking and medical-surgical tools and machinery.
Import licenses are effective for 90 days as of the date of approval through the SIMI.
With these new regulations, the new Government aims to optimize and facilitate foreign trade operations, which is an area that has been subject to several restrictions and delays in the last years.
Under Communication “A” 6037, dated August 8, 2016, but for certain exceptions, no further authorization is required for residents and non-residents to have access to local exchange market and there is no amount or matter that limits the access thereto.
Money Laundering
Law No. 25,246, as amended, categorizes money laundering as a crime, defining it as the exchange, transfer, management, sale or any other use of money or other assets obtained through a crime, by a person who did not take part in such original crime, with the potential result that such original assets (or new assets resulting from such original assets) appear as if obtained through legitimate means, provided that the aggregate value of the assets involved exceed in the aggregate (through one or more related transactions) Ps. 50,000.
In addition, Law No. 25,246 created the Financial Information Unit, which is charged with the handling and the transmission of information in order to prevent the laundering of assets originating from:
●
Crimes related to illegal trafficking and commercialization of narcotics;
●
Crimes related to arms trafficking;
●
Crimes related to the activities of an illegal association as defined in Article 210 bis of the Penal Code;
●
Illegal acts committed by illegal associations organized to commit crimes with political or racial objectives;
102
●
Crimes of fraud against the Public Administration;
●
Crimes against the Public Administration;
●
Crimes of underage prostitution and child pornography; and
●
Crimes related to terrorism financing.
Law No. 25,246 assigns information and control duties to certain private sector entities, such as banks, agents, stock exchanges and insurance companies, according to the regulations of the Financial Information Unit, and for financial entities, the BCRA. These regulations apply to many Argentine companies. These obligations consist mainly of maintaining internal policies and procedures aimed at preventing money laundering and financing of terrorism, especially through the application of “know your customer” policies.
On May 8, 2005, the CNV enacted Resolution No. 554, which establishes that broker-dealers and other intermediaries that are subject to its supervision can only take part in securities transactions if they are ordered or executed by parties that are registered or domiciled in jurisdictions that are not included in the list of tax havens included in Decree No. 1,344/98. Furthermore, the Resolution provides that securities transactions made by parties registered or domiciled in jurisdictions that are not included in such list, but that act as intermediaries of securities markets under the supervision of an agency similar to the CNV, are allowed only if such agency has signed a memorandum of mutual understanding with the CNV. Regarding the listed companies under the supervision of the CNV, Resolution No. 554 states that they shall identify any entity or individual (whether or not a shareholder at that time) that makes a capital contribution or a significant loan, and comply with the same obligations established in the previous paragraph for the brokers-dealers and other intermediaries.
Pursuant to Decree 360/2016 dated February 16, 2016, the Argentine government created the “National Coordination Program for Combating Money Laundering and Terrorist Financing” within the purview of the Ministry of Justice and Human Rights. Its purpose is to rearrange, coordinate and strengthen the anti-money laundering and anti-terrorist financing system at national level, in light of the actual risks that could impact the Argentine territory and the global requirements to be met under the scope of the obligations and international recommendations of the United Nations and FATF standards.
Moreover, Law No. 27.260 introduced certain tax modifications and a new regime for residents to disclose undeclared assets, and also established that the Financial Information Unit would now be within the purview of the Ministry of Economy and Finance.
E.
Taxation
General
The following is a general summary of certain Argentine and United States federal income tax matters that may be relevant to the ownership and disposition of ADSs or Class B Shares. The summary describes the principal tax consequences of the ownership and disposition of ADSs or Class B Shares, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a holder of ADSs or Class B Shares. Investors should consult their own tax advisors as to the tax consequences of the acquisition, ownership and disposition of common shares or ADSs.
The summary is based upon tax laws of Argentina and the United States and regulations thereunder as in effect on the date of this Annual Report, which are subject to change, possibly on a retroactive basis. In addition, the summary is based in part on representations of the Depositary and assumes that each obligation provided for in or otherwise contemplated by the deposit agreement or any other related document will be performed in accordance with its terms. Holders of ADSs or Class B Shares should consult their own tax advisors as to the United States, Argentine or other tax consequences of the acquisition, ownership and disposition of the ADSs or Class B Shares in their particular circumstances.
103
Argentine Taxes
Income tax. Law No. 26,893, enacted on September 12, 2013 and published in the Official Gazette on September 23, 2013, introduced several changes to Income Tax Law No. 20,628, including the derogation of Section 78 of Decree No. 2,284/1991, which had provided that foreign holders with no permanent establishment in Argentina were exempt from paying income tax on the capital gains arising from the sale or other disposition of Class B shares or ADSs. The scope of the law was clarified by means of Decree No. 2,334/14.
The changes introduced by Law No. 26,893 are effective from the date of publication of such law in the Official Gazette and are applicable to taxable events consummated from September 23, 2013 onwards.
Taxation of Dividends. Until Law No. 26,893 became effective, dividends of our cash, property or capital stock paid or distributed to holders of Class B Shares or ADSs were generally not subject to income tax withholding. However, according to Law No. 25,063, published on December 30, 1998, the portion of cash or other type of dividend distribution, exceeding our accumulated net income at year end (if any) is subject to a 35% withholding tax as a sole and definite payment.
In addition, as of the effective date of Law No. 26,893, the gross amount of dividends we distribute (other than stock dividends) in respect of Class B Shares or ADSs are subject to tax at a rate of 10%. This tax is imposed on dividends distributed to overseas beneficiaries through withholding. This dividend tax has been repealed by Law No. 27.260 for dividend payments since July 22, 2016.
Taxation of Capital Gains. Under Law No. 26,893, any income originating from the sale, exchange, disposition or transfer of our Class B Shares or ADRs is generally taxable, as described below. However, income to resident individuals from the sale, exchange, disposition or transfer of Class B Shares or ADSs that are listed on securities exchanges or markets and/or authorized to be offered to the public, is exempt from such tax.
Resident individuals
Capital gains obtained by resident individuals from the sale of our Class B Shares or ADR not listed on securities exchanges or markets or not authorized to be offered to the public are subject to tax at a rate of 15%.
Losses arising from the sale, exchange or other disposition of our Class B Shares or ADRs can be applied only to offset such capital gains arising from the sale, exchange or other disposition of these securities.
Foreign holders
As of the effective date of Law No. 26,893 on September 23, 2013, a non-resident holder who sells, exchanges or otherwise disposes of our Class B Shares or ADRs is subject to a capital gains tax at a rate of 15%. This tax is assessed, at the option of the seller, on either (i) 90% of the gross proceeds of such sale, exchange or disposition, or (ii) the net gain from such sale, exchange or disposition, as calculated under the relevant income tax law. However, when both the purchaser and the seller of Class B Shares or ADSs are non-residents, the purchaser of the shares or ADRs is liable for payment of this tax. Accordingly, when both the purchaser and the seller of Class B Shares or ADRs are non-residents, the purchaser is required to pay the capital gains tax in addition to the purchase price of the Class B Shares or ADSs. There is currently no guidance under Argentine law with respect to how a seller of Class B Shares or ADSs may determine the residence of the purchaser.
Holders are urged to consult their tax advisors regarding the applicability of Law No. 26,893 to the sale or acquisition of our Class B Shares or ADRs.
Argentine entities
Capital gains obtained by Argentine entities (generally entities organized or incorporated under Argentine law, certain traders and intermediaries, local branches of non-Argentine entities, sole proprietorships and individuals carrying on certain commercial activities in Argentina) derived from the sale, exchange or other disposition of Class B Shares or ADSs are subject to income tax at the rate of 35%.
104
Losses arising from the sale, exchange or other disposition of Class B Shares or ADSs can be applied only to offset such capital gains arising from the sale, exchange or other disposition of these securities.
Tax on Personal Property (Individuals). The Argentine Tax authority has introduced some amendments to the personal property tax law. In accordance with Law No. 25,585, the personal tax corresponding to the ownership of securities issued by entities domiciled in Argentina, whose direct owners are individuals domiciled in Argentina or abroad and entities domiciled abroad, will be liquidated and deposited by the entity that has issued such securities. The applicable rate is 0.50% on the equity value according to the last Financial Statements as of each respective fiscal year. Law No. 25,585 presumes that securities whose holders are entities domiciled or located abroad indirectly belong to individuals domiciled abroad.
We are responsible for depositing such tax and have the right to recover such amount from holders, even withholding and/or liquidating the securities which caused such tax payment. This Amendment was effective starting fiscal year 2002.
VAT. The sale, exchange or other disposition of ADSs or Class B Shares and the distribution of dividends are exempted from VAT.
Transfer Taxes. The sale, exchange or other disposition of ADSs or Class B Shares is not subject to transfer taxes.
Purchase or Sale of Foreign Currency. There is no tax on the purchase or sale of foreign currency.
Deposit and Withdrawal of Class B Shares in Exchange of ADSs. No Argentine tax is imposed on the deposit or withdrawal of Class B Shares in exchange for ADSs.
Other Taxes. There are no Argentine inheritance or succession taxes applicable to the ownership, transfer or disposition of ADSs or Class B Shares. There are no Argentine stamp, issue, registration or similar taxes or duties payable by holders of ADSs or Class B Shares.
Tax Treaties. Argentina has entered into tax treaties with several countries. There is currently no tax treaty or convention in effect between Argentina and the United States.
United States Taxes
General. This discussion relating to certain U.S. federal income tax consequences applies only to a U.S. holder (as defined below) who holds our Class B Shares or ADSs. It applies to holders only if he or she holds our Class B Shares or ADSs as capital assets for tax purposes and is not a member of a special class of holders subject to special rules, including: a dealer in securities; a trader in securities that elects to use a mark-to-market method of accounting for his or her securities holdings; a tax-exempt organization; a life insurance company; a person liable for alternative minimum tax; a person that actually or constructively owns 10% or more of our voting stock; a person that holds Class B Shares or ADSs as part of a hedging or straddle or conversion transaction; a person that purchases or sells Class B Shares or ADSs as part of a wash sale for tax purposes; or a person whose functional currency is not the U.S. dollar.
This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, and the laws of Argentina all as currently in effect. These laws are subject to change, possibly on a retroactive basis. In addition, this section is based in part upon the assumption that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms.
If a partnership holds Class B Shares or ADSs, the United States federal income tax treatment of a partner will generally depend on the status of the partner and the tax treatment of the partnership. A partner in a partnership holding Class B Shares or ADSs should consult its tax advisor with regard to the United States federal income tax treatment of an investment in Class B Shares or ADSs.
A holder is a U.S. holder if such holder is a beneficial owner of Class B Shares or ADSs and such holder is: a citizen or resident of the United States; a domestic corporation or other entity taxable as such; an estate whose income is subject to U.S. federal income tax regardless of its source; or a trust, if a US court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust.
105
In general, and taking into account the earlier assumptions, for U.S. federal income tax purposes, a holder of ADRs evidencing ADSs will be treated as the owner of the underlying Class B Shares represented by those ADSs, and exchanges of Class B Shares for ADRs, and ADRs for Class B Shares, will not be subject to U.S. federal income tax.
This discussion does not generally address any aspects of U.S. taxation other than federal income taxation. Holders of Class B Shares or ADSs are urged to consult their tax advisors regarding the U.S. federal, state and local tax consequences of owning and disposing of the Class B Shares or ADSs in their particular circumstances.
Taxation of Dividends. Under the United States federal income tax laws, and subject to the passive foreign investment company (“PFIC”) rules discussed below, a U.S. holder must include in his or her gross income the gross amount of any dividend that we pay out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes). If the holder is a non-corporate U.S. holder, dividends that constitute qualified dividend income will be taxable at the preferential rates applicable to long-term capital gains provided that the Class B Shares or ADSs are held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and certain other holding period requirements are met. Dividends that are paid with respect to the ADSs that are readily tradable on an established securities market in the United States are qualified dividend income. Under this rule, we expect that the dividends we pay with respect to the ADSs will be qualified dividend income. Because the Class B Shares are not readily tradable on an established securities market in the United States, it is unclear whether dividends paid with respect to the Class B Shares will also be qualified dividend income.
The holder must include any Argentine tax withheld from the dividend payment in this gross amount even though the holder does not in fact receive it. The holder must include the gross amount of dividends in income when the holder, in the case of Class B Shares, or the depositary, in the case of ADSs, receives the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations. Distributions in excess of current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, will be treated as a non-taxable return of capital to the extent of a holder’s basis in the Class B Shares or ADSs and thereafter as capital gain.
The amount of the dividend distribution that a holder must include in his or her income will be the U.S. dollar value of the Argentine peso payments made, determined at the spot Argentine peso/U.S. dollar rate on the date such dividend distribution is includible in such holder’s income, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date a holder includes the dividend payment in income to the date such payment is converted into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. Such gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.
For foreign tax credit purposes, the dividend will generally be income from sources outside the United States. Dividends will, depending on the holder’s circumstances, generally be either “passive” or “general” income, for purposes of computing the foreign tax credit allowable to the holder. Except as set forth in the following paragraph and subject to certain limitations, the Argentine tax withheld and paid over to Argentina will be creditable or deductible against your U.S. federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the preferential tax rates.
No U.S. foreign tax credit will be allowed to U.S. holders of Class B Shares or ADSs in respect of any personal property or similar tax imposed by Argentina (or any taxing authority thereof or therein).
Taxation of Capital Gains. Subject to the PFIC rules discussed below, a U.S. holder that sells or otherwise disposes of Class B Shares or ADSs will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the U.S. dollar value of the amount realized and his or her tax basis (determined in U.S. dollars) in such Class B Shares or ADSs. Capital gain of a non-corporate U.S. holder is generally taxed at preferential rates where the holder has a holding period greater than one year. The gain or loss generally will be income or loss from sources within the U.S. for foreign tax credit limitation purposes.
106
As discussed above under “Argentine Taxes—Taxation of Capital Gains”, it is possible that a U.S. holder who sells or purchases the Class B Shares or ADSs may be subject to Argentine tax upon such sale or acquisition. If the seller is legally liable for the tax and the seller pays this tax, then the seller should be able to claim a foreign tax credit for U.S. federal income tax purposes in an amount equal to the amount of the tax, subject to generally applicable limitations. However, because the gain from a sale or other disposition of Class B Shares or ADSs will be U.S. source income, such seller would need a sufficient amount of other foreign source income that is untaxed, or that is taxed at a tax rate that is sufficiently lower than the U.S. tax rate applicable to such seller, in order to be able to claim this foreign tax credit. Additionally, if an Argentine tax is withheld on the sale or other disposition of Class B Shares or ADSs, then the seller must include the amount of such tax withheld in the amount realized upon the sale or disposition, even though the seller does not in fact receive it. If the purchaser is legally liable for the tax, then the purchaser will likely not be entitled to receive any tax credit in the United States in respect of the payment of any such taxes.
PFIC Rules. We believe the Class B Shares or ADSs should not be treated as stock of a PFIC for United States federal income tax purposes, but this conclusion is a factual determination that is made annually and thus may be subject to change. If we were to be treated as a PFIC, unless a U.S. holder makes a valid election to be taxed annually on a mark-to-market basis with respect to the Class B Shares or ADSs, gain realized on the sale or other disposition of the shares or ADSs would in general not be treated as capital gain. Instead, the U.S. holder would be treated as if he had realized such gain and certain “excess distributions” ratably over the holding period for the shares or ADSs and would be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together with an interest charge in respect of the tax attributable to each such year. With certain exceptions, Class B Shares or ADSs will be treated as stock in a PFIC if we were a PFIC at any time during the holding period of a U.S. holder. In addition, dividends received from us will not be eligible for the special tax rates applicable to qualified dividend income if we are treated as a PFIC (or are treated as a PFIC with respect to a U.S. holder) either in the taxable year of the distribution or the preceding taxable year, but instead will be taxable at rates applicable to ordinary income.
F.
Dividends and Paying Agents
Not applicable.
G.
Statement by Experts
Not applicable.
H.
Documents on Display
We are subject to the informational requirements of the CNV and the BASE and file reports and other information relating to our business, financial condition and other matters with the CNV and the BASE. You may read such reports, statements and other information, including our publicly-filed Financial Statements, at the public reference facilities of the CNV and BASE maintained in Buenos Aires. We are also required to file annual and special reports and other information with the SEC. You may read and copy any documents filed by us at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our filings with the SEC will also be available to the public at the offices of the NYSE, 11 Wall Street, New York, New York 10005.
We have appointed The Bank of New York Mellon to act as depositary for our ADRs. For so long as our ADRs are deposited with the depositary, we will furnish the depositary with our annual reports and summaries of all notices of general meetings of shareholders and other reports and communications that are made generally available to our shareholders.
The depositary will, as provided in the deposit agreement, arrange for the mailing of summaries in English of such reports and communications to all record holders of our ADRs. Any record holder of ADRs may read such reports, notices, or summaries thereof, and communications at the depositary’s office. The depositary’s office is located at 111 Wall Street, New York, NY 10043.
107
Whenever a reference is made in this Annual Report to a contract or other document of ours, please be aware that such reference is not necessarily complete and that you should refer to the exhibits that are a part of the Annual Report for a copy of the contract or other document. You may review a copy of the Annual Report at the SEC’s public reference room in Washington, D.C.
I.
Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our consolidated financial position, results of operations or cash flows due to adverse changes in financial market prices and interest rates. We are exposed to market risk in the areas of interest rates and foreign currency exchange. This discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results could vary materially as a result of a number of factors. Uncertainties that are either non-financial or non-quantifiable, such as political, economic, tax, other regulatory or credit risks, are not included in the following assessment of our market risks.
Interest Rate Risk
Our interest rate risk arises from long-term borrowings. Borrowings issued at floating rates expose us to cash flow interest rate risk. Borrowings issued at fixed rates expose us to fair value interest rate risk.
Currently, our exposure to cash flow interest rate risk is limited due to the fact that 100% of our outstanding financial indebtedness bears fixed interest rates. Therefore, our exposure to market risk associated with changes in interest rates is limited to our financial assets which bear variable interest rate. Most of our financial assets bear fixed rate interests.
We place our cash and current investments in high quality financial institutions in Argentina, the United States of America and Europe. Our policy is to limit exposure with any one institution. Our temporary investments primarily consist of money market mutual funds, fixed-term deposits and public and private notes.
The following table provides information regarding our assets and liabilities as of December 31, 2016 according to its interest rate:

| Financial assets (1) | Financial liabilities (2)
Fixed interest rate | - | 3,068,819
Variable interest rate | 39,645 | -
Total | 39,645 | 3,068,819

(1) Includes time deposits, bank accounts and trade receivables. Trade receivables do not bear interest except for Ps. 36,484 which bears CER plus a spread of 8%.
(2) Includes loans, excluding issuance expenses.
Foreign Exchange Exposure
Our primary market risk exposure is associated with changes in the foreign currency exchange rates since most of our debt is denominated in U.S. dollars. As of December 31, 2016, our net monetary liability position that is subject to exchange rate fluctuations amounted to US$ 192.6 million.
As discussed herein, the Government has adopted various economic measures, including the repeal of the Convertibility Law and the pesification of our gas transportation revenues that have significantly increased our foreign exposure. As a result, our results of operations are very susceptible to changes in the peso/U.S. dollar exchange rate because a significant portion of our annual revenues, Ps. 3,172,4 million for 2016, are denominated in pesos while substantially all our financial debt is denominated in U.S. dollars.
108
To mitigate the foreign exchange risk, during recent years, we entered into agreements for the forward purchase of U.S. dollars, as well as investments in mutual funds linked to the U.S. dollar in order to cover the exposure to the risk associated with the foreign exchange rate derived from our financial debt.
At the end of 2015, our net position is buying U.S. dollars amounting to US$ 52.5 million at a weighted average exchange rate of $ 11.65 which due in May 2016. The fair value of these contracts as of December 31, 2015 amounted to a net asset position of Ps. 128.1 million.
Sensitivity Analysis Disclosure to Interest Rates and Exchange Rates
In view of the nature of our financial assets which bear variable interest, an immediate 100 basis points decrease in the interest rate curve would not have a significant impact on their total value.
The potential financial expense loss (before income tax) in our net monetary liability position held as of December 31, 2016, that would have resulted from a hypothetical, instantaneous and unfavorable 10% change in the peso/U.S. dollar exchange rates would have been Ps. 307.0 million. This sensitivity analysis provides only a limited view of the market risk sensitivity of certain of our financial instruments. The actual impact of market foreign exchange rate changes on our financial instruments may differ significantly from the impact shown in the sensitivity analysis.
Our indebtedness accrues interest at a fixed rate. Therefore, we do not currently have an exposure to changes in interest rates, except as noted above with respect to the financial assets at variable interest rate. The following table provides information presented in our reporting currency, Argentine pesos, with respect to our foreign exchange exposure. For debt obligations, the table presents principal cash flows and interest rates by expected maturity dates after giving effect to the settlement of the Exchange Offer. For further information see “Item 10. Additional Information.—C. Material Contracts.—Debt Obligations.”

| Expected maturity date |  |
| 2017 | 2018 | 2019 | 2020 | Thereafter | Total(6) | Fair value(2)
| (in millions of pesos) (1)
Debt denominated in U.S. dollars(1) (5) (6) |  |  |  |  |  |  |
Fixed rate | 293.0 | 965.9 | 1,161.3 | 1,063.6 | - | 3,483.9 | 3,275.1
Interest rate (3) | 9.625% | 9.625% | 9.625% | 9.625% | - | - | -
Financial lease in U.S. dollars(1) (6) |  |  |  |  |  |  |
Fixed rate | 164.9 | 118.9 | 118.9 | 118.9 | 665.4 | 1.186.9 | 848.2
Debt denominated in pesos(4) |  |  |  |  |  |  |
Fixed rate | 1.5 | - | - | - | - | 1.5 | -
Interest rate | 15.25% | 15.25% | - | - | - | - | -

(1) Converted at the exchange rate as of December 31, 2016: Ps. 15.89 = US$1.00.
(2) Based on the quoted market prices of our 2014 Notes.
(3) For a detailed description of 2014 Notes, see “Item 10. Additional Information—C. Material contracts—Debt Obligations.”
(4) For a detailed description of the peso denominated loans, see “Item 5. Operating and Financial Review and Prospects –B. Liquidity and Capital Resources – Description of Indebtedness.”
(5) For further information about limitations on our ability to make payments on our debt denominated in U.S. Dollars see “Item 3. D. Risk Factors. - The Argentine economy can be adversely affected by economic developments in other markets and by more general “contagion” effects, which could have a material adverse effect on Argentina’s economic growth.”
(6) Includes future interest payment not accrued as of December 31,2016.
See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Currency and Exchange Rates” and “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Derivative Financial Instruments” for more information.
Commodity Price Risk
In the liquids production and commercialization segment, we are exposed to market risk in relation to price volatility of the LPG and natural gasoline since they are subject to international prices (Mont Belvieu for the LPG and NWE ARA for the natural gasoline). Their prices have fluctuated in response to changing market forces. Based on our volume of sales in 2016, a US$ 50 per ton change in the weighted-average sale prices of propane, butane and natural gasoline would have approximately a Ps. 233.3 million annual net comprehensive income effect. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Exports.”
109
Ethane is sold to PBB under a recently negotiated annual contract which will expire on May 1, 2018. The price under the contract is adjusted for several factors including the cost of natural gas, the natural gas price and transportation charges. The decrease in the international price of ethane has increased the gap between our sale price and the price offered by the alternative supplier of PBB. This situation, together with the upcoming expiration of the contract in 2018, means that the risk of price decrease or displacement in supply (lower product sales) would be high.
For any given period, the liquids sales will be dependent on the international price of LPG and natural gasoline, taxes and other government take impacts and production volumes. Accordingly, changes in international prices for the mentioned products only provide a broad indicator of changes in the net income of any fiscal year.
Item 12. Description of Securities Other Than Equity Securities
American Depositary Shares
Fees and Charges Payable by a Holder of ADRs
Our ADSs are listed on the NYSE under the symbol ‘‘TGS’’. The Bank of New York Mellon is the Depositary issuing ADSs pursuant to the deposit agreement. Each ADS represents the right to receive five shares.
The Depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The Depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The Depositary may collect its annual fee for depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The Depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
110
The charges of the Depositary payable by investors are as follows:

Persons depositing or withdrawing shares must pay: | For:
US$5.00 (or less) per 100 ADSs | Issuance of ADRs, including issuances resulting from a distribution of shares or rights or other property
US$0.05 (or less) per ADS | Cancellation of ADRs for the purpose of withdrawal, including if the deposit agreement terminates
Any cash distribution to ADR registered holders
A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs | Distribution of securities distributed to holders of deposited securities which are distributed by the Depositary to ADR registered holders
US$0.02 (or less) per ADS per calendar year | Depositary services
Registration or transfer fees | Transfer and registration of shares on our share register to or from the name of the Depositary or its agent when you deposit or withdraw shares
Expenses of the Depositary | Cable, telex and facsimile transmissions (as provided in the deposit agreement) Converting foreign currency to U.S. dollars
Taxes and other governmental charges the Depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes | As necessary
Any charges incurred by the Depositary or its agents for servicing the deposited securities | As necessary

Disclosure for Fees Incurred in Past Annual Period. From January 1, 2016 to April 25, 2017, we received from the Depositary US$330,000 for the expenses incurred by us related to the administration and maintenance of the ADR program and investor relation activities.
Disclosure for Fees to be Paid in the Future. The Depositary has agreed to reimburse us for expenses incurred by us related to the administration and maintenance of the ADR program and investor relation activities. In certain instances, the Depositary has agreed to provide additional payments to us based on any applicable performance indicators relating to the ADR facility. There are limits on the amount of expenses for which the Depositary will reimburse us, but the amount of reimbursement available to us is not necessarily tied to the amount of fees the depositary collects from investors.
111
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
No events required to be reported have occurred that materially affect TGS.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
Item 15. Controls and Procedures.
A. Disclosure Controls and Procedures
We carried out an evaluation under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of December 31, 2016. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
B. Management’s Annual Report on Internal Control Over Financial Reporting
Our management, including our CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Financial Statements for external purposes in accordance with applicable generally accepted accounting principles.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Based on this assessment, management concluded that, as of the end of fiscal year 2016, our internal control over the financial reporting was effective.
C. Attestation Report of the Registered Public Accounting Firm
The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by PwC, an independent registered public accounting firm, as stated in their report which appears on page F-1 herein.
D. Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting during 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
We have one audit committee financial expert serving on our Audit Committee. Our Board of Directors has identified Mr. Carlos Olivieri as an audit committee financial expert. Mr. Olivieri is an independent director within the meaning of Rule 10A-3 under the Exchange Act.
112
Item 16B. Code of Ethics
We have adopted a code of ethics (the “Code of Ethics”), applicable to all employees including our principal executive, accounting and financial officers. Our Code of Ethics is available both on our website at http://www.tgs.com.ar/gobierno-corporativo/codigo-de-conducta and as an Exhibit to this Annual Report. For more information see, “Item 16G. Corporate Governance.”
Item 16C. Principal Accountant Fees and Services
Audit and Non-Audit Fees
Fees billed for professional services provided to us by PwC, during the year ended December 31, 2016 and 2015 in each of the following categories are:

| Year ended December 31,
| 2016 | 2015
| (in thousands of pesos)
Audit fees | 5,875.5 | 4,112.6
Audit-related fees | - | -
Tax fees | - | -
All other fees | - | -
Total fees | 5,875.5 | 4,112.6

Audit fees. Audit fees in the above table are mainly for the audit of our annual Financial Statements, the review of our quarterly reports, services in connection with the exchange offer for our financial debt and Form 20-F.
Audit Committee Pre-Approval Policies and Procedures
Consistent with SEC requirements regarding auditor independence, the Audit Committee pre-approves services prior to commencement of the specified service. Before the accountant is engaged to render audit or non-audit services, the engagement must be approved by the Audit Committee and the Audit Committee must pre-approve the provision of services by our principal auditor prior to commencement of the specified service. The Audit Committee has delegated to its President the authority to grant pre-approvals to auditors’ services. The decision of the President to pre-approve a service is presented to the full Audit Committee at each of its scheduled meetings.
All audit fees, audit-related fees, tax fees and other, if any, are submitted to our audit committee for prior approval. The Audit Committee evaluates the scope of the work to be performed by our accountants and the fees for such work prior to their engagement.
Consequently, 100% of the fees rendered by our principal accountants in 2016 were approved by the Audit Committee prior to their engagement to perform such work.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Registered Equity Securities of the Issuer by the Issuer and Affiliated Purchasers
Not applicable.
113
Item 16F. Change in Registrant’s Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
Our corporate governance practices are governed by:
■
applicable Argentine law (particularly, the General Corporations Law),
■
Capital Market Law and Decree No. 1,023/2013,
■
the standards of the CNV,
■
our By-laws,
■
our Code of Conduct and other internal control policies and procedures, and
■
certain rules of the NYSE applicable to listed foreign private issuers.
We have securities that are registered with the SEC and listed on the NYSE and, consequently, we are subject to the rules and regulations of the NYSE.
Under the Corporate Governance Standards issued by the NYSE in Section 303A of its Listed Company Manual (the “NYSE Standards”), non-U.S. companies are permitted, in general, to follow their home country corporate governance practices in lieu of the provisions included in such Section. However, non-U.S. companies must comply with sections 303A.06, 303A.11 and 303A.12(b) and (c).
Our Corporate Governance Guidelines are available on our website www.tgs.com.ar.
According to Section 303A.11 of the NYSE Standards, foreign private issuers must disclose any significant ways in which their corporate governance practices differ from those followed by U.S. issuers. Accordingly, the following list reflects such differences:
Directors
According to NYSE Standards, listed companies must have a majority of independent directors. Argentine law does not require a majority of independent directors, but does require at least two independent directors on the Audit Committee. At our Board of Directors meeting held on April 20, 2016, three independent directors (meeting the independence criteria set forth in the NYSE Standards) were appointed to the Audit Committee. We also have three alternate directors who qualify as independent.
Meeting of Non-Management Directors
According to NYSE requirements, the non-management directors must meet at regularly scheduled executive sessions without management. None of Argentine law, the CNV rules or our By-laws requires that any such meetings be held. Under Argentine law, a board of directors must meet at least once every three months.
Nominating/Corporate Governance Committee
U.S. listed companies must have a nominating/corporate governance committee composed entirely of independent directors. Argentine law and regulations do not require us to have a nominating or corporate governance committee.
Compensation Committee
U.S. listed companies must have a compensation committee composed entirely of independent directors. Argentine law and regulations do not require this committee. However, our Audit Committee is required to give an opinion about the reasonableness of directors’ fees and executive officers’ compensation and stock option plans (if applicable), as proposed by our Board of Directors, and the fee paid to members of our Board of Directors is approved by our shareholders at their ordinary annual meeting.
114
Audit Committee
According to SEC regulations, listed companies must have an audit committee consisting of a minimum of three independent members. The members of the Audit Committee must be financially literate or must acquire such financial knowledge within a reasonable period and at least one of its members shall have expertise in accounting or financial management. Also, if a member of the Audit Committee is simultaneously a member of the Audit Committee of more than three public companies, and the listed company does not limit the number of Audit Committees on which its members may serve, then, in each case the Board of Directors shall determine whether the simultaneous service would prevent such members from effectively serving on the listed company’s Audit Committee, and shall disclose its decision in the annual proxy statement of the company or in the company’s annual report filed with the SEC.
Argentine law requires an Audit Committee to be comprised of at least three members with a majority of independent members. Pursuant to CNV standards, Audit Committee members are required to have knowledge in business, financial or accounting matters and issues. In addition, CNV standards require the training of Audit Committee members in the practice areas that would permit them to carry out their duties on the Audit Committee. Our Audit Committee is made of three independent members. One of them qualifies as a “financial expert” within the meaning of Item 16A of the Form 20-F. See “Item 16A. Audit Committee Financial Expert.” The Audit Committee’s functions and duties are similar to those required by the NYSE. Furthermore, Argentine law does not limit the number of audit committees on which a member of its Audit Committee may serve.
Code Conduct
According to Section 303A.10 of the NYSE Standards, listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. In October 2005, our Board of Directors approved a “Code of Conduct” with the purpose of introducing SEC rules applicable to foreign registrants. Such code applies to all Board of Directors’ members, Audit Committee members, senior management, and employees, with no exceptions. Our Code of Conduct is available to the public on our website and as an Exhibit to this Annual Report.
CEO’s Certification
Each listed company CEO must annually certify to the NYSE that he or she is not aware of any violation by the company of the NYSE’s corporate governance listing standards. There is no such requirement under Argentine law.
Item 16H. Mine Safety Disclosure
Not applicable.
115
Part III
Item 17. Financial Statements
The registrant has responded to Item 18 in lieu of responding to this Item.
Item 18. Financial Statements
The following Financial Statements are filed as part of this Form 20-F:
Transportadora de Gas del Sur S.A.

| Page
Report of independent registered public accounting firm | F-1
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014 | F-2
Consolidated Statements of Financial Position as of December 31, 2016 and 2015 | F-3
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014 | F-4
Statements of Changes in Shareholders’ Equity for the years ended December 31, 2016, 2015 and 2014 | F-5
Notes to Consolidated Financial Statements for the years ended December 31, 2016 and 2015 | F-6

Reference is made to pages F-1 through F-73.
Item 19. Exhibits
See Exhibit Index.
116
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant hereby certifies that it meets all of the requirements for filing this Annual Report on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.

| TRANSPORTADORA DE GAS DEL SUR S.A. (Registrant) |
| By: | /s/ Javier Gremes Cordero |
| Name: | Javier Gremes Cordero |
| Title: | Chief Executive Officer |

| By: | /s/ Alejandro M. Basso |
| Name: | Alejandro M. Basso |
| Title: | Chief Financial Officer and Services Vice President |

Dated: April 25, 2017
117
EXHIBIT INDEX
Exhibit No.
1.1
Corporate Charter and By-laws. (1)
1.2
By-laws Amendments. (2)
2.1
Indenture dated as of May 14, 2007, among TGS, Law Debenture Trust Company of New York, as trustee, co-registrar, principal paying agent and transfer agent, and Banco Santander Río S.A., as registrar, paying agent and transfer agent, in respect of TGS’s 7.875% Notes Due 2017. (3)
2.2
Officers’ Certificate establishing the terms of TGS’ 7.875% Notes Due 2017. (3)
2.3
We hereby agree to furnish to the SEC, upon its request, copies of any instruments defining the rights of holders of our long-term debt (or any long-term debt of our subsidiaries for which we are required to filed consolidated or unconsolidated financial statements), where such indebtedness does not exceed 10% of our total consolidated assets.
2.4
Indenture dated as of February 11, 2014, among TGS, Law Debenture Trust Company of New York, as trustee, co-registrar, principal paying agent and transfer agent, and Banco Santander Río S.A., as registrar, paying agent and transfer agent, in respect of TGS’s 9.625% Notes Due 2020. (4)
2.5
Officers’ Certificate establishing the terms of TGS’ 9.625% Notes Due 2020. (4)
3.1
CIESA Shareholders’ Agreement. (5)
3.2
CIESA’s Fourth Amendment to the Restructuring Agreement. (6)
3.3
CIESA’s Settlement Agreement (7)
4.1
Technical Assistance Service Agreement between TGS and Petrobras Argentina dated November 4, 2014. (2)
5.1
Financial lease agreement between Petrobras Argentina S.A. and TGS dated July 25, 2016.
8.1
List of TGS’s Subsidiaries.
11.1
Code of Ethics.(5)
12.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
12.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
13.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
15.1
Audit Committee Charter. (8)
(1) Incorporated by reference to our Annual Report on Form 20-F filed with the Securities and Exchange Commission for the year-ended December 31, 2001 (Commission File No. 1-13396).
(2) Incorporated by reference to our Annual Report on Form 20-F filed with the Securities and Exchange Commission for the year-ended December 31, 2014 (Commission File No. 1-13396).
(3) Incorporated by reference to our Annual Report on Form 20-F filed with the Securities and Exchange Commission for the year-ended December 31, 2006 (Commission File No. 1-13396).
(4) Incorporated by reference to our Annual Report on Form 20-F filed with the Securities and Exchange Commission for the year-ended December 31, 2013 (Commission File No. 1-13396).
(5) Incorporated by reference to our Annual Report on Form 20-F filed with the Securities and Exchange Commission for the year-ended December 31, 2005 (Commission File No. 1-13396).
(6) Incorporated by reference to our Annual Report on Form 20-F filed with the Securities and Exchange Commission for the year-ended December 31, 2010 (Commission File No. 1-13396).
(7) Incorporated by reference to our Annual Report on Form 20-F filed with the Securities and Exchange Commission for the year-ended December 31, 2012 (Commission File No. 1-13396).
(8) Incorporated by reference to our Annual Report on Form 20-F filed with the Securities and Exchange Commission for the year-ended December 31, 2003 (Commission File No. 1-13396).
118
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Transportadora de Gas del Sur S.A.
In our opinion, the accompanying consolidated statements of financial position and the related consolidated statements of comprehensive income, of changes in equity and of cash flow present fairly, in all material respects, the financial position of Transportadora de Gas del Sur S.A. and its subsidiary (“the Company”) at December 31, 2016 and December 31, 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 15 to the Form 20-F. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PRICE WATERHOUSE & Co. S.R.L.
by | /s/ Alejandro P. Frechou (Partner) |
| Alejandro P. Frechou

Buenos Aires, Argentina
April 25, 2017
F-1
TRANSPORTADORA DE GAS DEL SUR S.A.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
(Stated in thousands of pesos as described in Note 3 except for weighted average of outstanding shares
and basic and diluted earnings per share)

| Notes | 2016 | 2015 | 2014
Revenue from sales | 7 | 7,402,172 | 4,226,569 | 4,303,971
Cost of sales | 8.h. | (4,435,915) | (2,759,905) | (2,565,535)
Gross profit |  | 2,966,257 | 1,466,664 | 1,738,436
Administrative expenses | 8.i. | (315,379) | (201,636) | (163,484)
Selling expenses | 8.i. | (353,514) | (241,330) | (647,359)
Other operating (expenses) / income(1) | 8.k. | (65,543) | (335,451) | 4,921
Operating profit |  | 2,231,821 | 688,247 | 932,514
Net financial results |  |  |  |
Financial income | 8.j. | 405,347 | 552,568 | 463,151
Financial expenses | 8.j. | (1,218,708) | (1,526,731) | (1,228,801)
Total |  | (813,361) | (974,163) | (765,650)
Share of profit from associates | 10 | 1,522 | 254 | 2,890
Net income / (loss) before income tax |  | 1,419,982 | (285,662) | 169,754
Income tax (expense) / gain | 13 | (489,304) | 113,553 | (64,766)
Total comprehensive income / (loss) for the year |  | 930,678 | (172,109) | 104,988
Total comprehensive income / (loss) attributable to: |  |  |  |
Owners of the Company |  | 930,675 | (172,109) | 104,983
Non-controlling interests |  | 3 | - | 5
|  | 930,678 | (172,109) | 104,988
Weighted average of outstanding ordinary shares |  | 794,495,283 | 794,495,283 | 794,495,283
Basic and diluted earnings / (losses) per share |  | 1.17 | (0.22) | 0.13

(1) For the year ended December 31, 2015 includes (Ps. 324,390) for the cost of Acquisition of the Rights of the Arbitration Proceeding (Note 16.a)
The accompanying notes are an integral part of these consolidated financial statements.

F-2
TRANSPORTADORA DE GAS DEL SUR S.A.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS OF DECEMBER 31, 2016 AND 2015
(Stated in thousands of pesos as described in Note 3)

| Notes | 2016 | 2015
ASSETS |  |  |
Non-current assets |  |  |
Property, plant and equipment | 11 | 5,333,344 | 4,219,520
Investments in associates | 9 | 2,874 | 3,684
Other financial assets at amortized cost | 16.c. | 21,584 | 34,353
Other financial assets at fair value through profit or loss | 8.m. | 142,872 | 44,063
Other receivables | 8.a. | 75,465 | 108,268
Trade receivables | 8.b. | 8,122 | 6,470
Total non-current assets |  | 5,584,261 | 4,416,358
Current assets |  |  |
Other receivables | 8.a. | 378,272 | 393,780
Inventories |  | 116,863 | 8,452
Trade receivables | 8.b. | 1,226,439 | 791,835
Derivative financial instruments | 15.l. | - | 128,124
Other financial assets at amortized cost | 16.c. | 14,900 | 12,772
Other financial assets at fair value through profit or loss | 8.m. | 55,508 | 22,719
Cash and cash equivalents | 8.c. | 1,555,089 | 872,537
Total current assets |  | 3,347,071 | 2,230,219
Total Assets |  | 8,931,332 | 6,646,577
EQUITY |  |  |
Common stock |  | 1,345,300 | 1,345,300
Legal Reserve |  | 247,503 | 247,503
Future dividends reserve |  | - | 99,734
Future Capital Expenditures and Other Financial Expenses Reserve |  | - | 175,000
Future capital expenditures reserve |  | 2,891 | -
Accumulated retained earnings |  | 930,675 | (172,109)
Non-controlling interests |  | 9 | 6
Total equity |  | 2,526,378 | 1,695,434
LIABILITES |  |  |
Non-current liabilities |  |  |
Deferred tax liabilities | 13 | 416,716 | 410,134
Advances from customers | 8.d. | 313,686 | 332,308
Loans | 12 | 3,771,604 | 2,888,100
Other payables | 8.e. | - | 20
Total non-current liabilities |  | 4,502,006 | 3,630,562
Current liabilities |  |  |
Provisions | 14 | 221,433 | 150,586
Advances from customers | 8.d. | 37,594 | 25,779
Other payables | 8.e. | 3,816 | 40,895
Taxes payables | 8.f. | 59,192 | 92,560
Income tax payable |  | 305,410 | 4,213
Payroll and social security taxes payable |  | 168,859 | 116,932
Loans | 12 | 145,396 | 447,092
Trade payables | 8.g. | 961,248 | 442,524
Total current liabilities |  | 1,902,948 | 1,320,581
Total liabilities |  | 6,404,954 | 4,951,143
Total equity and liabilities |  | 8,931,332 | 6,646,577
The accompanying notes are an integral part of these consolidated financial statements.

F-3
TRANSPORTADORA DE GAS DEL SUR S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
(Stated in thousands of pesos as described in Note 3)

| Shareholders Contributions | Retained Earnings |  |  |
| Common Stock | Inflation adjustent to commn stock | Total common stock | Legal reserve | Future Capital Expenditures and Other Expenses Reserve | Future Dividends Reserve | Future Capital Expenditures Reserve | Accumulated retained earnings | Subtotal | Total | Non- Controlling interests | Total
Balances at December 31, 2013 | 794,495 | 550,805 | 1,345,300 | 236,879 | - | 202,239 | 140,000 | 98,661 | 677,779 | 2,023,079 | 3 | 2,023,082
Cash dividends to non-controlling interest (1) | - | - | - | - |  | - | - | - | - | - | (2) | (2)
Resolutions of the Ordinary Shareholders´Meeting |  |  |  |  |  |  |  |  |  |  |  |
held on April 30, 2014 |  |  |  |  |  |  |  |  |  |  |  |
Derecognition of the Future Dividends and Capital Expenditures Reserve | - | - | - | - | - | (202,239) | (140,000) | 342,239 | - | - | - | -
Legal Reserve | - | - | - | 5,375 | - | - | - | (5,375) | - | - | - | -
Future Dividends Reserve | - | - | - | - | - | 260,525 | - | (260,525) | - | - | - | -
Future Capital Expenditures Reserve | - | - | - | - | - | - | 175,000 | (175,000) | - | - | - | -
Resolution of the Board of Directors´Meeting |  |  |  |  |  |  |  |  |  |  |  |
held on November 26, 2014 |  |  |  |  |  |  |  |  |  |  |  |
Cash dividends | - | - | - | - | - | (260,525) | - | - | (260,525) | (260,525) | - | (260,525)
Comprehensive income for the year | - | - | - | - | - | - | - | 104,983 | 104,983 | 104,983 | 5 | 104,988
Balances at December 31, 2014 | 794,495 | 550,805 | 1,345,300 | 242,254 | - | - | 175,000 | 104,983 | 522,237 | 1,867,537 | 6 | 1,867,543
Resolutions of the Ordinary Shareholders´Meeting |  |  |  |  |  |  |  |  |  |  |  |
held on April 23, 2015 |  |  |  |  |  |  |  |  |  |  |  |
Derecognition of Reserves | - | - | - | - | - | - | (175,000) | 175,000 | - | - | - | -
Legal Reserve | - | - | - | 5,249 | - | - | - | (5,249) | - | - | - | -
Future Dividends Reserve | - | - | - | - | - | 99,734 | - | (99,734) | - | - | - | -
Future Capital Expenditures and Other Financial Expenses | - | - | - | - | 175,000 | - | - | (175,000) | - | - | - | -
Comprehensive loss for the year | - | - | - | - | - | - | - | (172,109) | (172,109) | (172,109) | - | (172,109)
Balances at December 31, 2015 | 794,495 | 550,805 | 1,345,300 | 247,503 | 175,000 | 99,734 | - | (172,109) | 350,128 | 1,695,428 | 6 | 1,695,434
Resolutions of the Board of Directors' Meeting |  |  |  |  |  |  |  |  |  |  |  |
held on January 13, 2016 |  |  |  |  |  |  |  |  |  |  |  |
Cash dividends | - | - | - | - | - | (99,734) | - | - | (99,734) | (99,734) | - | (99,734)
Resolutions of the Extraordinary and Ordinary Shareholders' |  |  |  |  |  |  |  |  |  |  |  |
Meeting held on April 20, 2016 |  |  |  |  |  |  |  |  |  |  |  |
Future Capital Expenditures Reserve | - | - | - | - | - | - | 2,891 | (2,891) | - | - | - | -
Derecognition of reserves | - | - | - | - | (175,000) | - | - | 175,000 | - | - | - | -
Comprehensive income for the year | - | - | - | - | - | - | - | 930,675 | 930,675 | 930,675 | 3 | 930,678
Balances at December 31, 2016 | 794,495 | 550,805 | 1,345,300 | 247,503 | - | - | 2,891 | 930,675 | 1,181,069 | 2,526,369 | 9 | 2,526,378

The accompanying notes are an integral part of these consolidated financial statements.
´(1) Dividends distributed by Telcosur to the non-controlling interest in May 2014.
For supplemental Changes in Equity information, see Note 4.r).
F-4
TRANSPORTADORA DE GAS DEL SUR S.A.
CONDOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
(Stated in thousands of pesos as described in Note 3)
_____________________________________________________________________________________________________

| 2016 | 2015 | 2014
Cash flows provided by operating activities |  |  |
Total comprehensive income / (loss) for the year | 930,678 | (172,109) | 104,988
Reconciliation of total comprehensive income / (loss) to cash flows provided by operating activities: |  |  |
Depreciation of property, plant and equipment | 286,798 | 261,393 | 254,311
Consumption of materials | 7,201 | 8,481 | 3,916
Share of profit from associates | (1,522) | (254) | (2,890)
Increase in allowances and provisions | 98,833 | 46,202 | 19,966
Interest expense accrual | 392,372 | 287,290 | 285,307
Interest income on Other financial assets other than Cash and cash equivalents | (37,616) | (47,174) | (58,753)
Income tax | 489,305 | (113,553) | 64,766
Acquisition of the Rights of the Arbitration Proceeding (Note 16.a) | - | 324,390 | -
Derivative financial instrument results | 8,933 | (128,525) | 103,497
Foreign exchange loss | 623,756 | 948,456 | 539,425
Doubtful accounts | 20,546 | - | -
Changes in assets and liabilities: |  |  |
Other financial assets at fair value through profit or loss | - | (19,856) | -
Trade receivables | (524,014) | (474,352) | (50,551)
Other receivables | (227,569) | (120,299) | (118,926)
Inventories | (108,411) | 20,679 | (21,775)
Trade payables | 487,238 | (86,502) | 141,771
Payroll and social security taxes | 51,927 | 35,249 | 20,302
Taxes payables | (33,368) | 48,391 | (15,586)
Income tax | (39,189) | 321 | (64,804)
Other payables | (37,131) | (195) | 1,693
Provisions | (27,986) | (45,963) | (13,238)
Interest paid | (324,869) | (230,031) | (205,413)
Income tax paid | (10,529) | (10,517) | (17,469)
Derivative financial instruments | 118,490 | (44,009) | (48,187)
Advances from customers | (6,359) | (20,478) | 70,750
Cash flows provided by operating activities | 2,137,514 | 467,035 | 993,099
Cash flows used in investing activities |  |  |
Additions to property, plant and equipment | (596,109) | (401,980) | (350,559)
Other financial assets other than Cash and cash equivalents | 61,436 | 173,698 | 181,995
Cash flows used in investing activities | (534,673) | (228,282) | (168,564)
Cash flows used in financing activities |  |  |
Payment of loans | (916,490) | (294,556) | (769,932)
Dividends paid to the Company's shareholders | (99,734) | - | (212,459)
Dividends paid to non-controlling interest | - | - | (2)
Cash flows used in financing activities | (1,016,224) | (294,556) | (982,393)
NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS | 586,617 | (55,803) | (157,858)
Cash and cash equivalents at the beginning of the year | 872,537 | 789,420 | 893,812
Foreign exchange gains on Cash and cash equivalents | 95,935 | 138,920 | 53,466
Cash and cash equivalents at the end of the year | 1,555,089 | 872,537 | 789,420
The accompanying notes are an integral part of these consolidated financial statements.
For supplemental cash flow information see Note 6.

F-5
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
1.
BUSINESS DESCRIPTION
Business Overview
Transportadora de Gas del Sur S.A. (“TGS”) is one of the companies created as a result of the privatization of Gas del Estado S.E. (“GdE”). TGS commenced operations on December 29, 1992 and it is engaged in the Transportation of Natural Gas, and Production and Commercialization of natural gas Liquids (“Liquids”). TGS’s pipeline system connects major natural gas fields in southern and western Argentina with natural gas distributors and industries in those areas and in the greater Buenos Aires area. The natural gas transportation license to operate this system was exclusively granted to TGS for a period of thirty-five years (“the License”). TGS is entitled to a one-time extension of ten years provided that it has essentially met the obligations imposed by the License and by the Ente Nacional Regulador del Gas (National Gas Regulatory Body or “ENARGAS”). The General Cerri Gas Processing Complex (the “Cerri Complex”), where TGS processes natural gas by extracting liquids, was transferred from GdE along with the gas transmission assets. TGS also provides midstream services, which mainly consist of gas treatment, removal of impurities from the natural gas stream, gas compression, wellhead gas gathering and pipeline construction, operation and maintenance services. Also, telecommunications services are provided through the subsidiary Telcosur S.A. (“Telcosur”). These services consist of data transmission services through a network of terrestrial and digital radio relay.
Major Shareholders
TGS’s controlling shareholder is Compañía de Inversiones de Energía S.A. (“CIESA”), which holds 51% of the common stock. Local and foreign investors hold the remaining ownership of TGS’s common stock. CIESA is under co-control of: (i) Petrobras Argentina S.A. (in the process of merging with Pampa Energía S.A. “Pampa Energía”), which holds 10% of CIESA’s common stock, (ii) CIESA Trust (whose trustee is TMF Trust Company (Argentina) S.A. and whose beneficiary is Petrobras Hispano Argentina SA, a wholly owned subsidiary of by Pampa Energía) (the "Trust"), who has a trust shareholding of 40% of the share capital of CIESA) and (iii) Grupo Inversor Petroquímica S.L. (member of GIP Group, headed by Sielecki´s family; “GIP”), and PCT L.L.C. ("PCT"), which directly and together with WST S.A. (Member of Werthein Group, "WST") indirectly through PEPCA S.A. ("PEPCA"), hold a 50% of the shareholding in CIESA.
The current shareholding structure of CIESA is the result of the transaction carried out on July 27, 2016, by which: (i) Pampa Energía S.A. and its subsidiary Pampa Participaciones SA sold all of the capital stock and votes of its ownership in PEPCA in favor of GIP (by 51%), WST (by 45.8%) and PCT (by 3.2%), and (ii) Pampa Inversiones S.A. transferred its status as beneficiary of the Trust to GIP and PCT, with a holding of 55% and 45%, respectively (the "Transaction").
On July 27, 2016, Pampa Energía SA acquired from an affiliate of Petroleo Brasileiro SA the total shareholding and votes of Petrobras Participaciones S.L., the controlling company of Petrobras Argentina S.A., and consequently the indirect control of Petrobras Hispano Argentina S.A.
As a result of the transactions mentioned before and in accordance with the regulations set forth by Law N° 19.550, section 258, and in view of the vacancies occurred in TGS’ Board of Directors, situation that is contemplated in section 23 of TGS´ bylaws, on July 27, 2016, the Supervisory Committee appointed the replacement Directors. Their terms of office will last until the upcoming General Ordinary Meeting of Shareholders. On August 29, 2016, TGS’ Ordinary General Shareholders’ Meeting was held in which the management of the members of the Board of Directors was approved, and new directors and trustees were appointed to fill the vacancies generated with a term until the Ordinary General Shareholders’ Meeting that considers the financial statements for the year ending December 31, 2016.
On August 9, 2016, ENARGAS authorized the change of share control in CIESA, approving through Resolution No. I/3939: (i) the acquisition by Pampa Energía of the entire shareholding that Petrobras Participaciones S.L. held in Petrobras Argentina; (ii) the acquisition by GIP, WST and PCT of PEPCA shareholding; (iii) the transfer of rights made by Pampa Energía to GIP and PCT and, (iv) the replacement of The Royal Bank of Scotland N.V. Argentine Branch as Trustee of the Trust, by TMF Trust Company (Argentina) S.A.
F-6
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
On December 7, 2016, Pampa Energía, Petrobras Argentina S.A., Petrobras Hispano Argentina S.A., Pampa Participaciones S.A. and Pampa Inversiones S.A. (jointly "Pampa Group") requested authorization from ENARGAS to exercise the exchange option (the "Exchange") provided for in the Transaction. The Exchange consists of a series of transfers by which Pampa Group transfers to GIP and PCT 40% of the capital stock of CIESA, while GIP and PCT transfer to Petrobras Hispano Argentina S.A. their status as Beneficiaries of the Trust. Thus, the Exchange did not modify GIP, PCT and WST percentage ownership of CIESA, and thereby TGS. Finally, the Exchange was approved by ENARGAS on December 29, 2016, and notified to CIESA on January 17, 2017.
On February 16, 2017, the Extraordinary Shareholders’ Meetings of Pampa Energía and Petrobras Argentina S.A approved the merger commitment mentioned above. The merger will be effective as of November 1, 2016. At the date of issuance of these consolidated financial statements, the administrative compliance of the merger is still pending by the controlling bodies.
Mandatory tender offer (the“Offer”)
In accordance with the provisions of Capital Market Law No. 26,831 (the “Capital Markets Law”) and the Rules of the Comisión Nacional de Valores (“CNV”) (“New Text 2013” or “NT 2013”) adopted by General Resolution No. 622/13 on mandatory tender offers for change of control and acquisition of significant indirect interest, on July 27, 2016, the Company was notified by GIP, WST and PCT of its intention to launch a tender offer for the Company's Class “B” common shares, representing up to 24.5% of the common stock of TGS, which are listed on the Buenos Aires Stock Exchange. The Offer is subject to the terms and conditions that will be indicated in the prospect that will be issued opportunely, once the CNV approves it.
GIP, WST and PCT reported that their Boards resolved to set the price of the Offer in Ps. 18.20 per share (the "Offered Price").
On August 22, 2016, the Company's Board of Directors asserted that the Price Offered under the Offer is reasonable and fair and also approved the report required by the Capital Markets Law.
On October 21, 2016, GIP, WST and PCT informed TGS that their Boards resolved to increase the Offered Price to Ps.18.39.
The Offer was finally authorized by the CNV on December 22, 2016. Subsequently, on December 30, 2016, GIP, PCT and WST launched that offer in the US. The US offer is subject to the same terms and conditions indicated in the prospectus authorized by the CNV on February 6, 2017. The offer was made concurrently in both the Buenos Aires and US stock markets. The period of acceptance of the Offer will expire on March 8, 2017, with an additional term until March 15, 2017. On that date, GIP, PCT and WST informed us that a total of 4,003 Class B Shares had been validly tendered in Argentina (representing approximately 0.0005% of our capital stock). With respect to the US Offer, a total of (i) 42,117.542762 Class B Shares underlying ADSs were validly tendered and (ii) no Class B Shares were validly tendered, representing approximately 0.0053% of TGS’ share capital. All conditions to the Offer in the U.S. having been satisfied, including the completion of the Offer in Argentina, GIP, PCT and WST accepted for purchase all ADSs and Class B Shares validly tendered and not withdrawn pursuant to the Offer.
2.
CONSOLIDATED FINANCIAL STATEMENTS
TGS presents its consolidated financial statements for the years ended December 31, 2016 and 2015 in compliance with the provisions of Title IV, Chapter I, Section I, Article b.1) of the NT 2013. In these consolidated financial statements as of December 31, 2016, TGS and Telcosur S.A., its consolidated subsidiary, are jointly referred to as “the Company”.
3.
BASIS OF PRESENTATION
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (“IASB”) and the International Financial Interpretations Committee (“IFRIC”), jointly the “IFRS”.
F-7
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
NT 2013 mandates the application of Technical Resolution (“TR”) N° 26 and TR N° 29 approved by the Federación Argentina de Consejos Profesionales de Ciencias Económicas (“FACPCE”). Both TRs establish that certain Argentine companies which are subject to the Argentine Public Offering Regime (Law No. 26,831) should adopt IFRS issued by the IASB.
The preparation of the consolidated financial statements in conformity with IFRS requires management to make accounting estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting fiscal year. Estimates are used when accounting for the allowance for doubtful accounts, income taxes, provisions for legal claims and others, impairment of property, plant and equipment, and present value of long term receivables. Actual results could be significantly different from such estimates.
The presentation in the statement of financial position distinguishes between current and non-current assets and liabilities. The assets and liabilities are those expected to be recovered or settled within twelve months after the end of the reporting period under review, and those held for sale. The fiscal year begins on January 1 and ends on December 31 of each year. The economic and financial results are presented on a fiscal year basis.
The consolidated financial statements are stated in thousands of Argentine pesos (“Ps.” or “pesos”), the functional currency of the Company and its subsidiary, unless otherwise stated. For further information, see Note 4.c.
4.
SIGNIFICANT ACCOUNTING POLICIES
a) New accounting standards
New standards and interpretations issued by the IASB effective for the periods beginning on or after January 1, 2016 adopted by the Company
Below is a description of the standards, amendments and interpretations to existing standards that have been issued and were mandatory for the Company’s fiscal periods beginning on or after January 1, 2016:
Amendments to IAS 1 “Presentation of financial statements”.
In December 2014, the IASB issued amendments to IAS 1. The amendments aim is to clarify the guidance included in IAS 1 for the presentation of financial statements. Amendments to IAS 1 make the following changes:
●
Introduced modifications to the guidance included in IAS 1 regarding materiality considerations.
●
The amendment added additional examples of possible ways of ordering the notes to clarify that understandability and comparability
●
Made clarification on the breakdown of information and the inclusion of subtotals.
These amendments are applicable for annual periods beginning on or after January 2016, with earlier application permitted.
New standards and interpretations issued by the IASB not effective for the periods beginning on January 1, 2016 and that have not been earlier adopted by the Company
Below is a description of the standards, amendments and interpretations to existing standards that have been issued and are mandatory for the Company’s fiscal periods beginning on or after January 1, 2016 or later and which have not been early adopted by the Company:
F-8
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
IFRS 15 Revenue from contracts with customers
In May 2014, IFRS 15 was issued which establishes a single model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 “Revenue”, IAS 11 “Construction Contracts” and the related interpretations when it becomes effective.
The core principle of IFRS 15 is that an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation. IFRS 15 introduces a 5-step approach to revenue recognition:
Step 1: Identify the contract with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
The new revenue recognition model established in IFRS 15 is applicable to all contracts with customers, except lease contracts, insurance contracts and financial instruments. The recognition of interest and dividends are not under the scope of this standard.
IFRS 15 will be applicable for annual periods beginning on or after January 1, 2018, with earlier application permitted.
The Company is currently analyzing the impact of IFRS 15 requirements and, as of the date of the issuance of these consolidated financial statements, it is not possible to reasonably determine its impact.
IFRS 9 Financial instruments
In July 2014 a new revised version of IFRS 9 was issued. The complete version of IFRS 9 replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. Also, new requirements to classify and measure financial assets were included in this version.
IFRS 9 will be applicable for annual periods beginning on or after January 1, 2018, with earlier application permitted.
The Company is analyzing the impact of IFRS 9 and, as of the date of the issuance of these financial statements, it is not possible to reasonably determine its impact.
Annual improvements to IFRSs 2012 – 2014 Cycle
The annual improvement to IFRSs 2012 – 2014 Cycle include four amendments to IFRSs issued by the IASB, among them IAS 34 “Interim financial reporting”. The standard requires new disclosures to be included in the interim financial statements.
These amendments will be applicable for annual periods beginning on or after July 1, 2016, with earlier application permitted.
The Company is currently analyzing the impact of the new disclosure requirements.
IFRS 16 “Leases”
In January 2016, IFRS 16 was issued which establishes the new model of registration of leasing operations. This standard replaces the current guidance on the accounting for such operations in IAS 17 "Leases" and related interpretations when it comes into force.
F-9
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
As a result of the modifications introduced, the accounting treatment of leases in the tenant's accounting will undergo major changes. IFRS 16 eliminates the dual accounting model for tenants distinguishing between on-balance sheet finance leases and operating leases for which no recognition of future lease payments is required. Instead, a unique, in-balance model is developed that is similar to the current leasing model. There are certain exceptions for short-term and insignificant leases.
The landlord's accounting will not be changed.
IFRS 16 will be effective for annual periods beginning on or after January 1, 2019, with earlier application permitted. Adoption is retroactive.
The Company is currently assessing the impact of IFRS 16 and as of the date of these consolidated financial statements is not reasonably possible to determine its impact.
Amendments to IAS 12 "Income Taxes"
In January 2016, the IASB issued certain amendments with respect to the recognition of deferred tax assets for unrealized losses.
These amendments will be effective for annual periods beginning on or after January 1, 2017, with early adoption permitted.
The Company is analyzing the impact of IAS 12, and as of the date of the issuance of these financial statements, it is not possible to reasonably determine the impact of IAS 12.
Amendments to IAS 7 "Statements of Cash Flows"
In February 2016, the IASB issued certain amendments regarding disclosures of the Statement of Cash Flows.
Modifications to the Disclosure Initiative (Amendments to IAS 7) aim entities to disclose information that enables users of financial statements to evaluate changes in liabilities arising from financing activities. For this purpose, the IASB requires that an entity shall disclose the following changes in liabilities arising from financing activities: (i) changes from financing cash flows; (ii) changes arising from obtaining or losing control of subsidiaries or other businesses; (iii) the effect of changes in foreign exchange rates; (iv) changes in fair value; and (v) other changes.
Finally, the amendments state that changes in liabilities arising from financing activities must be disclosed separately from changes in other assets and liabilities.
These amendments will be effective for annual periods beginning on or after January 1, 2017, with early adoption permitted.
The Company is analyzing the impact of IAS 7, and as of the date of the issuance of these financial statements, it is not possible to reasonably determine the impact of IAS 7.
IFRIC 22 — Foreign Currency Transactions and Advance Consideration
This interpretation refers to the determination of the "transaction date" that determines the exchange rate to be used in the initial recognition of an asset, expense or income related to an entity that received or paid a foreign currency advance. Applies to foreign currency transactions when an entity recognizes a non-monetary asset or non-monetary liability arising from the receipt or payment of advance consideration before the entity recognizes the related asset, expense or income.
For the purpose of determining the exchange rate to be used in the initial recognition of an asset, expense or income, the transaction date is the date on which the non-monetary asset or liability derived from the receipt or payment of the advance is recognized.
F-10
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
This interpretation applies to fiscal years beginning on or after January 1, 2018. Early adoption is permitted. The initial application may be retroactive or prospective from: i) the beginning of the period in which it is applied; or (ii) the beginning of an earlier comparative period.
b) Consolidation
Subsidiary
Subsidiaries are all entities (including structured entities) over which the Company has control. The Company controls an entity when the Company is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are deconsolidated from the date that control ceases.
Inter-company transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Company.
Furthermore, Telcosur is the only consolidated subsidiary of the Company and its financial statements as of December 31, 2016 have been used for consolidation purposes. Detailed data reflecting subsidiary control as of December 31, 2016 and 2015 is as follows:

| % of shareholding |  |  |
Company | and votes | Country | Closing date | Main activity
Telcosur S.A. | 99.98 | Argentina | December 31 | Telecommunication Services

Associates
Associates are entities over which the group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting. Under the equity method, the investment is initially recognized at cost, and the carrying amount is increased or decreased to recognize the investor’s share of the profit or loss of the investee after the date of acquisition.
If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognized in other comprehensive income is reclassified to profit or loss where appropriate.
The Company accounted for the investments in its associates, on the basis on the financial statements as of September 30, 2016 of Gas Link S.A. (“Link”), Transporte y Servicios de Gas en Uruguay SA (“TGU”) and Emprendimientos de Gas del Sur S.A. (“EGS”). Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Company.
The Company’s management is not aware of any significant subsequent events which affected the financial statements as of September 30, 2016 of Link and TGU, from this date to December 31, 2016.
As mentioned in note 21, on October 13, 2016, the liquidator of EGS ordered the payment of a dividend in kind to its shareholders, which was made in proportion to their shareholdings. For this reason, as of December 31, 2016, the valuation of the investment in EGS has been adjusted in Ps. 2,289.
Profits and losses resulting from upstream and downstream transactions between the Company and its associate are recognized in the Company’s financial statements only to the extent of unrelated investor’s interests in the associates. Unrealized losses are eliminated unless the transaction provides evidence of an impairment of the asset transferred.
F-11
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
When the Company’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Company does not recognize further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate.
According to Link’s accounting policies, certain items of PPE are measured using the revaluation model, meanwhile, as it is stated in note 4.j to the present Consolidated Financial Statements, the Company use the cost model to measure PPE items. Furthermore, as of December 31, 2016, investment in Link has been reduced to zero in the extent that it recorded a shareholders’ equity below zero according to the accounting policies used by TGS. As of the date of issuance of these Consolidated Financial Statements, has not incurred in any legal or constructive obligation or made payments on behalf of the associate.
In the table below, associates are disclosed, together with the percentage of shareholding and voting as of December 31, 2016 and 2015:

| % of shareholding |  |  |
Company |  | Country | Main activity | Closing date
TGU | 49.00 | Uruguay | Pipeline Maintenance | December 31
EGS | 49.00 | Argentina | Pipeline exploitation and construction | December 31
Link | 49.00 | Argentina | Pipeline exploitation and construction | December 31

c) Foreign currency translation
Functional and presentation currency
The consolidated financial statements are presented in Argentine Pesos, which is the Company’s functional currency. Items included in the financial statements of each of the Company’s entities (TGS and Telcosur) are measured using the Argentine Pesos, which is the currency of the primary economic environment in which these entities operate (‘the functional currency’).
IAS 29 "Financial reporting in hyperinflationary economies" requires that the financial statements of an entity whose functional currency is that of a hyperinflationary economy, regardless of whether they are based on the historical cost method or the current cost method, are expressed in terms of the current unit of measure at the reporting date of the reporting period. For this purpose, in general terms, the inflation produced from the date of acquisition or from the date of revaluation, as appropriate, should be included in non-monetary items. In order to conclude about the existence of a hyperinflationary economy, the standard details a series of factors to consider including a cumulative rate of inflation in three years that approaches or exceeds 100%.
As of December 31, 2016, for companies in Argentina, it is not possible to compute the cumulative inflation rate for the three-year period ended on that date based on official data of the Instituto Nacional de Estadísticas y Censos (“INDEC”), because in October 2015, INDEC ceased to compute the Wholesale Price Index, and started to compute it again as from January 2016.
Although during the first half of 2016 inflation increased mainly as a result of the devaluation of the Argentine peso and other factors, according to official data, inflation is currently declining.
At the end of the reporting period, as a result of: (i) local inflation data has not been reported consistently, (ii) the slowdown in inflation in the second half of 2016 and (iii) mixed qualitative indicators suggest that there are not conclusive evidence that the Argentine peso meet the characteristics to qualify as the currency of a hyperinflationary economy according to the guidelines established in IAS 29 and, therefore, these consolidated financial statements have not been restated in constant currency.
F-12
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
However in recent years, certain macroeconomic variables affecting the Company's operations, such as wage costs, prices of inputs and services, have undergone significant annual variations. This circumstance should be considered in the evaluation and interpretation of the financial situation and results presented by the Company in these Consolidated Financial Statements.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. 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 profit or loss for the year.
Foreign exchange gains and losses are presented in the statement of comprehensive income within financial income and financial expenses, as appropriate.
Associates
The company located abroad, TGU, has a functional currency different from the Argentine peso. Assets and liabilities were converted into Argentine pesos using the exchange rate prevailing at the end of each year, their common stock and retained earnings at their historical exchange rates and results at average exchange rates.
d) Financial instruments
Classification
Financial assets are classified into the following categories:
1.
Financial assets at fair value through profit or loss: Includes financial assets held for trading or selling in the near future or designated by the management upon initial recognition. The Company includes in this category balances in mutual funds, public and private bonds, and certain deposits in guarantee which are valued at fair value at each closing date.
2.
Financial assets held to maturity: Within this category, TGS includes non-derivative financial assets with fixed or determinable payments and fixed maturities that the Company has the intent and ability to hold to maturity. The Company includes in this category fixed term deposits.
3.
Loans and other receivables. Within this category the Company includes financial assets with fixed or determinable payments that are not quoted in an active market. Current assets are included, except those whose maturity exceeds twelve months, which are included as non-current assets. The Company includes in this category bank accounts and cash on hand, trade receivables, other receivables and other financial assets valued at amortized cost.
4.
Financial assets available for sale. Financial assets available for sale are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless the investment matures or management intends to dispose of it within 12 months of the end of the reporting period. As of December 31, 2016 and 2015, there are no instruments classified in this category.
Financial liabilities are classified into the following categories:
1.
Financial liabilities at fair value through profit or loss: Includes financial liabilities held for trading. As of December 31, 2016, there are no instruments classified in this category.
2.
Other financial liabilities: Within this category the Company includes financial liabilities with fixed or determinable payments that are not quoted in an active market. Current liabilities are included, except those whose maturity exceeds twelve months, which are included as non-current liabilities. The Company includes in this category trade payables, loans, payroll payables, derivative financial instruments and other payables except for investing in associates.
F-13
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
The classification of the financial instruments depends on the nature and purpose of the financial assets and liabilities and is determined at the time of initial recognition.
Recognition and measurement
Financial assets are initially measured at fair value, net of transaction costs except for those financial assets classified at fair value through profit or loss. Financial assets at fair value through profit or loss are initially recognized at their fair value recognizing the corresponding interest charge. Financial assets available for sale and financial assets at fair value through profit or loss are subsequently recorded at fair value. Loans and receivables and financial assets held to maturity are subsequently recorded at amortized cost in accordance with the method of the effective rate of interest, less, if applicable, impairment losses.
Gains or losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category are presented in the statement of comprehensive income within ‘Financial Income’ in the period in which they arise.
Financial liabilities at fair value through profit or loss are initially and subsequently recorded at fair value. Other financial liabilities, including loans, are initially measured at fair value and subsequently measured at amortized cost using the effective interest rate, recognizing the corresponding interest charge.
Impairment of financial assets at amortized cost
The Company assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired and if so, an impairment charge is recorded. Impairment losses are incurred if there is objective evidence of impairment as a result of one or more events occurring after initial recognition of the asset and that event (or events) has a negative impact on the estimated future projected cash flows of the financial asset or group of financial assets that can be reliably estimated. For this, the Company evaluates several factors, including the credit risk of customers, historical trends and other available information.
The carrying amount of the asset is reduced through an allowance account and the amount of the loss is recognized in the statement of comprehensive income at the time it occurs. If in subsequent periods, the amount of the impairment loss decreases, the reversal is also recorded in the statement of comprehensive income.
As of December 31, 2016 and 2015, impairment of financial assets corresponds to the allowance for doubtful accounts indicated in Note 8.b.
Offsetting of financial instruments
Financial assets and liabilities are offset 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.
e) Derivative financial instruments
Derivative financial instruments are recognized at their fair value at inception and subsequently measured at their fair value and disclosed as assets or liabilities depending if it is gain or loss. The results of derivative financial instruments are classified under "Financial expenses" in the statement of comprehensive income.
Derivative financial instruments have been measured in accordance with IFRS 13.
The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument or not and, according to the nature of the item being hedged. As of the date of the issuance of these financial statements, the Company has not applied hedge accounting in any of its outstanding derivative financial instruments.
F-14
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
The Company does not use derivative financial instruments for speculative purposes.
As of December 31 2015, the Company entered into currency forward agreements with major financial institutions for the purchase of U.S. dollars, which are disclosed under "derivative financial instruments" in the statement of financial position. A (decrease) / increase of financial expenses for the fiscal years 2016 and 2015 is recognized in the statement of comprehensive income within "derivative financial instruments result".
f) Inventories
Inventories consist of natural gas (in excess of the “Line Pack” classified as property, plant and equipment) in the Company’s pipeline system, and the liquids obtained from natural gas processing at the Cerri Complex.
Inventories are measured at the lower of cost or net realizable value. Cost is determined using the weighted average price method. The cost of inventories includes expenditure incurred in purchasing and production and other necessary costs to bring them to their existing location and condition.
The net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs to make the sale.
The assessment of the recoverable value of these assets is made at each reporting date, and the resulting loss is recognized in the statement of comprehensive income when the inventories are overstated.
g) Trade receivables, other receivables and trade payables
Trade receivables and other receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less allowance for trade receivables.
An allowance for trade receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments, including the customers’ credit risk, historical trends and other relevant information are considered indicators that such receivables are impaired. Such evaluation may require future adjustments if economic conditions substantially differ from the assumptions made.
The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in the statement of comprehensive income within selling expenses. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against selling expenses in the statement of comprehensive income.
Tax credits (income tax and value added tax -“VAT”) recorded as a result of the reversion of the tariff increase (Note 16.a.) have been valued at the discounted value of the amounts expected to be collected using a market interest rate.
Trade payables have been initially valued at their fair values and subsequently at their amortized cost, using the effective interest method.
h) Cash and cash equivalents
Cash and cash equivalents include cash on hand, bank accounts, fixed term deposits and other short-term highly liquid investments with original maturities of three months or less.
F-15
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
i) Other financial assets at fair value through profit or loss
The Other financial assets at fair value through profit or loss consist of public and private bonds and mutual funds not considered as cash equivalents.
Initially they were recognized at fair value and subsequently measured at fair value through profit or loss.
Results from Other financial assets at fair value through profit or loss are recognized in the Statement of Comprehensive Income as "Financial Income".
j) Property, plant and equipment
Property, plant and equipment are recorded at cost, less accumulated depreciation and impairment losses, if any. Historical cost comprises the purchase price and any costs directly attributable to the acquisition.
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. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to the statement of comprehensive income when they are incurred.
Property, plant and equipment are comprised as follows:
●
Assets transferred from the privatization of GdE: The value of these assets was determined based on the price paid for the acquisition of 70% of the Company’s common stock, which amounted to US$ 561.2 million. This price was the basis to determine a total value of common stock of US$ 801.7 million, which, when added to the debt assumed under the Company’s privatization agreement (the “Transfer Agreement”) of US$ 395.0 million, resulted in a total value for property, plant and equipment of US$ 1,196.7 million. Such value, converted at the exchange rate in effect as of the date of the Transfer Agreement, has been restated for the effects of inflation.
●
Line pack: It represents the natural gas in the transportation system that is necessary to keep the system at operating capacity, valued at acquisition cost and restated for the effects of inflation.
●
Additions: They have been valued at acquisition cost restated for the effects of inflation. The Company has capitalized all the investments stipulated as mandatory in the License during the first five-year period, in order to achieve system integrity and public safety equal to those required by international standards. Such investments included, among others, the costs of survey programs related to internal and external pipeline inspection, cathodic protection and pipeline replacement and recoating. Additionally, Resolutions No. 1,660 and No. 1,903 issued by ENARGAS include definitions prescribing which costs should be considered improvements and which costs should be considered maintenance expenses. Repair and maintenance costs have been expensed as incurred.
●
Capitalization of foreign exchange loss: Resolutions No. 3/2002 and No. 87/03 issued by the Consejo Profesional de Ciencias Económicas (“CPCECABA”) established that exchange losses arising from the devaluation of the peso from January 6, 2002 to July 28, 2003, to the extent that they were related to foreign currency liabilities existing at the first date, may be added to the cost basis of assets acquired or constructed with direct financing by such foreign currency liabilities.
After its first application, IFRS allows to choose the accounting policy to be used for the measurement of PPE. The alternatives allowed by IAS No. 16 - Property, plant and equipment - ("IAS 16") are the "cost model" or the "revaluation model". The Company chose to continue to apply the cost model for all kinds of elements PPE, using the "deemed cost" determined at the date of transition, as mentioned above.
F-16
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
Accumulated depreciation related to natural gas transportation assets is computed under the straight-line method over the estimated useful lives of the specific assets, which are lower than the maximum useful lives established by ENARGAS through Resolutions No. 1,660 and No. 1,903 of the year 2000.
For depreciation of all other property, plant and equipment, the Company uses the straight-line method of depreciation and applies the annual depreciation rates.
Where individual components of an item of property, plant and equipment have different useful lives, they are accounted for as separate items, which are depreciated separately.
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each statement of financial position date. For further information, see Note 11.
When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in the statement of comprehensive income.
Capitalized foreign exchange loss is depreciated over the remaining useful lives of the assets that led to such capitalization.
In accordance with IAS 23, the Company capitalizes financial expense on long term construction projects. Financial expense capitalized was Ps. 39,735, Ps. 22,676 and Ps. 10,409 for the year ended December 31, 2016, 2015 and 2014.
Impairment of non-financial assets
At each statement of financial position date, the Company reviews the carrying amounts of its property, plant and equipment to determine whether there is any indication that those assets have suffered an impairment loss (e.g. significant decreases in the market value of assets, in the prices of the main products sold by the Company, as well as changes in the regulatory framework for the Company’s activities, significant increases in operating expenses, or evidence of obsolescence or physical damage). If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent, if any, of the impairment loss. Where the asset does not generate cash flows that are independent from other assets, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs.
If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. An impairment loss is recognized immediately in the statement of income.
Where an impairment loss subsequently reverses the carrying amount of the asset or cash-generating unit is increased to the revised estimate of its recoverable amount, not to exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset or cash-generating unit in prior years. A reversal of an impairment loss is recognized immediately in the statement of comprehensive income.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. To such end, the Company makes estimates and assumptions of the economic conditions that will prevail throughout the useful life of the assets.
As a result of the factors mentioned above, actual cash flows and values could vary significantly from projected cash flows and the values derived from the discounting techniques used.
As of December 31, 2016 and 2015, the carrying value of PPE does not exceed their recoverable value.
F-17
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
k) Financial Leases
TGS classifies leases as financial when it assumes substantially all the risks and benefits of ownership of leased assets. To that end, an asset and a liability are initially recognized at the same amount as the lower value that results from comparing the fair value of the leased asset and the present value of the minimum lease payments.
Subsequently, each finance lease payment should be apportioned between the finance charge and the reduction of the outstanding liability (the finance charge to be allocated so as to produce a constant periodic rate of interest on the remaining balance of the liability). The corresponding lease payments, net of financial charges, are included in "Financial leases" in the current and non-current financial Loans of the Statement of Financial Position. Interest on the financial cost is charged to the Statement of Comprehensive Income in the period of the lease in order to obtain a constant periodic interest rate on the debt pending amortization in each period.
Assets acquired through finance leases are depreciated over the useful life of the assets received in accordance with current depreciation policies.
l) Loans
Loans have been initially recorded at the amount received. Subsequently, loans are valued at their amortized cost. Liabilities are disclosed as non-current when their maturity exceeds twelve months.
m) Income tax and deferred income tax
Income tax includes current tax and deferred income tax. Income Tax is presented in the Statement of Comprehensive Income.
The current income tax is calculated on the basis of tax regulations in force at each year-end. Management periodically evaluates positions taken in tax returns with respect to situations in which tax regulations are subject to interpretation and establishes provisions if applicable. As of December 31, 2016, TGS recognized and income provision of Ps. 482,721. As of December 31, 2015, there are no provisions for this concept.
The Company has calculated their respective income tax charges using the deferred tax method, which considers the effect of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
To estimate deferred tax assets and liabilities, the tax rate expected to be in effect at the time of utilization was applied to identify temporary differences based on the legal requirements effective at the date of preparation of these consolidated financial statements.
A deferred tax is recognized on the temporary differences arising from investments in subsidiaries and associates, except for deferred tax liabilities where the Company is able to control the timing of the reversal of the temporary difference and it is probable that the reversal will not occur in the foreseeable future.
Deferred tax assets and liabilities are offset if the Company has a legally enforceable right to offset recognized amounts and when deferred tax assets and liabilities relate to income tax levied by the same tax authority on the same taxable entity or different taxable entities that intend to settle tax assets and liabilities on a net basis. Current and deferred tax assets and liabilities have not been discounted.
Deferred tax assets are recognized only to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilized.
F-18
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
n) Asset tax
The Company is subject to the Impuesto a la Ganancia Mínima Presunta (the “Asset Tax” Law). The asset tax is calculated on an individual entity basis at the statutory tax rate of 1%, and is based upon the taxable assets of each Argentine entity as of the end of the year. This tax is complementary to income tax and the Company is required to pay the greater of the income tax or the asset tax. Any excess of the asset tax over the income tax may be carried forward and recognized as a payment on account of any excess of income tax over asset tax occurring within the subsequent ten years.
When the Company considers it is probable that the position of asset tax is utilized as payment on account of income tax, TGS accounts for asset tax credit as current or non-current, as appropriate, under "Other receivables" in the statement of financial position. As of December 31, 2016, the Company recorded a balance of Ps. 71,405 offsetting the balance of income tax payables. As of December 31, 2015, the Company recorded under "Other non-current receivables" a balance of Ps. 42,500.
o) Provisions
The Company has recorded provisions related to legal actions, judicial court, claims and administrative proceedings, including those of legal and regulatory nature.
Provisions for legal claims and/or claims by third parties ("legal claims and others") are recorded when the Company has a present obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Estimates are reviewed and adjusted, as the Company obtains additional information.
p) Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for goods and/or services supplied. The Company recognizes revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when specific criteria have been met for each of the Company’s activities, as described below.
Tax on exports and turnover tax are disclosed as Selling Expenses.
Natural Gas transportation services includes: (i) firm natural gas transportation, whose revenues are recognized when the capacity is reserved and paid for regardless of actual usage by the customer and (ii) interruptible natural gas transportation whose revenues are recognized at the inception of the rendering of the service.
Liquids Production and Commercialization services includes: (i) Liquids production and commercialization for its own account and on behalf of third parties, whose revenues are recognized at the time of the delivery of the liquids to the customers, and (ii) Other Liquids services, which corresponds mainly to the receipt, storage and dispatch from facilities located in Puerto Galván, and whose sales revenues are recognized when the service is provided.
Services from Other Services segment primarily consist of the treatment, removal of impurities and natural gas compression, as well as inspection and maintenance of pipelines and compressor plants and services of steam generation for electricity production.
Also, TGS provides telecommunications services provided through Telcosur. Revenues in this segment are recognized when the service is provided.
F-19
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
q) Advances of customers
Mainly consist of pre-payments for services made by customers in order to finance the works to render the service. Advances from customers are recognized initially at their fair value. Subsequent to initial recognition, advances from customers are measured at their amortized cost which is higher than the cost of rendering the agreed services that will cancel said advances.
r) Equity accounts
The activity in the Equity accounts reflects resolutions adopted by Shareholders in their meetings, or the effects of the laws or regulations in force.
Common stock
The common stock consists of contributions made by shareholders represented by shares and comprises outstanding shares at their nominal value.
Adjustment to common stock
Common stock accounts were restated in constant currency in accordance with previously applicable accounting standards in Argentina to the implementation of IFRS. Common stock account was kept at nominal value and the adjustment arising from such restatement is shown under “Inflation Adjustment to common stock”.
Common stock adjustment is not distributable in cash or in kind but may be capitalized through issuance of shares. In addition, this balance may be used to compensate accumulated losses in accordance with the compensation method specified under “Accumulated Retained earnings”.
Legal Reserve
Pursuant to the provisions of the Argentine Business Association Law and the CNV, the Company is required to set up a legal reserve by providing at least 5% of the aggregate amount of net income for the year, prior year adjustments, transfers of other comprehensive income to retained earnings and accumulated losses of prior years, when this aggregate amount exceeds zero until the legal reserve equals 20% of the sum of Capital stock and Adjustment to capital stock balances.
Future dividends reserve
Corresponds to the remaining balance of the appropriation made by the General Annual Shareholders’ Meeting held on April 23, 2015, for which a specific amount was intended to constitute a special future dividends reserve. In addition, the Shareholders delegated on the Company’s Board of Directors the determination of the date and amount of the dividend distribution.
TGS’ Board of Directors’ meeting held on January 13, 2016 ordered the payment of a cash dividend by means of the total withdrawal of said reserve. And thus, as of December 31, 2016, the future dividends reserve has no balance.
Future Capital Expenditures and Other Financial Expenses Reserve
The Company’s Shareholders’ Meeting allocates a specific amount to establish a special reserve to Future Capital Expenditures and Other Financial Expenses.
The balance as of December 31, 2016 corresponds to the reserve constituted by the Ordinary and Extraordinary Shareholders' Meeting of TGS held on April 20, 2016.
F-20
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
Distribution of dividends
The cash dividend is recognized as a liability in the Company’s financial statements in the year in which they are approved by the shareholders of the Company or the Board of Directors according to the powers delegated by the Shareholders’ Meeting, as appropriate.
Retained earnings
The outstanding balance of retained earnings includes accumulated gains or losses which were not allocated to a specific purpose reserve and, when positive, may be distributed pursuant to the decision of the Shareholders provided these retained earnings are not subject to legal restrictions, as mentioned above “Legal reserve”.
General Resolution No. 593/2011 issued by the CNV provided that Shareholders in the Meetings at which they should decide upon the approval of financial statements in which the Retained earnings account has a positive balance, should adopt an express resolution as to the allocation of such balance, whether to dividend distribution, capitalization, setting up of reserves or a combination of these.
s) Basic and diluted (losses) / earnings per share
Basic earnings per share as of December 31, 2016 and 2015 were calculated by dividing the amount of income or loss attributable to Shareholders of the Company by the weighted average number of ordinary shares outstanding during the fiscal year (794,495,283 shares). Since the Company does not have preferred shares or debt convertible into shares, basic and diluted earnings per share are the same.
t) Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker (“CODM”). The Company’s CODM is the Board of Directors. Business segment information is provided in note 7 below.
u) Dividend distribution
The cash dividend is recognized as a liability in the Company’s financial statements in the year in which they are approved by the shareholders of the Company or the Board of Directors according to the powers delegated by the Shareholders’ Meeting, as appropriate.
Dividends distributed during years ended December 31, 2016, 2015 and 2014 amounted to Ps. 99,734 (Ps. 012 per share), Ps. nil and Ps. 260,525 (Ps. 0.33 per share), respectively.
v) Comparative information
For the purposes of the comparative presentation, necessary reclassifications were made on the financial statements of the previous year to be presented on a uniform basis. The modification of the comparative information does not imply changes in the decisions taken in due course.
5.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
Critical accounting policies are those that are most important to the portrayal of the Company’s financial condition, results of operations and cash flows, and require management to make difficult, subjective or complex judgments and estimates about matters that are inherently uncertain. Management bases its estimates on various factors, including past trends, expectation of future events regarding the outcome of events and results and other assumptions that it believes are reasonable.
Actual results could differ from estimates used in employing the critical accounting policies and these could have a material impact on the Company’s results of operations. The Company’s critical accounting policies are discussed below:
F-21
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
(a) Impairment of PPE
The Company considers each of its business segments to be a single cash generating unit. Accordingly, the Company evaluates the carrying value of its property, plant and equipment on a segment-by-segment basis at the end of each fiscal year. In addition, the Company periodically evaluates the carrying value of its property, plant and equipment for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
The calculation of the value in use is based on the definition of discounted future cash flows. The projected cash flows are prepared taking into account: (i) projections of the price of liquids and purchase cost of natural gas used as raw material associated with the Liquids and Commercialization segment, (ii) estimates relating to the amount of the tariff increase and the recognition of cost adjustments for the Natural Gas Transportation segment, (iii) projections of the future costs to be incurred, (iv) the use of certain macroeconomic variables such as interest rates, inflation, foreign exchange rates. The discount rate is the weighted average cost of capital (“WACC”).
The Company recorded no impairment losses of components of property, plant and equipment at December 31, 2016 and 2015.
Due to the uncertainties surrounding the tariff renegotiation process as describes in Note 16.a), estimates of future tariff adjustments are highly uncertain and there is a substantial risk that these estimates could prove to be materially different from actual future tariffs. Within this framework, during 2016, the Company received a limited transitional increase of 200.1% and began the Integral Tariff Revision (“RTI” process). For further information, see Note 16.a to these consolidated financial statements.
In performing the analysis, TGS based on: (i) the status of the negotiations with the Argentine government and the impact of the tariff increases received, (ii) the current regulatory framework, (iii) recent experiences and renegotiation agreements signed by other gas and electricity utility peers, (iv) management’s expectations regarding other measures that management believes are likely to be taken by the Argentine government to deal with the present economic situation of gas and electricity utilities, and (v) expectations of the Company to conclude the RTI process, with the application of tariff increases as from 2017 and the impact of a cost monitoring scheme that allows the realization of semiannual adjustments at current tariffs.
In this sense, as of December 31, 2016the Company has prepared three different estimates of expected cash flows to which the following percentages of probability of occurrence have been assigned: optimistic: 20%, base: 70% and pessimistic: 10%. Each of the cash flows prepared contains assumptions regarding the implementation of an Integral Renegotiation Agreement, which includes different estimates related to the amount of tariff increases for the Natural Gas Transportation segment.
Based on those estimations, the estimated discounted cash flows were higher than the carrying amount of such assets as of December 31, 2016.
Since the preparation of the different estimates of cash flows implied the modification of the assumptions used for their preparation and all of them imply to obtain of a new tariff scheme that remunerates in a fair and reasonable way the provision of the natural gas transportation public service and the recovery of the invested capital, even a 100% increase in the weighted probability of the pessimistic case (from 10% to 100%) and a reduction from 20% to 0% in the probability of occurrence of the optimistic case and a reduction from 70% to 0% in the base case would not generate adjustment for impairment. As of December 31, 2016, there are no impairment balances subject to reversal.
F-22
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
As mentioned in “Note 22. Subsequent Events”, on March 30, 2017 TGS signed a new transitional agreement (the “2017 Transitional Agreement”), ratified by Resolution No. 4362/2017 (“Resolution 4362”), which the ENARGAS established increases of 214.2% and 37% in the transportation tariffs and CAU, respectively, in case they had been implemented in one time shot since April 1, 2017. However, Resolution 74 established that the increases were granted in three stages effective from April 1, 2017, December 1, 2017 and April 1, 2018. On March 30, 2017, TGS also signed the 2017 Integral Renegotiation Agreement, which is still pending approval by the different governmental authorities. All these steps are neccesary for the conclusion of the renegotiation of TGS’ License.
Considering the terms obtained by Resolution 4362 issued by ENARGAS on March 30, 2017 and the 2017 Integral Renegotiation Agreement, TGS re-estimated the different cash flows used to evaluate the impairment of elements of PPE associated with the Natural Gas Transportation business segment. In this sense, the Company’s management believes that it is not necessary to estimate three different cash flows applicable for this business segment. In this case, a single cash flow was prepared which considers: (i) the amount of the first tranche of the tariff increase, (ii) the timing of the rate increases obtained, (iii) the estimated amounts of the rate increases to obtain in December 2017 and April 2018, (iv) the six-month adjustment mechanism provided by Resolution 4362, (v) the Five-Year Investment Plan, and (vi) the macroeconomic variables that will impact on our business.
Thus, considering the above mentioned assumptions, as of December 31, 2016 there are no changes regarding the opinion of the Company with respect that no impairment losses should be recognized.
(b) Allowances for doubtful accounts
The Company provides for doubtful accounts relating to its accounts receivables. The allowance for doubtful accounts is based on management’s evaluation of various factors, including the credit risk of customers, historical trends and other information. While management uses the information available to make evaluations, future adjustments to the allowance may be necessary if future economic conditions differ substantially from the assumptions used in making the evaluations. Management has considered all events and/or transactions that are subject to reasonable and normal methods of estimation, and the consolidated financial statements reflect that consideration.
(c) Provisions for legal claims and others
The Company has certain liabilities with respect to existing court or out-of-court claims, lawsuits and other proceedings, including those involving legal and regulatory matters. The Company records liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Such provisions are based on developments known at the date of the issuance of these consolidated financial statements, estimates of the outcome of these matters and the experience of its legal counsel in contesting, litigating and settling other matters. As the scope of the liabilities become better defined, there will be changes in the estimates of future costs, which could have a material effect on the Company's future results of operations and financial condition or liquidity.
(d) Income Tax
Deferred tax assets are recognized for all tax losses to the extent that it is probable that there will be a tax benefit against which these losses can be utilized. Determining the amount of deferred tax assets that can be registered requires a considerable judgment by the Management, based on the probable term and level of future taxable profits together with future tax planning strategies and macroeconomic variables affecting the business. As of December 31, 2015, the Company recorded a deferred tax asset for the tax loss carryforward in this fiscal year amounting to Ps. 58,936.
F-23
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
6.
SUPPLEMENTAL CASH FLOW INFORMATION
For purposes of the consolidated statement of cash flows, the Company considers all highly liquid temporary investments with an original maturity of three months or less at the time of purchase to be cash equivalents. The cash flow statement has been prepared using the indirect method, which requires a series of adjustments to reconcile net income for the period to net cash flows from operating activities.
Non-cash investing and financing activities for the years ended December 31, 2016, 2015 and 2014 are presented below:

| 2016 | 2015 | 2014
Acquisition of PPE through an increase in Trade payable | 47,198 | 25,608 | 31,738
Financial charges capitalization | 39,735 | 22,676 | 10,409
Increase in financial assets through a decrease in Other receivables | 144,773 | - | -
Leasing for PPE acquisition | 750,389 |  |

(1)
Corresponds to the collection of the compensation received for the participation in the Propane for Networks Agreement. For further information see Note 16.b.
(2)
See Note 12.
7.
CONSOLIDATED BUSINESS SEGMENT INFORMATION
IFRS 8 “Operating Segments” requires an entity to report financial and descriptive information about its reportable segments, which are operating segments or aggregations of operating segments that meet specified criteria. Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the CODM in deciding how to allocate resources and in assessing performance. The Company’s CODM is the Board of Directors.
The CODM evaluates the business based on the differences in the nature of the Company’s products and services. The business segment information is reported consistently with the information reviewed by the Board of Directors. The amount reported for each segment item is the measure reported to the CODM for these purposes. This measure is the operating profit / deficit.
Operating segments identified are disclosed as reportable segments if they meet any of the following quantitative thresholds:
●
Reported revenues of the operating segments are 10%t or more of the combined revenue, internal and external, of all operating segments;
●
The absolute amount of reported profit or loss is 10% or more of the greater, in absolute amount, of (i) the combined reported profit of all operating segments that did not report a loss and (ii) the combined reported loss of all operating segments that reported a loss.
●
Assets are 10 per cent or more of the combined assets of all operating segments
As well as this, the operating segments that do not meet any of the quantitative thresholds can be considered as reportable segments if the management estimates that this information could be useful for the users of the financial statements.
If, after determining reportable segments in accordance with the preceding quantitative thresholds, the total external revenue attributable to those segments amounts to less than 75% of the total Company’s consolidated external revenue, additional segments are identified as reportable segments, even if they do not meet the thresholds described above, until at least 75% of the Company’s consolidated external revenue is included in reportable segments.
F-24
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
Segment information has been prepared and classified according to different types of businesses in which the Company conducts its activities. The four reportable segments under IFRS 8 are as follows:
●
Natural Gas Transportation: revenues of this business segment are derived mainly from firm contracts, under which pipeline capacity is reserved and paid for regardless of actual usage by the customer. The Company also provides interruptible natural gas transportation services subject to available pipeline capacity. In addition, TGS renders operation and maintenance services of the Natural Gas Transportation facilities, which belong to certain gas trusts (fideicomisos de gas) created by the Argentine Government to expand the capacity of the Argentine natural gas transportation pipeline system. This business segment is subject to ENARGAS regulation.
●
Production and Commercialization of Liquids: Liquids production and commercialization activities are conducted at Cerri Complex, which is located, near the city of Bahía Blanca in the Province of Buenos Aires. In the Cerri Complex, ethane, LPG and natural gasoline are extracted from the natural gas, which arrives through three main pipelines from the Neuquén and Austral natural gas basins. TGS sells its production of liquids in the domestic and the international markets. TGS sells part of its production of propane and butane to liquids marketers in the domestic market. The remainder of these products and all of its natural gasoline are exported at current international market prices. Ethane is entirely sold in the domestic market to PBB-Polisur S.A. at agreed prices.
●
Other services: Midstream services include natural gas treatment, separation, and removal of impurities from the natural gas stream, as well as natural gas compression, rendered at the wellhead typically for natural gas producers. In addition, TGS provides services related to pipeline and compression plant construction, operation and maintenance of pipelines and compressor plants services, as well as steam generation for electricity production.
●
Telecommunications: Telecommunication services are rendered through Telcosur, a company controlled by TGS. Telcosur provides services as an independent carrier of carriers to leading telecommunication operators and corporate customers located in its service area.
Detailed information on each business segment for the years ended December 31, 2016, 2015 and 2014 is disclosed below:

Year ended December 31, 2016
|  | Production and |  |  |
| Natural Gas | Commercialization of | Other |  |
| Transportation | Liquids | Services | Telecommunications | Total
Revenue from sales (1) | 2,087,191 | 4,768,326 | 485,855 | 60,800 | 7,402,172
Cost of sales | (997,635) | (3,218,936) | (187,815) | (31,529) | (4,435,915)
Administrative expenses | (264,821) | (32,535) | (14,734) | (3,289) | (315,379)
Selling expenses | (121,189) | (180,499) | (44,286) | (7,540) | (353,514)
Other operating (expenses) / income | (44,678) | (19,147) | (1,261) | (457) | (65,543)
Operating profit | 658,868 | 1,317,209 | 237,759 | 17,985 | 2,231,821
Depreciation of property, plant and equipment | (238,844) | (16,693) | (31,261) | - | (286,798)
(1) Revenues from sales from Production and Commercialization of Liquids segment includes Ps. 183,870 of National Government subsidies. |

Identifiable assets | 6,454,526 | 1,184,593 | 1,235,079 | 57,134 | 8,931,332
Identifiable Liabilities | 4,209,833 | 1,214,944 | 968,527 | 11,650 | 6,404,954

|  | Production and |  |  |
| Natural Gas | Commercialization of | Other |  |
| Transportation | Liquids | Services | Telecommunications | Total
External market | - | 1,437,902 | - | - | 1,437,902
Local market | 2,087,191 | 3,330,424 | 485,855 | 60,800 | 5,964,270

F-25
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________

Year ended December 31, 2015
|  | Production and |  |  |
| Natural Gas | Commercialization of | Other |  |
| Transportation | Liquids | Services | Telecommunications | Total
Revenue from sales (1) | 1,013,998 | 2,907,770 | 260,600 | 44,201 | 4,226,569
Cost of sales | (758,488) | (1,869,397) | (108,617) | (23,403) | (2,759,905)
Administrative expenses | (172,667) | (16,512) | (9,985) | (2,472) | (201,636)
Selling expenses | (48,082) | (155,747) | (32,889) | (4,612) | (241,330)
Other operating (expenses) / income | (332,997) | (2,663) | 191 | 18 | (335,451)
Operating profit | (298,236) | 863,451 | 109,300 | 13,732 | 688,247
Depreciation of property, plant and equipment | (194,659) | (49,651) | (17,083) | - | (261,393)
(1) Revenues from sales from Production and Commercialization of Liquids segment includes Ps. 129,629 of National Government subsidies. |

Identifiable assets | 5,032,799 | 1,237,732 | 310,441 | 65,605 | 6,646,577
Identifiable Liabilities | 4,095,216 | 625,023 | 196,031 | 34,873 | 4,951,143

|  | Production and |  |  |
| Natural Gas | Commercialization of | Other |  |
| Transportation | Liquids | Services | Telecommunications | Total
External market | - | 967,340 | - | - | 967,340
Local market | 1,013,998 | 1,940,430 | 260,600 | 44,201 | 3,259,229

Year ended December 31, 2014
|  | Production and |  |  |
| Natural Gas | Commercialization of | Other |  |
| Transportation | Liquids | Services | Telecommunications | Total
Revenue from sales (1) | 744,089 | 3,243,299 | 256,716 | 59,867 | 4,303,971
Cost of sales | (626,658) | (1,828,312) | (90,439) | (20,126) | (2,565,535)
Administrative expenses | (121,994) | (30,814) | (8,532) | (2,144) | (163,484)
Selling expenses | (35,339) | (574,501) | (32,148) | (5,371) | (647,359)
Other operating (expenses) / income | (2,509) | 7,192 | 232 | 6 | 4,921
Operating profit | (42,411) | 816,864 | 125,829 | 32,232 | 932,514
Depreciation of property, plant and equipment | (189,524) | (48,112) | (16,675) | - | (254,311)
(1) Revenues from sales from Production and Commercialization of Liquids segment includes Ps. 85,945 of National Government subsidies. |

Identifiable assets | 5,069,464 | 739,076 | 314,616 | 51,264 | 6,174,420
Identifiable Liabilities | 3,494,144 | 602,655 | 189,032 | 21,046 | 4,306,877

|  | Production and |  |  |
| Natural Gas | Commercialization of | Other |  |
| Transportation | Liquids | Services | Telecommunications | Total
External market | - | 1,490,853 | - | - | 1,490,853
Local market | 744,089 | 1,752,446 | 256,716 | 59,867 | 2,813,118

F-26
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
8.
SUMMARY OF SIGNIFICANT STATEMENT OF FINANCIAL POSITION AND STATEMENT OF COMPREHENSIVE INCOME ITEMS
a)
Other receivables

| 2016 | 2015
| Current | Non-Current | Current | Non-Current
Turnover tax credit balance | 1,074 | - | - | -
Income tax credit balance | 962 | - | 89,311 | -
VAT credit balance | 101,460 | - | 50,038 | -
Asset tax credit balance (1) | - | - | - | 42,500
Other tax receivables (2) | 15,430 | 68,686 | 10,469 | 58,019
Prepaid expenses | 20,124 | - | 17,096 | -
Advances to suppliers | 70,203 | - | 64,404 | -
Subsidies receivables | 156,399 | - | 133,647 | -
Taxes to be recovered | - | - | 2,346 | -
Guaranteed deposits | 765 | - | 10,749 | -
Easements to be recovered | - | 461 | - | 3,007
Deferred Income tax | - | - | - | -
Others | 11,855 | 6,318 | 15,720 | 4,742
Total | 378,272 | 75,465 | 393,780 | 108,268
(1) As of December 31, 2016 includes Ps. 71,405 the asset tax credit offsetting the income tax payable
(2) As of December 31, 2016 and 2015, other non-current tax receivables include Ps. 69,391 and Ps. 54,872, respectively of income tax and VAT credits generated by the reversion of the tariff increase credit.

The breakdown of other receivables based on its currency of origin is the following:

| 2016 | 2015
| Current | Non-Current | Current | Non-Current
Argentine Pesos | 359,103 | 75,465 | 257,866 | 108,268
U.S. Dollars | 19,169 | - | 131,665 | -
Euros | - | - | 4,249 | -
Total | 378,272 | 75,465 | 393,780 | 108,268

b)
Trade receivables

| 2016 | 2015
| Current | Non-Current | Current | Non-Current
Commons | 1,128,454 | 8,122 | 714,626 | 6,470
Natural Gas Transportation | 405,388 | - | 119,290 | -
Production and Commercialization of Liquids | 550,596 | - | 552,500 | -
Other services | 172,470 | 8,122 | 42,836 | 6,470
Related parties | 117,688 | - | 78,598 | -
Natural Gas Transportation | 5,544 | - | 2,341 | -
Production and Commercialization of Liquids | - | - | 48,317 | -
Other services | 112,144 | - | 27,940 | -
Allowance for doubtful accounts | (19,703) | - | (1,389) | -
Total | 1,226,439 | 8,122 | 791,835 | 6,470

F-27
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
The breakdown of trade receivables based on its currency of origin is the following:

| 2016 | 2015
| Current | Non-Current | Current | Non-Current
Argentine Pesos | 568,500 | - | 220,743 | -
U.S. Dollars | 657,939 | 8,122 | 571,092 | 6,470
Total | 1,226,439 | 8,122 | 791,835 | 6,470

The movement of the allowance for doubtful accounts is as follows:

Balances as of December 31, 2013 | 4,121
Additions | -
Applications | (2,525)
Decreases | (207)
Balances as of December 31, 2014 | 1,389
Additions | -
Applications | -
Decreases | -
Balances as of December 31, 2015 | 1,389
Additions (1) | 19,703
Applications | (1,389)
Decreases | -
Balances as of December 31, 2016 | 19,703
(1) Included in Selling expenses.

c)
Cash and cash equivalents

| 2016 | 2015
Cash and banks | 650,248 | 407,038
Time deposits | - | 338,994
Mutual funds | 901,680 | 122,816
Bank account | 3,161 | 3,689
Total | 1,555,089 | 872,537

The breakdown of cash and cash equivalents based on its currency of origin is the following:

| 2016 | 2015
Argentine Pesos | 921,768 | 473,222
U.S. Dollars | 633,321 | 399,315
Total | 1,555,089 | 872,537

F-28
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
d)
Advances from customers (1)

| 2016 | 2015
| Current | Non-Current | Current | Non-Current
Aluar Aluminio Argentino S.A.C.I. (“Aluar”) | 6,742 | 144,980 | 6,742 | 151,722
Fideicomiso de Gas | - | - | 2,760 | -
Total Austral S.A. (“Total Austral”) | 795 | - | 4,770 | 795
YPF S.A. (“YPF”) | 2,434 | 6,947 | 2,347 | 9,381
Pan American Sur S.A. (“PAS”) | 530 | - | 3,180 | 530
Pan American Energy L.L.C. (“PAE”) | 2,182 | 58,976 | 2,182 | 60,813
Polisur | 3,905 | 98,531 | 2,982 | 104,367
Others | 21,006 | 4,252 | 816 | 4,700
Total | 37,594 | 313,686 | 25,779 | 332,308
(1) They are mainly related to expansion works for the rendering of services contracted by such clients. The advance will be settled with the effective rendering of the service.

Advances from customers are denominated in pesos.
e)
Other payables

| 2016
| Current | Non-Current
Dividends payable (1) | - | -
Provision for compensation for the Board of Directors and Supervisory Committee | 2,334 | -
Others | 1,482 | -
Total | 3,816 | -
(1) Dividends were paid on January 13, 2016.

Other payables are denominated in pesos.
f)
Taxes payables

| 2016 | 2015
| Current | Non-Current | Current | Non-Current
Asset tax credit balance | - | - | 42,500 | -
Withholdings and perceptions made to third parties | 43,687 | - | 43,583 | -
Tax on exports | 2,299 | - | - | -
Turnover Tax | 4,570 | - | - | -
Others | 8,636 | - | 6,477 | -
Total | 59,192 | - | 92,560 | -

Taxes payables are denominated in pesos.
g)
Trade payables

| 2016 | 2015
| Current | Non-Current | Current | Non-Current
Suppliers | 911,318 | - | 410,126 | -
Customers (credit balances) | 8,592 | - | 9,531 | -
Related companies | 41,338 | - | 22,867 | -
Total | 961,248 | - | 442,524 | -

F-29
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
_____________________________________________________________________________________________________
The breakdown of trade payables based on its currency of origin is the following:

|  | 2016 |  | 2015
|  | Current | Non-Current |  | Current | Non-Current
Argentine Pesos |  | 290,245 | - |  | 166,819 | -
U.S. Dollars |  | 671,003 | - |  | 275,705 | -
Total |  | 961,248 | - |  | 442,524 | -

h)
Cost of sales

|  | 2016 | 2015 | 2014
Inventories at the beginning of the year | 8,452 | 29,131 | 7,356
Natural gas purchases | 2,868,189 | 1,574,999 | 1,591,315
Operating expenses (Note 8.i.) | 1,676,137 | 1,164,227 | 995,995
Inventories at the end of the year | (116,863) | (8,452) | (29,131)
Total |  | 4,435,915 | 2,759,905 | 2,565,535

F-30
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
i)
Expenses by nature – Information required under art. 64 paragraph I, clause B) Commercial Companies Law

| 2016
|  | Operating expenses |  |  |
Accounts | Total | Regulated Activities | Non Regulated Activities | Administrative expenses | Selling expenses | Financial expenses
Salaries, wages and other contributions | 814,731 | 403,546 | 200,403 | 163,999 | 46,783 | -
Social security taxes | 139,356 | 64,518 | 33,944 | 30,874 | 10,020 | -
Compensation to Directors and Supervisory Committee | 6,328 | - | - | 6,328 | - | -
Professional services fees | 41,392 | 1,434 | 3,645 | 32,657 | 3,656 | -
Technical operator assistance fees | 168,008 | 54,128 | 113,880 | - | - | -
Materials | 43,205 | 14,153 | 29,052 | - | - | -
Third parties services | 94,185 | 37,014 | 49,257 | 7,914 | - | -
Telecommunications and post expenses | 5,177 | 342 | 1,087 | 3,405 | 343 | -
Rents | 3,219 | 722 | 252 | 2,099 | 146 | -
Transports and freight | 27,614 | 17,020 | 9,846 | 709 | 39 | -
Easements | 19,315 | 19,315 | - | - | - | -
Offices supplies | 2,679 | 917 | 305 | 1,223 | 234 | -
Travels expenses | 9,972 | 4,832 | 1,550 | 2,742 | 848 | -
Insurance | 26,509 | 15,048 | 9,330 | 1,771 | 360 | -
Property, plant and equipment maintenance | 209,257 | 150,923 | 52,100 | 5,065 | 1,169 | -
Depreciation of property, plant and equipment | 286,798 | 190,031 | 47,928 | 48,839 | - | -
Amortization of intangible assets | - | - | - | - | - | -
Taxes and contributions | 355,445 | 80,365 | 8,927 | 728 | 265,426(1) | -
Advertising | 584 | - | - | - | 584 | -
Doubtful accpunts | 20,546 | - | - | - | 20,546 | -
Banks expenses | 2,120 | - | - | 2,120 | - | -
Interests expense | 431,561 | - | - | - | - | 431,561
Foreign exchange loss | 711,822 | - | - | - | - | 711,822
Other financial charges | 66,392 | - | - | - | - | 66,392
Derivate financial instruments | 8,933 | - | - | - | - | 8,933
Costs of services rendered to third parties | 40,453 | - | 40,453 | - | - | -
Transactions among business segments | - | (71,079) | 71,079 | - | - | -
Other expenses | 28,136 | 13,908 | 5,962 | 4,906 | 3,360 | -
Total 2016 | 3,563,737 | 997,137 | 679,000 | 315,379 | 353,514 | 1,218,708

(1) Includes tax on exports of Ps. 11,081 for the year ended December 31, 2016.
F-31
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)

| 2015
|  | Operating expenses |  |  |
Accounts | Total | Regulated Activities | Non Regulated Activities | Administrative expenses | Selling expenses | Financial expenses
Salaries, wages and other contributions | 564,489 | 295,429 | 121,264 | 114,577 | 33,219 | -
Social security taxes | 98,812 | 46,067 | 19,839 | 25,962 | 6,944 | -
Compensation to Directors and Supervisory Committee | 5,379 | - | - | 5,379 | - | -
Professional services fees | 25,025 | 563 | 1,124 | 21,139 | 2,199 | -
Technical operator assistance fees | 52,481 | 3,000 | 49,481 | - | - | -
Materials | 29,113 | 10,545 | 18,568 | - | - | -
Third parties services | 51,604 | 20,161 | 25,429 | 6,014 | - | -
Telecommunications and post expenses | 4,161 | 445 | 778 | 2,714 | 224 | -
Rents | 2,619 | 516 | 367 | 1,615 | 121 | -
Transports and freight | 19,506 | 12,484 | 6,634 | 381 | 7 | -
Easements | 15,003 | 15,003 | - | - | - | -
Offices supplies | 1,508 | 531 | 239 | 634 | 104 | -
Travels expenses | 8,279 | 4,069 | 1,290 | 2,285 | 635 | -
Insurance | 22,850 | 12,935 | 8,280 | 1,279 | 356 | -
Property, plant and equipment maintenance | 137,814 | 105,054 | 28,791 | 3,262 | 707 | -
Depreciation of property, plant and equipment | 261,393 | 184,251 | 66,734 | 10,408 | - | -
Taxes and contributions | 261,712 | 60,094 | 4,999 | 524 | 196,095(1) | -
Advertising | 154 | - | - | - | 154 | -
Banks expenses | 1,430 | - | - | 1,430 | - | -
Interests expense | 320,428 | - | - | - | - | 320,428
Foreign exchange loss | 1,164,585 | - | - | - | - | 1,164,585
Other financial charges | 41,718 | - | - | - | - | 41,718
Costs of services rendered to third parties | 26,375 | - | 26,375 | - | - | -
Transactions among business segments | - | (21,435) | 21,435 | - | - | -
Other expenses | 17,486 | 8,512 | 4,376 | 4,033 | 565 | -
Year ended Deccember 31, 2015 | 3,133,924 | 758,224 | 406,003 | 201,636 | 241,330 | 1,526,731

(1) Includes tax on exports of Ps. 511,600 for the year ended December 31, 2015.

| 2014
|  | Operating expenses |  |  |
Accounts | Total | Regulated Activities | Non Regulated Activities | Administrative expenses | Selling expenses | Financial expenses
Salaries, wages and other contributions | 416,968 | 224,727 | 84,138 | 82,777 | 25,326 | -
Social security taxes | 74,640 | 37,074 | 15,027 | 17,136 | 5,403 | -
Compensation to Directors and Supervisory Committee | 4,595 | - | - | 4,595 | - | -
Professional services fees | 22,094 | 1,238 | 2,239 | 17,539 | 1,078 | -
Technical operator assistance fees | 69,966 | 3,000 | 66,966 | - | - | -
Materials | 26,597 | 11,079 | 15,518 | - | - | -
Third parties services | 41,059 | 15,650 | 20,567 | 4,842 | - | -
Telecommunications and post expenses | 3,543 | 252 | 690 | 2,461 | 140 | -
Rents | 1,802 | 411 | 122 | 1,092 | 177 | -
Transports and freight | 15,647 | 11,059 | 4,261 | 325 | 2 | -
Easements | 14,832 | 14,832 | - | - | - | -
Offices supplies | 1,669 | 560 | 208 | 820 | 81 | -
Travels expenses | 6,142 | 3,056 | 1,008 | 1,431 | 647 | -
Insurance | 19,125 | 11,386 | 6,853 | 841 | 45 | -
Property, plant and equipment maintenance | 113,011 | 79,984 | 29,713 | 2,718 | 596 | -
Depreciation of property, plant and equipment | 254,311 | 175,461 | 64,787 | 14,063 | - | -
Taxes and contributions | 686,707 | 47,016 | 17,320 | 8,825 | 613,546(1) | -
Advertising | 136 | - | - | - | 136 | -
Doubtful accounts | (207) | - | - | - | (207) | -
Banks expenses | 1,155 | - | - | 1,083 | 72 | -
Interests expense | 300,334 | - | - | - | - | 300,334
Foreign exchange loss | 777,514 | - | - | - | - | 777,514
Other financial charges | 47,456 | - | - | - | - | 47,456
Derivative financia instruments results | 103,497 | - | - | - | - | 103,497
Costs of services rendered to third parties | 18,740 | - | 18,740 | - | - | -
Transactions among business segments | - | (17,299) | 17,299 | - | - | -
Other expenses | 14,306 | 6,908 | 4,145 | 2,936 | 317 | -
Year ended Deccember 31, 2014 | 3,035,639 | 626,394 | 369,601 | 163,484 | 647,359 | 1,228,801
(1) Includes tax on exports of Ps. 511,600 for the year ended December 31, 2014.

F-32
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
j)
Net financial results

| 2016 | 2015 | 2014
Financial income |  |  |
Derivative financial instrument results | - | 128,525 | -
Interest income | 100,418 | 79,387 | 141,453
Fair value gains on financial instruments through profit or loss | 169,890 | 55,892 | 9,238
Foreign exchange gain | 135,039 | 288,764 | 158,981
Subtotal | 405,347 | 552,568 | 309,672
Financial expenses |  |  |
Interest expense | (470,663) | (343,104) | (230,807)
Foreign exchange loss | (712,456) | (1,165,803) | (626,979)
Derivative financial instrument results | (8,933) | - | 38,025
Other financial charges | (66,392) | (41,718) | (29,885)
Less: Amounts capitalised on qualifying assets | 39,736 | 23,894 | 7,245
Subtotal | (1,218,708) | (1,526,731) | (842,401)
Total | (813,361) | (974,163) | (532,729)

k)
Other operating (expenses) / income

| 2016 | 2015 | 2014
Net increase in provisions | (61,634) | (15,897) | (1,641)
Acquisition of the Rights of the Arbitration Proceeding (Note 16.a) | - | (324,390) | -
Others | (3,909) | 4,836 | 6,562
Total | (65,543) | (335,451) | 4,921

l)
Other financial assets at fair value through profit or loss

| 2016 | 2015
| Current | Non-Current | Current | Non-Current
Public bonds | 55,508 | 84,857 | 2,863 | -
Mutual Funds | - | - | 19,856 | -
Private bonds | - | 58,015 | - | 44,063
Total | 55,508 | 142,872 | 22,719 | 44,063

The breakdown of other financial assets at fair value through profit or loss based on its currency of origin is the following:

| 2016 | 2015
| Current | Non-Current | Current | Non-Current
Argentine Pesos | - | - | 22,719 | -
U.S. Dollars | 55,508 | 142,872 | - | 44,063
Total | 55,508 | 142,872 | 22,719 | 44,063

F-33
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
9.
INVESTMENTS IN ASSOCIATES

| 2016 | 2015
| Cost Value | Book Value | Book Value
EGS | 116 | 357 | 1,909
TGU | 5 | 2,517 | 1,775
Subtotal | 121 | 2,874 | 3,684
Link | 503 | - | -
Total | 624 | 2,874 | 3,684

10.
PROFIT / (LOSS) FROM ASSOCIATES

| 2016 | 2015 | 2014
EGS | 780 | 177 | (197)
TGU | 742 | 77 | 29
Link | - | - | 3,058
Total | 1,522 | 254 | 2,890

F-34
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
______________________________________________________________________________________________
11.
PROPERTY, PLANT AND EQUIPMENT

| 12/31/2016
| C o s t | D e p r e c i a t i o n |
|  |  |  |  |  | Accumulated at |  |  |  | Accumulated at |
| Beginning |  |  |  | End of | the beginning |  |  |  | at the end | Net
Account | of the year | Additions | Retirements | Transfers | the year | of the year | Retirements | For the year | Rate % | of the year | book value
Pipelines | 3,644,917 | - | - | 1,794 | 3,646,711 | 1,520,415 | - | 86,178 | 2.2 | 1,606,593 | 2,040,118
Compressor plants | 1,512,294 | 306 | - | 52,220 | 1,564,820 | 910,354 | - | 83,439 | 3.3 to 25 | 993,793 | 571,027
Other industrial plants | 2,868 | - | - | - | 2,868 | 554 | - | 97 | 3.3 | 651 | 2,217
Stations of regulation and/or |  |  |  |  |  |  |  |  |  |  |
measurement of pressure | 129,228 | - | - | 7,060 | 136,288 | 87,972 | - | 5,235 | 4.0 | 93,207 | 43,081
Other technical installations | 28,368 | - | - | 493 | 28,861 | 20,978 | - | 966 | 6.7 | 21,944 | 6,917
Subtotal assets related to |  |  |  |  |  |  |  |  |  |  |
natural gas transportation service | 5,317,675 | 306 | - | 61,567 | 5,379,548 | 2,540,273 | - | 175,915 |  | 2,716,188 | 2,663,360
Assets related to natural gas |  |  |  |  |  |  |  |  |  |  |
upstream service | 206,576 | 750,389 | - | 15,096 | 972,061 | 119,046 | - | 21,528 | 2.2 to 25 | 140,574 | 831,487
Assets related to liquids |  |  |  |  |  |  |  |  |  |  |
production and commercialization service | 756,700 | - | - | 25,895 | 782,595 | 570,286 | - | 12,648 | 5.9 | 582,934 | 199,661
Lands | 6,279 | 4,935 | 292 | - | 10,922 | - | - | - | - | - | 10,922
Buildings and constructions | 198,796 | - | - | 8,046 | 206,842 | 102,436 | - | 4,043 | 2.0 | 106,479 | 100,363
Fittings and features in building | 33,897 | - | - | 501 | 34,398 | 5,598 | - | 1,430 | 4.0 | 7,028 | 27,370
Machinery, equipment and tools | 48,655 | 5,780 | - | 569 | 55,004 | 38,370 | - | 2,345 | 6.7 to 20 | 40,715 | 14,289
Computers and Telecommunication systems | 419,541 | 660 | - | 50,148 | 470,349 | 308,394 | - | 56,258 | 6.7 to 20 | 364,652 | 105,697
Vehicles | 33,072 | 12,281 | 453 | - | 44,900 | 24,351 | 389 | 4,987 | 10 and 20 | 28,949 | 15,951
Furniture | 13,485 | - | - | 1,372 | 14,857 | 12,852 | - | 121 | 10 | 12,973 | 1,884
Capitalization of foreign exchange loss | 177,272 | - | - | - | 177,272 | 106,272 | - | 7,523 | 4 | 113,795 | 63,477
Materials | 356,008 | 209,239 | 6,845 | (75,856) | 482,546 | - | - | - | - | - | 482,546
Line pack | 13,872 | - | - | - | 13,872 | 1,618 | - | - | - | 1,618 | 12,254
Works in progress | 467,188 | 424,233 | - | (87,338) | 804,083 | - | - | - | - | - | 804,083
Total 2016 | 8,049,016 | 1,407,823 | 7,590 | - | 9,449,249 | 3,829,496 | 389 | 286,798 |  | 4,115,905 | 5,333,344

F-35
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
______________________________________________________________________________________________

| 12/31/2015
| C o s t | D e p r e c i a t i o n |
|  |  |  |  |  | Accumulated at |  |  |  | Accumulated at |
| Beginning |  |  |  | End of | the beginning |  |  |  | at the end | Net
Account | of the year | Additions | Retirements | Transfers | the year | of the year | Retirements | For the year | Rate % | of the year | book value
Pipelines | 3,631,240 | - | - | 13,677 | 3,644,917 | 1,434,424 | - | 85,991 | 2.2 | 1,520,415 | 2,124,502
Compressor plants | 1,436,084 | - | - | 76,210 | 1,512,294 | 834,255 | - | 76,099 | 3.3 to 25 | 910,354 | 601,940
Other industrial plants | 2,868 | - | - | - | 2,868 | 456 | - | 98 | 3.3 | 554 | 2,314
Stations of regulation and/or |  |  |  |  |  |  |  |  |  |  |
measurement of pressure | 129,228 | - | - | - | 129,228 | 82,806 | - | 5,166 | 4.0 | 87,972 | 41,256
Other technical installations | 28,355 | - | - | 13 | 28,368 | 20,002 | - | 976 | 6.7 | 20,978 | 7,390
Subtotal assets related to |  |  |  |  |  |  |  |  |  |  |
natural gas transportation service | 5,227,775 | - | - | 89,900 | 5,317,675 | 2,371,943 | - | 168,330 |  | 2,540,273 | 2,777,402
Assets related to natural gas |  |  |  |  |  |  |  |  |  |  |
upstream service | 205,773 | 423 | 566 | 946 | 206,576 | 111,667 | 536 | 7,915 | 2.2 to 25 | 119,046 | 87,530
Assets related to liquids |  |  |  |  |  |  |  |  |  |  |
production and commercialization service | 695,548 | - | 313 | 61,465 | 756,700 | 526,427 | 311 | 44,170 | 5.9 | 570,286 | 186,414
Lands | 6,279 | - | - | - | 6,279 | - | - | - | - | - | 6,279
Buildings and constructions | 196,204 | - | - | 2,592 | 198,796 | 97,700 | - | 4,736 | 2.0 | 102,436 | 96,360
Fittings and features in building | 33,975 | - | 242 | 164 | 33,897 | 4,319 | 142 | 1,421 | 4.0 | 5,598 | 28,299
Machinery, equipment and tools | 46,917 | 1,130 | 6 | 614 | 48,655 | 36,400 | 6 | 1,976 | 6.7 to 20 | 38,370 | 10,285
Computers and Telecommunication systems | 389,779 | - | - | 29,762 | 419,541 | 286,351 | - | 22,043 | 6.7 to 20 | 308,394 | 111,147
Vehicles | 31,064 | 2,403 | 395 | - | 33,072 | 21,571 | 395 | 3,175 | 10 and 20 | 24,351 | 8,721
Furniture | 13,147 | 62 | - | 276 | 13,485 | 12,743 | - | 109 | 10 | 12,852 | 633
Capitalization of foreign exchange loss | 177,272 | - | - | - | 177,272 | 98,754 | - | 7,518 | 4 | 106,272 | 71,000
Materials | 286,677 | 161,986 | 8,349 | (84,306) | 356,008 | - | - | - | - | - | 356,008
Line pack | 13,872 | - | - | - | 13,872 | 1,618 | - | - | - | 1,618 | 12,254
Works in progress | 327,282 | 241,319 | - | (101,413) | 467,188 | - | - | - | - | - | 467,188
Total 2015 | 7,651,564 | 407,323 | 9,871 | - | 8,049,016 | 3,569,493 | 1,390 | 261,393 |  | 3,829,496 | 4,219,520

F-36
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
______________________________________________________________________________________________

| 12/31/2014
| C o s t | D e p r e c i a t i o n |
|  |  |  |  |  | Accumulated at |  |  |  | Accumulated at |
| Beginning |  |  |  | End of | the beginning |  |  |  | at the end | Net
Account | of the year | Additions | Retirements | Transfers | the year | of the year | Retirements | For the year | Rate % | of the year | book value
Pipelines | 3,612,277 | - | - | 18,963 | 3,631,240 | 1,348,651 | - | 85,773 | 2.2 | 1,434,424 | 2,196,816
Compressor plants | 1,354,086 | - | - | 81,998 | 1,436,084 | 762,272 | - | 71,983 | 3.3 to 25 | 834,255 | 601,829
Other industrial plants | 2,868 | - | - | - | 2,868 | 358 | - | 98 | 3.3 | 456 | 2,412
Stations of regulation and/or |  |  |  |  |  |  |  |  |  |  |
measurement of pressure | 126,403 | - | - | 2,825 | 129,228 | 77,640 | - | 5,166 | 4.0 | 82,806 | 46,422
Other technical installations | 28,342 | - | - | 13 | 28,355 | 19,027 | - | 975 | 6.7 | 20,002 | 8,353
Subtotal assets related to |  |  |  |  |  |  |  |  |  |  |
natural gas transportation service | 5,123,976 | - | - | 103,799 | 5,227,775 | 2,207,948 | - | 163,995 |  | 2,371,943 | 2,855,832
Assets related to natural gas |  |  |  |  |  |  |  |  |  |  |
upstream service | 205,084 | - | - | 689 | 205,773 | 103,669 | - | 7,998 | 2.2 to 25 | 111,667 | 94,106
Assets related to liquids |  |  |  |  |  |  |  |  |  |  |
production and commercialization service | 677,111 | - | - | 18,437 | 695,548 | 483,606 | - | 42,821 | 5.9 | 526,427 | 169,121
Lands | 6,279 | - | - | - | 6,279 | - | - | - | - | - | 6,279
Buildings and constructions | 184,665 | - | - | 11,539 | 196,204 | 93,198 | - | 4,502 | 2.0 | 97,700 | 98,504
Fittings and features in building | 5,692 | - | - | 28,283 | 33,975 | 3,539 | - | 780 | 4.0 | 4,319 | 29,656
Machinery, equipment and tools | 43,036 | 3,381 | 253 | 753 | 46,917 | 34,941 | 253 | 1,712 | 6.7 to 20 | 36,400 | 10,517
Computers and Telecommunication systems | 363,374 | - | - | 26,405 | 389,779 | 264,435 | - | 21,916 | 6.7 to 20 | 286,351 | 103,428
Vehicles | 28,122 | 3,549 | 607 | - | 31,064 | 19,210 | 607 | 2,968 | 10 and 20 | 21,571 | 9,493
Furniture | 13,147 | - | - | - | 13,147 | 12,645 | - | 98 | 10 | 12,743 | 404
Capitalization of foreign exchange loss | 177,272 | - | - | - | 177,272 | 91,233 | - | 7,521 | 4 | 98,754 | 78,518
Materials | 226,701 | 112,846 | 3,916 | (48,954) | 286,677 | - | - | - | - | - | 286,677
Line pack | 13,872 | - | - | - | 13,872 | 1,618 | - | - | - | 1,618 | 12,254
Works in progress | 214,619 | 253,614 | - | (140,951) | 327,282 | - | - | - | - | - | 327,282
Total 2014 | 7,282,950 | 373,390 | 4,776 | - | 7,651,564 | 3,316,042 | 860 | 254,311 |  | 3,569,493 | 4,082,071

F-37
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
As of December 31, 2016, the assets allocated to the natural gas treatment and compression service include the following amounts in which the Company is a financial leasing under the terms of leasing contracts:

| 2016
Cost – Capitalized financial leasing | 750,389
Accumulated depreciation | (20,148)
Total | 730,241

The financial leasing agreement expires in September 2026, the date on which the purchase options provided for in the contracts may be exercised.
As of December 31, 2015, there are no PPE items under this category.
12.
LOANS
Short-term and long-term loans as of December 31, 2016 and 2015 comprise the following:

| 2016 | 2015
Current loans: |  |
2007 EMTN Program: Series 1 Notes | - | 401,903
Interest payable | 31,269 | 32,493
Other financial loans | 1,466 | 12,696
Financial leasing | 112,661 | -
Total current loans | 145,396 | 447,092
Non-current loans |  |
2007 EMTN Program: Series 1 Notes | - | 401,903
2014 EMTN Program: Series 1 Notes | 3,036,084 | 2,484,786
Other financial loans | - | 1,411
Financial leasing | 735,520 | -
Total non-current loans | 3,771,604 | 2,888,100
Total loans(1) | 3,917,000 | 3,335,192

(1)
Issuance expenses net.
The breakdown of loans based on its currency of origin is the following:

| 2016 | 2015
Argentine pesos | 1,466 | 14,107
U.S. Dollars | 3,915,534 | 3,321,085
Total loans | 3,917,000 | 3,335,192

The activity of the loans as of December 31, 2016 and 2015 is the following:

| 2016 | 2015
Beginning balance | 3,335,192 | 2,465,689
Finance leasing | 750,389 | -
Accrued interest | 362,127 | 246,079
Effect of foreign exchange rate change | 710,651 | 1,148,011
Payment of loans | (916,490) | (294,556)
Interest paid | (324,869) | (230,031)
Ending balance | 3,917,000 | 3,335,192

F-38
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
The maturities of the current and non-current loans as of December 31, 2016 are as follows:

| 2016
Less than 1 year | 38,054
From 1 to 2 years | 2,029,564
From 3 to 4 years | 1,014,781
Financial lease as of December 31, 2016(1) | 3,082,399

(1)
Excluding issuance expenses
The following table sets reconciliation between the total of future minimum lease payments as of December 31, 2016, and their present value:

| 2016
Less than 1 year | 164,874
From 1 to 2 years | 237,746
From 3 to 4 years | 237,746
Over 4 years | 546,538
Total future minimum payments | 1,186,904
Future financial expenses over financial lease | (338,725)
Financial lease as of December 31, 2016 | 848,179

The following are the maturities of the finance leases in force as of December 31, 2016:

| 2016
Less than 1 year | 112,660
From 1 to 2 years | 128,709
From 3 to 4 years | 158,075
Over 4 years | 448,735
Financial lease as of December 31, 2016 | 848,179

Issuance of notes under the 2007 Global Program (the “2007 Program”):
The Extraordinary Shareholders’ meeting held on December 21, 2006 approved the creation of the 2007 Global Program for the issuance of new notes up to a maximum aggregate amount of US$ 650.0 million. The 2007 Program was authorized by the CNV on January 18, 2007.
Accordingly, between May and June 2007, the Company refinanced its outstanding indebtedness through the issuance of US$500.0 million new notes (the “2007 Notes”), the early prepayment of its outstanding debt through an exchange offer, the cancellation of outstanding notes which did not participate in the exchange offer and cancellation of bank loans. The Company’s goal in issuing these notes was to improve the Company’s financial indebtedness profile and to ease the restrictions imposed by the prior debt restructured in 2004, including but not limited to dividend distribution, additional indebtedness and capital expenditures.
The 2007 Notes have a coupon rate of 7.875%, with interest being paid semiannually, and maturity date of May 2017. Principal on the 2007 Notes is to be paid in four equal annual installments beginning in May 2014 until maturity. The 2007 Notes are traded in the Bolsa de Comercio de Buenos Aires ("BCBA"), the Mercado Abierto Electrónico (“MAE”) and the Euro MTF of the Luxembourg Exchange.
Moreover, between August 2008 and August 2010, considering favorable conditions in the market, the Company reduced its financial indebtedness through the cancellation of a portion of the 2007 Notes for an aggregate amount of US$ 125,976,000, which had previously been purchased on the market at a lower price.
On January 10, 2014, TGS launched an offer to exchange its outstanding 2007 Notes for newly issued notes under the 2014 Global Program (the “2014 Global Program”), as it is described below. The period of acceptance of this offer expired on February 7, 2014. The percentage of acceptance received amounted to 67%. As a result of the exchange, a total US$ 123,283,000 of the 2007 Notes remained outstanding and thus, the amortization payments are expected to amount to US$ 30,820,750.
F-39
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
During 2016, the Company made the cancellation of the principal with maturity on May 14, 2016 and the early cancellation of the principal corresponding to the 2017 fiscal year according to the provisions of the Board Meeting of TGS held on October 14, 2016. As of December 31, 2016, the financial debt of TGS corresponding to the 2007 Program is totally canceled.
The fair value of the 2007 Notes is based on a discounted cash flow at an effective interest rate of 7.942%.
Issuance of notes under the 2014 Global Program (the “2014 Program”):
The 2014 Program provides for the issuance of up to a maximum principal amount of US$400 million in notes, and was authorized by resolutions of an Extraordinary Shareholders’ Meeting dated April 25, 2013, and by resolutions of its Board of Directors adopted on July 23, 2013 and December 23, 2013. The program was also authorized by the CNV on January 3, 2014, after the issuance of Resolution No. 17,262.
As it is mentioned above, on January 10, 2014 TGS launched an offer for a voluntary exchange. The exchange offer settled on February 7, 2014. TGS accepted 67% of the 2007 Notes. For this reason, on February 7, 2014, the Company issued its 2014 Notes in aggregate principal amount of US$255,451,506 under its 2014 Program. The main conditions of 2014 Notes are as follows:

| 2014 Notes
| Amount in US$ | 255,451,506
| Interest rate | 9.625% anual

|  | Scheduled payment date | Percentage of original principal amount
| Amortization | May 14, 2014 | 25%
|  | May 14, 2018 | 25%
|  | May 14, 2019 | 25%
|  | May 14, 2020 | 25%
| Frequency of Interest payment | Semiannual, payable el May 14 and November 14 of each year.
| Guarantor | None

The 2014 Notes are traded in the BCBA, the MAE and the Euro MTF of the Luxembourg Exchange.
The terms and conditions of the 2014 Notes are similar to those applied to the 2007 Notes, having not changed financial covenants with respect to those effective for the 2007 Notes. According to the criteria established by IAS 39, the exchange offer was not accounted for as an extinguishment of financial liabilities, and thus, the costs paid are amortized over the remaining life of the 2014 Notes.
The fair values are based on cash flows discounted at an effective rate of 10.126%.
Covenants:
The 2014 Notes contain certain restrictive covenants that, among other things, limit the ability of the Company to (i) incur additional indebtedness, (ii) pay dividend, (iii) issue guarantees, (iv) dispose certain assets and (v) make certain related party transactions. The Company was in compliance with all covenants of the 2014 Notes as of the December 31, 2016.
The foregoing limitations are subject to exceptions as set forth in the Indenture. For example, the Company may incur in additional indebtedness as long as (i) after issuing it, the consolidated coverage ratio (calculated as the quotient of the consolidated adjusted EBITDA -earnings before financial results, income tax, depreciation and amortization-) and the consolidated interest expense) is equal or higher than 2.0:1; and (ii) the consolidated debt ratio (calculated as the quotient of the consolidated debt and the consolidated EBITDA) is equal or lower than 3.75:1; (ii) it is incurred to refinance outstanding debt and (iii) it is originated in advances from customers.
F-40
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
Additionally, the Company may pay dividends as long as (i) the Company is not in default under 2014 Notes, (ii) immediately after any dividend payment, the Company would be able to incur in additional indebtedness pursuant to item (i) and (ii) of the preceding paragraph.
Financial Lease
On August 11, 2016, the Company entered into a financial lease agreement with Pampa Energía. The agreement is valid for 10 years, for 9 years and 11 months TGS pays Pampa Energía a monthly fee of USD 623.5, without taxes, with an option to purchase in month 120 for the same amount.
Other Loans:
On November 22, 2013, the Company entered into a loan with Itaú Bank for Ps. 20.0 million. The loan has a repayment schedule with 25 equal and monthly installments and final maturity in November 2016. The first installment was in November 2014. As of the date of the issuance of these consolidated financial statements, the loan was totally cancelled. The loan bore interest at an annual fixed rate of 15.25% payable on a monthly basis.
On December 3, 2013, the Company entered into a loan with Macro Bank for Ps. 10.0 million. The loan bears interest at an annual fixed rate of 15.25% payable on a monthly basis. The loan has a repayment schedule with 34 monthly installments as from July 2014 and final maturity in April 2017.
The fair value of such loans is equivalent to their book value. The fair values are based on discounted cash flows at an effective rate of 15.25% for the loans received from Banco Macro S.A. and Banco Itaú Argentina S.A.
The current terms of the Company’s interest-bearing borrowings as of December 31, 2016 and 2015 have been reviewed and compared to the market pricing at year’s end, and the carrying value is considered to represent a reasonable approximation to fair value.
13.
INCOME TAX AND DEFERRED TAX
The reconciliation between the tax computed for tax purposes and the income tax expense charged to the statement of comprehensive income in the years ended December 31, 2016, 2015 and 2014 is as follows:

| 2016 | 2015 | 2014
Estimated current income tax gain / (expense) | (482,721) | 68,626 | (78,658)
Deferred income tax | (6,583) | 44,927 | 13,892
Income tax (expense) / gain | (489,304) | 113,553 | (64,766)

The analysis of the net deferred tax assets and liabilities is as follows:

| 2016 | 2015
Deferred tax assets: |  |
Deferred tax assets to be recovered after more than 12 months | 375,430 | 126,350
Deferred tax assets to be recovered after more than 12 months | 12,184 | 10,463
Deferred tax liabilities: |  |
Deferred tax liabilities ti be recovered after more than 12 months | (791,823) | (539,622)
Deferred tax liabilities to be recovered after more than 12 months | (12,507) | (7,325)
Deferred tax liabilities, net | (416,716) | (410,134)

F-41
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
The components of the net deferred tax assets and liabilities as of December 31, 2016, 2015 and 2014 are the following:
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the years in which those temporary differences become recoverable. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning in making these assessments.
Income tax expense computed at the statutory tax rate on pre-tax income differs from the income tax expense for the years ended December 31, 2016, 2015 and 2014 as follows:

| 2016 | 2015 | 2014
Pre-tax income | 1,419,982 | (285,662) | 169,754
Statutory income tax rate | 35% | 35% | 35%
Pre-tax income at statutory income tax rate | (496,994) | 99,982 | (59,411)
Tax effects due to: |  |  |
-Non-taxable income or non-deductible expenses | 7,690 | 13,571 | (5,355)
Income tax expense | (489,304) | 113,553 | (64,766)

Cumulative tax loss carryforwards recorded by the Company that are pending at year end may be offset against taxable income in future years, according to the following detail:

Year | Amount | Expiration Date
2015 tax loss carryforward (estimated) | 168,383 | 2020
Tax loss carryforward used | (168,383) |
Cumulative tax loss carryforward | - |

The realization of deferred tax assets, including those mentioned losses, depends on the generation of future taxable income during the years in which temporary differences become deductible. To determine the realization of deferred tax assets, the Company considers the reversal of deferred tax liabilities, tax planning and projections of future taxable profits based on its best estimate in accordance with the guidelines set out in Note 5.d). Based on these projections, the Company estimates that as of December 31, 2016 it is probable that all deferred tax assets are made.
F-42
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
14.
PROVISIONS

| For legal claims and others
Balances as of December 31, 2013 | 143,412
Additions(1) | 42,859
Uses | (13,238)
Decreases(2) | (22,686)
Balances as of December 31, 2014 | 150,347
Additions(1) | 51,929
Uses | (45,963)
Decreases(1) | (5,727)
Balances as of December 31, 2015 | 150,586
Additions(1) | 115,056
Uses | (27,986)
Decreases(3) | (16,223)
Balances as of December 31, 2016 | 221,433

(1) Ps. 76,603, Ps. 21,625 and Ps. 24,327 are included in “Other operating expenses” and Ps. 38,453, Ps. 30,304 and Ps. 18,532 in “Financial expenses” for the years ended on December 31, 2016, 2015 and 2014, respectively.
(2) The total amount is recorded in “Other operating income”.
(3) Ps. 14,852 are included in “Other operating expenses” and Ps. 1,371 in “Financial expenses”.
The total amount of the Provisions are included in current liabilities.
15.
FINANCIAL RISK MANAGEMENT
1.
Financial risk factors
The Company’s activities and the market in which it operates expose it to a series of financial risks: market risk (including foreign exchange risk, cash flows interest rate risk, and commodity price risk), credit risk and liquidity risk. To that extent, the Company has different policies adopted to mitigate its exposure to financial risks.
1.1
Foreign exchange risk
The Company is primarily exposed to the fluctuation of the exchange rate of the U.S. dollar against the Argentine Peso due to the fact that almost its entire financial indebtedness is denominated in U.S. dollars.
As regards to the revenue derived from the Natural Gas Transportation segment, under Public Emergency and Reform of the Foreign Exchange System Law No. 25,561 (the “Public Emergency Law”), the tariffs charged by the Company are currently denominated in Argentine pesos. In accordance with the Public Emergency Law, in January 2002, public service tariffs were converted into Argentine pesos and fixed at an exchange rate of Ps. 1.00 = US$ l.00 even as the Argentine peso was allowed to devalue against the US dollar. On the other hand, revenues in US dollars derived from the Liquids Production and Commercialization segment accounted for approximately 79%, 84% and 83% of the segment’s total revenues for both the years ended December 31, 2016 and 2015, respectively. Total revenues denominated in Argentine Pesos accounted for 43%, 40% and 35% for the years ended December 31, 2016, 2015 and 2014, respectively.
Considering the net liability financial position described in the table below, the Company estimated that, other factors being constant, a 10% appreciation of the US dollar against the Argentine Peso for the years ended December 31, 2016, 2015 and 2014 would have decreased the Company’s income before tax for the year in approximately Ps. 306,961, Ps. 244,418, and Ps. 196,725 respectively. A 10% depreciation of the US dollar against the Argentine Peso would have an equal and opposite effect on the income statement. Actual results may differ significantly from these theoretical sensitivity scenarios.
F-43

Net liability position in US$ | 12/31/2016 | 12/31/2015 | 12/31/2014
U.S. dollars | (192,574) | (186,754) | (229,489)
Total | (192,574) | (186,754) | (229,489)
Decrease of financial results in Ps. |  |  |
Pesos | 306,961 | 244,418 | 196,725
Total | 306,961 | 244,418 | 196,725

Derivative Financial Instruments
To mitigate the foreign exchange risk, during the year 2015, the Company entered into forward purchase of US dollars, as well as investments in mutual funds linked to the US dollar in order to cover the exposure to the risk associated with the foreign exchange rate derived from its financial debt.
At the end of 2015, the net position is buying US dollars amounting to US$ 52.5 million at a weighted average exchange rate of Ps. 11.65 which due in May 2016. The fair value of these contracts as of December 31, 2015 amounted to a net asset position of Ps. 128,124, which is disclosed under the item “Derivative financial instruments” in the Statement of Financial Position. Such contracts are guaranteed by Ps. 29,910 which are disclosed under "Other Receivables."
1.2
Interest rate risk
The Company’s interest rate risk arises from long-term borrowings. Borrowings issued at floating rates expose the Company to cash flow interest rate risk. Borrowings issued at fixed rates expose the Company to fair value interest rate risk. The interest rate profile of the Company's borrowings is set out in Note 12.
Currently, the Company’s exposure to cash flow interest rate risk is limited due to the fact that 100% of its outstanding financial indebtedness bears fixed interest rates.
As far as interest-bearing financial assets, the exposure to interest rate risk is limited to the financial assets of the Company which bear variable interest rate. Most of the financial assets of the Company bear fix rate interests.
The following table shows a breakdown of the Company’s fixed-rate and floating-rate financial assets and liabilities as of December 31, 2016 and 2015:

| Financial assets (1) | Financial liabilities (2)
| 2016 | 2015 | 2016 | 2015
Fix interest rate | - | 333,100 | 3,068,819 | 3,335,192
Variable interest rate | 39,645 | 50,817 | - | -
Total | 39,645 | 383,917 | 3,068,819 | 3,335,192
(1) Includes time deposits, bank accounts and trade receivables. Trade receivables do not bear interests, except for Ps. 36,484 and Ps. 47,128 which bears CER plus a spread of 8% as of December 31, 2016 and 2015, respectively.
(2) Includes loans, excluding issuance expenses.

In view of the nature of the Company’s financial assets which bear variable interest, an immediate 100 basis points decrease in the interest rate would not have a significant impact on the total value of the financial assets.
F-44
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
1.3
Commodity price risk
Commercial operations performed by the Company in its Liquids Production and Commercialization segment are affected by a number of factors beyond its control, including changes in the international prices of the products sold, and government regulations on prices, taxes and other charges, among others.
The sale prices of propane and butane (“LPG”) and natural gasoline the Company exports in its Liquids Production and Commercialization segment are referenced to international prices (Mont Belvieu for the LPG and NWE ARA for the natural gasoline). These prices have historically been cyclical, reflecting overall economic conditions and changes in capacity within the industry, which may affect the profitability of companies engaged in this business.
Based on the volume of sales for the years ended December 31, 2016, 2015 and 2014, the Company estimated that, other factors being constant, a decrease of US$50/ton in the international price of LPG and natural gasoline, respectively, would have decreased the Company’s net comprehensive income in its Liquids Production and Commercialization segment in Ps.233,323, Ps. 157,051 and Ps. 69,228 respectively.
The Company does not currently use derivative financial instruments to mitigate the risks associated with international commodity price fluctuations.
Ethane is sold to PBB Polisur S.A. (“Polisur”) under a recently negotiated annual contract with a maturity date of May 31, 2017. Furthermore, due to the sharp decrease in the international price of the ethane, the gap between the selling price of TGS has increased against the price offer by the alternative Polisur’s alternative supplier. This gap, plus the expiration of the contract, it would be expected that the risk of lower price or volumes of ethane sales could be considered high. This, together with the expiration of the contract, means that the risk of price decrease or displacement in supply (lower product sales) is considered high.
1.4
Credit risk
The Company’s exposures to credit risk takes the form of a loss that would be recognized if counterparties failed to, or were unable to, meet their payment obligations. These risks may arise in certain agreements in relation to amounts owed for physical product sales, the use of derivative instruments, and the investment of surplus cash balances. This risk mainly results from economic and financial factors or from a possible default of counterparty.
The Company is subject to credit risk arising from outstanding receivables, cash and cash equivalents and deposits with banks and financial institutions, and from the use of derivative financial instruments. The Company’s policy is to manage credit exposure to trading counterparties within defined trading limits.
If any of the Company’s customers are independently rated, these ratings are used. Otherwise, if there is no independent rating, the Company assesses the credit quality of the customer taking into account its financial position, past experience and other factors. The Company may seek cash collateral, letter of credit or parent company guarantees, as considered appropriate.
As of December 31, 2016 and 2015, the balance of current and non-current trade receivables, net of allowances of doubtful accounts are as follows:

| 2016 | 2015
Current trade receivables | 1,246,742 | 793,224
Non-current trade receivables | 8,122 | 6,470
Allowances for doubtful accounts(1) | (19,703) | (1,389)
Total | 1,235,161 | 798,305

(1)
Corresponds to the best estimate made by TGS according to what is mentioned in note 5.b.
F-45
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
The Company, in the normal course of business, renders natural gas transportation services, principally to gas distribution companies and to Pampa Energía. Significant customers in terms of revenues and trade receivables (net of allowances of doubtful accounts) from natural gas transportation for the years ended December 31, 2016 and 2015 are as follows:

| 2016 | 2015 | 2014
| Revenues | Trade receivables | Revenues | Trade receivables | Revenues | Trade receivables
MetroGAS | 597,041 | 70,319 | 268,626 | 28,511 | 194,904 | 20,001
Camuzzi Gas Pampeana S.A. | 358,756 | 51,908 | 154,209 | 16,480 | 108,668 | 22,433
Gas Natural BAN S.A. (“BAN”) | 268,043 | 38,635 | 110,259 | 12,185 | 78,913 | 8,501
Pampa Energía | 27,353 | 5,943 | 27,681 | 29,348 | 30,192 | 13,517
Camuzzi Gas del Sur S.A. | 58,056 | 50,001 | 36,614 | 3,939 | 26,296 | 2,905

Revenues from Liquids Production and Commercialization customers (including those made on behalf of third parties, from whom the Company earns a commission and trade receivables (net of allowances of doubtful accounts) for the years ended December 31, 2016, 2015 and 2014 are as follows:

| 2016 | 2015 | 2014
| Revenues | Trade receivables | Revenues | Trade receivables | Revenues | Trade receivables
Polisur | 1,949,460 | 223,938 | 1,298,152 | 346,197 | 1,055,582 | 89,148
Petredec | - | - | 254,061 | 29,435 | 944,233 | 42,989
Petroleo Brasileiro | 513,912 | 57,335 | 95,618 | 25,475 | 627,468 | 25,475
Petrobras Global | - | - | 44,058 | - | - | -
Braskem Netherlands B.V. | 19,706 | - | 135,971 | 35,996 | - | -
Trafigura Beheer B.V. | - | - | 159,911 | - | - | -
Geogas Trading S.A. | 460,234 | 125,303 | 112,392 | 33,796 | 83,134 | -

Below is a detail of the maturities of the financial assets included in: (i) cash and cash equivalents, (ii) loans granted to related parties, (iii) other financial assets at fair value through profit or loss, (iv) trade receivables, (v) other receivables, (vi) derivate financial instruments, and (vii) Other financial assets at amortized cost as of December 31, 2016 and 2015:
F-46
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
F-47
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
The Company is exposed to counterparty credit risk on cash and cash equivalent balances. The Company holds cash on deposit with a number of financial institutions. The Company manages its credit risk exposure by limiting individual deposits to clearly defined limits in various financial institutions. The Company considers that this risk is limited because it has short-term funds policies whose main objective is to obtain an adequate return in terms of market characteristics and minimizing exposure. The Company only deposits with high quality banks and financial institutions.
The maximum exposure to credit risk is represented by the carrying amount of cash and cash equivalents in the statement of financial position. Below we include information regarding their credit rating:

Concept | (In thousands of pesos) | Credit rate
Mutual funds | 189,953 | A+
Mutual funds | 120,024 | AA+
Mutual funds | 112,449 | AA-
Mutual funds | 242,206 | AA
Mutual funds | 229,338 | BBB
Public bonds | 140,364 | CCC

1.5
Liquidity risk
The Company is exposed to liquidity risks, including: risks associated with refinancing borrowings as they mature, the risk that borrowing facilities are not available to meet cash requirements and the risk that financial assets cannot readily be converted to cash without loss of value. Failure to manage financing risks could have a material impact on the Company’s cash flow and statement of financial position.
Prudent liquidity risk management includes managing the profile of debt maturities and funding sources and close oversight of cash flows projections. The Company has funding policies whose main objectives are to meet the financing needs at the lowest cost possible according to market conditions. The main objective of the Company is its financial solvency. Given the current financial market conditions, the Company believes that the availability of resources and the positive cash flow from operations are sufficient to meet its current obligations.
Additionally, TGS applies a methodology for analyzing and assigning credit limits to individual financial institutions in order to minimize the associated credit risk. In line with this, the Company invests its liquid funds in certain financial institutions with an appropriate credit rating.
The table below includes a detail of the maturities of the obligations corresponding to financial liabilities corresponding to: trade payables, payroll payables, other payables, derivative financial instruments and loans as of December 31, 2016 and 2015. The amounts disclosed in the table are the contractual undiscounted cash flows and as a result, they do not reconcile to the amounts disclosed on the statement of financial position.
F-48
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
1.6
Capital risk 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 credit quality and capital structure to reduce the cost of capital.
The Company seeks to maintain a level of cash generation from operating activities, which may allow it to meet all of its commitments.
The Company monitors capital on the basis of the gearing ratio. This ratio is calculated as total financial debt (including current and non-current loans as shown in the consolidated statement of financial position, if applicable) divided by total capital. Total capital is calculated as equity, as shown in the consolidated statement of financial position, plus total debt.
F-49
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
During the year ended December 31, 2016 and 2015, the gearing ratio was as follows:

| 2016 | 2015
Total Loans (note 12) | 3,917,000 | 3,335,192
Total Equity | 2,526,378 | 1,695,434
Total Capital | 6,443,378 | 5,030,926
Gearing ratio | 0.61 | 0.66

2
FINANCIAL INSTRUMENTS BY CATEGORY AND HIERARCHY
2.1
Financial instrument categories
Accounting policies for the categorization of financial instruments are explained in Note 4.d. According to the provisions of IFRS 7 and IAS 32, non-financial assets and liabilities such as property, plant and equipment, investments in associates, inventories, advances from customers, deferred income tax, taxes and social taxes payables and provisions are not included.
The categories of financial assets and liabilities as of December 31, 2016 and 2015 are as follows:
F-50
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
2.2
Fair value measurement hierarchy and estimates
According to IFRS 13, the fair value hierarchy introduces three levels of inputs based on the lowest level of input significant to the overall fair value. These levels are:
●
Level 1: includes financial assets and liabilities whose fair values are estimated using quoted prices (unadjusted) in active markets for identical assets and liabilities. The instruments included in this level primarily include balances in mutual funds and public or private bonds listed on the MERVAL/BCBA. Additionally within this level, the Company included derivative financial instruments because the settlement date thereof coincided with the closing date of the fiscal year. For the calculation of fair value, the corresponding quoted price was obtained.
●
Level 2: includes financial assets and liabilities whose fair value is estimated using different assumptions quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (for example, derived from prices). Within this level, the Company includes those derivate financial instruments for which it was not able to find an active market.
●
Level 3: includes financial instruments for which the assumptions used in estimating fair value are not based on observable market information.
During 2015, there were neither transfers between the different hierarchies of fair values nor reclassifications between financial instruments categories.
F-51
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
The table below shows different assets and liabilities at their fair value classified by hierarchy as of December 31, 2016 and 2015:

| December 31, 2016
| Level 1 | Level 2 | Level 3 | Total
Financial assets at fair value |  |  |  |
Cash and cash equivalents | 901,680 | - | - | 901,680
Other current financial assets at fair value through profit or loss | 55,508 | - | - | 55,508
Other non-current financial assets at fair value through profit or loss | 142,872 | - | - | 142,872
Total | 1,100,060 | - | - | 1,100,060

| December 31, 2015 |
| Level 1 | Level 2 | Level 3 | Total
Financial assets at fair value |  |  |  |
Cash and cash equivalents | 122,816 | - | - | 122,816
Derivative financial instruments | 30,530 | 97,594 | - | 128,124
Other current financial assets at fair value through profit or loss | 22,719 | - | - | 22,719
Other non-current financial assets at fair value through profit or loss | 44,063 | - | - | 44,063
Total | 220,128 | 97,594 | - | 317,722

The carrying amount of the financial assets and liabilities is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
As of December 31, 2016 and 2015, the carrying amount of certain financial instruments used by the Company including cash, cash equivalents, other investments, receivables, payables and short term loans are representative of fair value because of the short-term nature of these instruments.
The estimated fair value of other Non-current assets and Other loans does not differ significantly from the carrying amount. The following table reflects the carrying amount and estimated fair value of the 2007 Notes and 2014 Notes at December 31, 2015 and for the 2014 Notes at December 31, 2016, based on their quoted market price:

2007 Notes
| 2016 | 2015
Carrying amount | - | 811,609
Fair value | - | 837,762
2014 Notes
| 2016 | 2015
Carrying amount | 3,067,355 | 2,509,476
Fair value | 3,275,135 | 2,518,552

16.
REGULATORY FRAMEWORK
a)
General framework of the regulated segment:
General aspects
Regarding TGS’ Natural Gas Transportation business, it is regulated by Law No. 24,076 (“the Natural Gas Act”), its regulatory Decree No. 1,738/92 and the Regulatory framework for the transportation and distribution of natural gas in Argentina. The Natural Gas Act created ENARGAS, which is entitled, among other things, to set the basis for the calculation, monitoring and approval of tariffs. On January 28, 2016, Resolution No. 7 of the Ministry of Energy and Mining (“MINEM”) of Argentina repealed the Resolution 2000/2005 of the former Ministry of Federal Planning, Public Investment and Services (“ex MPFIPyS”) which provided that all tariff increases should have the prior intervention of the Undersecretary of Coordination and Management Control.
TGS License has been granted for an original period of 35 years beginning on December 28, 1992. However, the Natural Gas Act provides that TGS may apply to ENARGAS for a renewal of its license for an additional period of ten years. ENARGAS should evaluate at that time the performance of TGS and raise a recommendation to the Executive Branch. At the end of the period of validity of the license, 35 or 45, as appropriate, the Natural Gas Act requires a call for a new tender for the granting of a new license, in which TGS, provided the Company fulfilled substantially with the obligations resulting from the license, would have the option of matching the best offer that the Government received in this bidding process.
General tariff situation
Prior the enactment of the Public Emergency Law, and according to the Regulatory Framework, transportation tariffs were to be calculated in US dollars and converted into Argentine pesos at the time the customer was billed using the exchange rate prevailing at the date of the billing. The basic natural gas transportation tariffs charged by TGS had been established at the time of the privatization of GdE and were to be adjusted, subject to prior authorization, in the following cases: (i) semi-annually to reflect changes in the US producer price index (“PPI”) and (ii) every five years according to efficiency and investment factors determined by ENARGAS. The “efficiency factor” is a reduction to the base tariff resulting from future efficiency programs while the “investment factor” increases the tariffs to compensate the licensees for future investments which are not repaid through tariffs. Also, subject to ENARGAS approval, tariffs were to be adjusted to reflect non-recurrent circumstances or tax changes, other than income tax.
The terms and conditions as described in the precedent paragraph in connection with tariff adjustments contemplated within the Regulatory Framework are no longer effective since the enactment of the Public Emergency Law in early 2002, which, among other provisions, eliminated tariff increases based on US dollar exchange rate fluctuations, foreign price indexes or any other indexing procedure and established a conversion rate of one peso to one US dollar for tariffs. The Public Emergency Law also granted the Executive Branch power to renegotiate contracts entered into with private utility companies, pursuant to the framework included in the said law as long as it is in force, which will expire in December 31, 2017, after several extensions.
In July 2003, the former Unit for Renegotiation and Assessment of Utilities Contracts (“ex UNIREN”) was created under the joint jurisdiction of the Ministry of Economy and Finance and the Ministry of Federal Planning, Public Investment and Services (“ex MPFIPyS”). Ex UNIREN conducts the renegotiation process of the contracts related to utilities and public works, and is entitled to enter into total or partial agreements with the licensees and submit projects regulating the transitory adjustment of tariffs and prices, among other things. As provided in the Public Emergency Law, TGS should reach a consensus with the ex UNIREN on the modalities, terms and dates for signing the comprehensive agreement before its due date. In the event that such a consensus is not reached, ex UNIREN will submit a report to the Executive Branch with recommendations of the next steps to follow in the future.
On February 16, 2016, the Executive Branch issued Decree No. 367/2016. It establishes the dissolution of the ex UNIREN and transfers to each ministry the responsibility to renegotiate public service agreements. In our case, the assumption of ex UNIREN duties will be by the MINEM together with the Ministry of Economy and Public Finance (“MHPP”).
Transitional Agreement
After having received two proposals during 2005 from the ex UNIREN, on October 9, 2008, TGS signed the 2008 Transitional Agreement with ex UNIREN that contemplated a tariff increase of 20%, which would be retroactively applicable to September 1, 2008 (the “2008 Transitional Agreement”). On December 3, 2009, the Executive Branch ratified this transitional agreement through Decree No. 1,918/09. By means of this decree, TGS will be able to bill the tariff increase to its clients as soon as ENARGAS publishes the new tariffs schedule and sets the methodology to bill the retroactive effect.
F-52
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
This administrative act did not become effective promptly and because of this delay, in August 2010, TGS requested from ENARGAS authorization to issue the tariff schedule, including the 20% transitory tariff increase and the retroactive collection methodology, and application of an interest rate in line with the established method of payment. ENARGAS responded to TGS that they had submitted the records and the tariff project to the Coordination and Management Control Under-Secretariat (“SCyCG”), which is under the scope of ex MPFIPyS, based on Resolution No. 2000/2005 of ex MPFIPyS.
On September 30, 2010, the Company filed an acción de amparo (a summary proceeding to guarantee constitutional rights) under the terms of the Article 43 of the National Constitution and Law No. 16,986, against ENARGAS and the SCyCG, in order to obtain the implementation of the new tariff schedule, which had favorable reception in court.
On April 7, 2014, ENARGAS issued Resolution No. I-2852 (the “Resolution No. I-2852”) containing the new rate schedules authorizing an increase to the rate applicable to the natural gas firm and interruptible transportation rates. This tariff increase was established in a progressive scheme beginning with an 8% increase as from April 1, 2014, an accumulated 14% increase as from June 1, 2014 and an accumulated 20% increase as from August 1, 2014. These tariff increases were not enough to effectively support the increasing operating costs in the natural gas transportation business segment.
Over the past 15 years, the Consumer Price Index has increased by 582.6%, while the Wholesale Price Index rose 828.6% and the Salary Index jumped by 1,323.1%.
On June 5, 2015, ENARGAS issued Resolution No. 3347, complementary to Resolution No. I-2852, which approves an increase in the tariff schedule applicable to the public transportation of natural gas as from May 1, 2015. This increase represents to TGS a temporary increase of 44.3% in the price of the service of natural gas transportation and 73.2% in the Charge of Access and Use (“CAU”).
These increases represent a partial recognition of prior administrative claims made by the Company but they were not enough to alleviate the constant increase in the operating costs. TGS will continue with the corresponding actions towards safeguarding its rights, including those necessary to accomplish the signing of the Integral Renegotiation License Agreement (“Integral Renegotiation Agreement”).
On December 9, 2014, TGS filed administrative claims under the terms of Article 30 of the National Administrative Procedures Act to the Argentine government claiming damages for the failure to implement the retroactive increase provisions of the 2008 Transitional Agreement for the period between September 1, 2008 and March 31, 2014 and the lack of adjustment of the CAU.
On the other hand, and in relation to the execution of a sentence corresponding to the acción de amparo initiated by TGS in September 2010 in order require that the Argentine Government implements the increase established in the 2008 Transitional Agreement, the Judge of First Instance rejected TGS’ request that ENARGAS publish the corresponding tariff schedule for the increase included in the 2008 Transitional Agreement effective as of October 1, 2008. Therefore, in September 2014, TGS filed an appeal before the National Chamber for Federal Administrative Law Disputes of the City of Buenos Aires who dismissed the same. Upon the rejection of this appeal, in April 2015, TGS filed a complaint with the Supreme Court of Justice and the Court was informed of the ruling of Resolution 3347, which complied with TGS's requirements regarding the validity of the appeal. On November 18, 2015, the appeal filed by TGS was dismissed.
Finally, on February 24, 2016, jointly with the MINEM and the Ministry of Economy and Public Finances, TGS signed a new Transitional Agreement (“2016 Transitional Agreement”). The main implications of the 2016 Transitional Agreement are:
F-53
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
●
It sets the guidelines to grant to TGS an additional transitional tariff increase;
●
It sets the guidelines for the implementation of a Mandatory Investment Plan to be approved by ENARGAS;
●
It provides the basis for the signing of the Integral Renegotiation License Agreement (“Integral Renegotiation Agreement”)
●
Set guidelines to perform a RTI process which will be in a period not exceeding 12 months from the issuance of ENARGAS Resolution No. I/3724/2016 ("Resolution 3724"), which instructed the start of the RTI, and;
●
Obligates TGS for the non-distribution of dividends without prior authorization of ENARGAS.
On March 19, 2016, MINEM issued Resolution No. 31/2016 (“Resolution 31”) instructing ENARGAS to carry out the above-mentioned RTI process and to grant a tariff increase on a transitional basis until the RTI process ends, which allows the execution of the Mandatory Investment Plan (the “Investment Plan”) committed for 12 months to cover operating and maintenance, administration and commercialization expenses, and to comply with the expiration of the obligations contracted ensuring the continuity of the normal provision of the public natural gas transportation service until the final tariff charts are established.
On March 31, 2016, and according to the provisions of Section 2 of Resolution 31 enacted by the MINEM, ENARGAS issued Resolution No. 3724 which granted to TGS a 200.1% tariff increase effective as from April 1, 2016 (the “Increase”). This resolution also provides that TGS will not be able to distribute dividends in the transition period until the end of the RTI process, without the prior authorization of ENARGAS.
As mentioned, the increase was granted based on TGS’ economic-financial condition and is subject to compliance with the Investment Plan for Ps. 794.3 million, which is greater by approximately four times the capital expenditures made in 2015, to be controlled by ENARGAS. At the date of issuance of these consolidated financial statements, the Investment Plan is being implemented with certain delays due to the impossibility on the part of TGS to invoice the entire Increase in accordance with the provisions of Resolution 3724.
As referred in the section "Legal actions initiated against Resolutions 28 and 31", on August 18, 2016, the Supreme Court of Justice of the Nation (“Supreme Court”) unanimously upheld the judgment issued by Chamber II of the Federal Court of Appeals of La Plata regarding the nullity of Resolutions 31 and No. 28/2016 ("Resolution No. 28", and in conjunction with Resolution 31, jointly referred as "Resolutions 28 and 31") with respect to resident users. For further information see “Legal actions initiated against Resolution 28 and 31” below.
On August 23, 2016, ENARGAS issued Resolution No. I/3961 instructing TGS to apply in relation to the transportation service provided to the license of the natural gas distribution service to supply residential users, the tariff schedule in force as of March 31, 2016. On September 9, 2016, ENARGAS notified the natural gas distribution service licensees the applicable procedure to determine and to inform the Company of the volumes of natural gas destined for residential users.
The aforementioned Supreme Court ruling and the numerous legal actions initiated against the application of Resolutions 28 and 31, of which the Company was and is not a party, seriously affected and accentuated the economic and financial imbalance of TGS, which resulted in almost 15 years of failure to update the natural gas transportation tariff. This was due to the delayed billing that TGS was obliged to comply with the impossibility of the full application of the tariff scheduled provided by Resolution 3724.
F-54
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
Subsequently, and within the framework of the public hearing held on September 16 and 18, 2016 (the "September Public Hearing") following the provisions of the Supreme Court in the ruling issued in the CEPIS case (for further information see "Legal actions Initiated against Resolutions 28 and 31"), on 6 October 2016, ENARGAS issued Resolution No. I-4054/2016 ("Resolution 4054"). The resolution includes the same terms than those included in Resolution 3724 in respect of: (i) the Increase applicable to all users of the public natural gas transportation service, (ii) the execution of the Investment Plan and (iii) restrictions on the payment of dividends. The effect of these tariff schedules is as from October 7, 2016.
This Increase, together with those previously obtained in 2014 and 2015, represent a partial recognition of prior administrative claims initiated by TGS but they were not enough to alleviate the persistent increase in operating costs of the Company. TGS will continue with the corresponding actions towards safeguarding their rights, including those necessary to sign the Integral Renegotiation Agreement.
Legal actions initiated against Resolution 28 and 31
As a result of the tariff increases provided by ENARGAS to the Licensees of the Public Service of Natural Gas Transportation and Distribution, as well as the increase in the price of Natural Gas provided by Resolution 28, numerous legal actions were initiated bringing about their nullity, which seriously affected their application and the established framework.
After the request to freeze rates filed by an NGO, on July 6, 2016, the Federal Court of La Plata issued a ruling which declared the null and void of Resolutions No. 28 and 31 rolling back the tariff situation to the existing prior to the issuance of these regulations.
The National Government requested the review of the judgment by the Supreme Court, and thus filed the corresponding extraordinary appeal before the Federal Court of La Plata.
On July 12, 2016, the MINEM issued Resolution No. 129/2016 (the "Resolution 129") which places limits on final charges to be included in invoices issued by the distribution of natural gas for residential consumers and businesses. This scheme will be in force until December 31, 2016. Resolution 129 does not change the current value of the tariff chart that pays the service provided by the Company nor the service for the distribution of natural gas. These maximum limits will be retroactive to April 1, 2016. In addition Resolution 129 provides that, for both segments of transportation and distribution of natural gas, the actions planned will be implemented to develop the RTI process in the last quarter of 2016, including conducting public hearings before October 31, 2016.
Finally, on August 18, 2016, the Supreme Court partially upheld the ruling issued by the Chamber, establishing: (i) the obligation to comply with the prior public hearing for the determination of the natural gas tariffs related to the transportation and distribution segments, (ii) it will also be mandatory to carry out prior public hearings to fix the price of natural gas at the Point of Entry to the Transportation System (“PIST” as its acronym in Spanish), and (iii) the nullity of Resolutions 28 and 31 regarding the residential users, in respect of which the rates had to be retroactive to the amounts in force as of March 31, 2016.
Regarding the transportation system, the Supreme Court remarks the illegitimate claim that the tariff regime remains unchanged over time if circumstances require its modification. At the same time, it is highlighted that the evolution of natural gas tariffs for distribution and transportation service has been almost null, concluding that the tariffs are deficient.
In accordance with the ruling of the Supreme Court, on August 19, 2016, the MINEM published Resolution No. 152/2016 instructing ENARGAS to provide the necessary measures to enable natural gas distributors to apply to residential users the tariff charts in force as of March 31, 2016, for the consumptions made as from April 1, 2016.
F-55
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
Likewise, ENARGAS issued Resolution No. 3953/2016, which provided for the holding of the September Public Hearing required by the Supreme Court, which was held between September 16 and September 18, 2016. The Public Hearing considered: (i) the transfer to tariffs of the new price of natural gas in the PIST; and (ii) the transitory tariffs for the public natural gas transportation and distribution service that will be in force until the new tariffs resulting from the ongoing RTI process are effective.
After the September Public Hearing, the MINEM issued Resolution No. 212/2016 instructing ENARGAS to provide for the applicable transitional tariff increases until the completion of the initiated RTI process.
Integral Renegotiation Agreement
In October 2008, TGS received an integral license renegotiation agreement from ex UNIREN (which included the initial 20% tariff increase), whose purpose is the license renegotiation and the overall tariff revision. This proposal was not accepted by TGS since the granting of an indemnity required for the Argentine Government was unable to provide.
In October 2011, TGS received a new proposal from ex UNIREN (the “Renegotiation Agreement”) which included similar terms and conditions from the ones included in the last proposal received in 2008. In August 2011 TGS’ Board of Directors approved the new proposal, which was initiated by the Company allowing ex UNIREN to initiate the administrative procedure for finalizing the Renegotiation Agreement. Ex UNIREN issued a supplementary report for the subscription of the Renegotiation Agreement between the Argentine Government and TGS, filing it on December 22, 2011 together with the Agreement filed by TGS before the Legal Under Secretary of the ex MPFIPyS. Taking into consideration that the case was returned to UNIREN, on July 16, 2012 TGS called for the continuation of appropriate administrative proceedings. On October 4, 2012, TGS notified the ex UNIREN the filing made before ENARGAS and the CNDC regarding the suspension of the claim initiated by Enron Corp. and Ponderosa against the Argentine Republic mentioned above, and formally required the order of quick sentence.
Given the lack of progress in the administrative procedure in ex MPFIPyS, on December 29, 2014, TGS filed a preliminary administrative appeal under the terms of article 30 of the National Administrative Procedures Act to the Argentina Government claiming damages for the failure to implement the recomposition of the tariff.
In October 2015, the Company and the ex UNIREN signed a new version of the Integral Renegotiation Agreement to incorporate as legal predecessor the Resolution 3347.
As mentioned above, the 2016 Transitional Agreement sets the basis for the signing of the Integral Agreement Act and the guidelines for carrying out the RTI within a period of no more than 12 months.
Within this framework, on November 9, 2016, ENARGAS issued Resolution No. I-4122/2016 calling for a public hearing to consider: (i) the RTI, (ii) the proposals for amendments made by ENARGAS to the License and (iii) the semiannual adjustments methodology (the " December Public Hearing"). This public hearing was finally held on December 2, 2016. The Company was able to highlight the negative impact on its economic and financial situation of the lack of adjustment of its tariff charts after more than 15 years in which the different macroeconomic variables that impacted on their business suffered significant increases.
The sustainable recovery of the natural gas transportation segment, which, in view of the national energy matrix, is strategic for the country's development, will depend of the immediate implementation of the RTI process for which TGS presented an ambitious investments and expenditures plan for the five – year period 2017-2021 and for the effective implementation of the Integral Renegotiation Agreement.
F-56
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
As of the date of issuance of these consolidated financial statements there is no certainty of when the Integral Renegotiation Agreement shall be subscribed and implemented by the Argentine Government.
Acquisition of the Rights of Arbitration Proceedings
In November 2005, in response to the requirement made by the ex UNIREN, Ponderosa Assets L.P., as an indirect shareholder of TGS and CIESA, informed a claim that was filed jointly with Enron Corp. against the Argentine Government under the International Centre for Settlement of Investment Disputes of the World Bank (the “ICSID Claim”). The ICSID Claim argues that the pesification of tariffs and other unilateral changes to our regulatory structure affected by the Public Emergency Law and related laws and decrees violate the requirement of fair and equitable treatment under the treaty. On May 22, 2007, ICSID decided in favor of Enron and ordered the Government to pay US$ 106.2 million to the Claimants. In July 2010, an ICSID committee annulled the award rendered in 2007 and ordered the Claimants to reimburse the Government the total amount of the annulment award costs. This annulment does not prevent the plaintiff from filing a new claim before the ICSID. On October 18, 2010, Enron Creditors Recovery Corp. (Enron’s new corporate name) and Ponderosa filed a new claim against the Government before the ICSID. In June 2011, a tribunal to hear the case was constituted.
On March 11, 2011, Pampa entered into a call option agreement with the Claimants in order to acquire the rights to monitor, suspend and withdraw the ICSID Claim. In October, 2011, Pampa acquired the rights under the arbitration proceeding (the "Rights of the arbitration proceeding") which include the powers to suspend, monitor and withdraw from arbitration proceedings.
Through the enactment of Resolutions No. I-2852 and No. I-3347 and after having verified its effectiveness, the Transitional Agreement was implemented between the Company and ex UNIREN in October 2008, and thus, the condition provided by the loan awarded by TGS to Pampa Energía that consists of its compulsory cancellation by transferring the rights acquired by Pampa with the proceeds of the Loan in respect of the arbitration proceeding initiated by Enron Creditors Recovery Corp. and Ponderosa Assets LLP against the Republic of Argentina before the International Centre for Settlement of Investment Disputes ("ICSID") of the World Bank ("the Arbitration Proceeding"). The rights acquired under the arbitration proceeding (the "Rights of the arbitration proceeding") include the powers to suspend, monitor and withdraw from arbitration proceedings.
The acquisition of the Rights of the Arbitration Proceeding by TGS was implemented through the transfer to a trust established abroad of which TGS shall be its beneficiary.
The exercise of the Rights of the arbitration proceeding allows TGS to continue with the tariff renegotiation process and comply with the conditions for the signing and implementation of the Integral Renegotiation Agreement by the Executive Branch and the new rate schedules resulting from the Integral tariff Review process provided therein. In accordance with the terms and conditions of the Integral Renegotiation Agreement, TGS may suspend and subsequently abandon those claims brought against Argentina for the lack of tariff adjustments by the PPI following the enactment of the Public Emergency Law.
According to IFRS, the Rights of the arbitration proceeding do not qualify to be recognized as an asset in the financial statements of the Company. Consequently, they were recognized and classified under "Other Operating (loss) / Income" in the Statement of Comprehensive Income for the year ended December 31, 2015. The net loss recognized amounted to Ps. 324,390.
As of the date of issuance of these consolidated financial statements, as agreed with the National Government, the Arbitration Proceeding is suspended until April 15, 2017.
F-57
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
b) Regulatory Framework for non-regulated segments
Domestic market
The Production and Commercialization of Liquids segment is subject to regulation by ENARGAS, and as it is provided in the Transfer Agreement, is organized as a separate business unit within TGS, keeping accounting information separately. However, over recent years, the Argentine Government enacted regulations which significantly impacted on it.
In April 2005, the Argentine Government enacted Law No. 26,020 which sets forth the regulatory framework for the industry and commercialization of LPG. Among other things, the Law No. 26,020 creates the framework through which the Secretary of Hydrocarbon Resources (“SHR”) (formerly the Federal Energy Bureau) establishes regulations meant to cause LPG suppliers to guarantee sufficient supply of LPG in the domestic market at low prices. Law No. 26,020 creates a price regime pursuant to which the SRH periodically publish reference prices for LPG sold in the local market. It also sets forth LPG volumes to be sold in the local market.
On March 30, 2015, the Executive Branch issued Decree No. 470/2015, regulated by Resolution No. 49/2015 issued by the Federal Energy Bureau, which created the Programa Hogares con Garrafa (the “New Program”). It replaced Stabilization Agreement signed in September 2008 between the Federal Energy Bureau and the LPG producers (“2008 Stabilization Agreement”) (which, after several extensions, remained in force until March 31, 2015).
In line with the 2008 Stabilization Agreement, the New Program sets a maximum reference price for the members of the marketing chain in order to guarantee the supply to low-income residential user, by committing the LPG producers to supply at a fixed price (below the market price) with a quota assigned to each producer. This price reduction is partially offset by a subsidy paid to producers by a trust fund created for that purpose. Through the New Program, the Argentine government subsidizes low-income residential users.
On April 1, 2015, the former Federal Energy Bureau issued Resolution No. 70/2015, which sets the new reference prices and the compensation to be paid to domestic LPG producers intended for ten, twelve and fifteen kilos LPG bottles under the New Program. Notes 547/15 and 612/15 of the Federal Energy Bureau notified the volumes to be sold by TGS during 2015.
On March 28 and March 29, 2016, the MINEM informed TGS the volumes of butane and propane, respectively that were assigned to commercialize under this program during 2016. These administrative acts were also duly challenged by TGS.
It is noteworthy that participation in the new program implies that the Company produces and markets the volumes of LPG required by the SHR at prices significantly lower than the market price, which means that, under limited circumstances, the Company will fail to cover production costs, providing a negative operating margin.
As in prior periods, the Company will continue making the corresponding objections in order to safeguard its financial position and to ensure that this situation is not extended in the future.
In this regard, on April 4, 2016, the Company made a request for early release regarding the claim filed on August 18, 2015 on the objections made to Resolutions 49/15 and 70/15.
In addition, on May 26, 2016, the Company filed a motion for reconsideration to administrative acts, which provided butane and propane quotas under the New Stabilization Program for 2016. Likewise, on September 21, 2016, TGS filed a motion for reconsideration for the period from May to December 2016.
In addition, the Company is a party of the Propane Gas Supply Agreement for Induced Propane Gas Distribution Networks ("Propane Agreement for Networks") entered into with the Argentine Government by which it undertakes to supply propane to the domestic market at a lower price to the market. In compensation, the Company receives an economic compensation calculated as the difference between the sales price and the export parity determined by the MINEM.
F-58
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
In June 2016, the Company signed the thirteenth and fourteenth extensions to the Propane Network Agreement, which provides for propane deliveries through April 30, 2017. In September 2016, the Company signed the addenda corresponding to these agreements for the purpose of re-determination of the price of propane sold by TGS to distributors and sub-distributors as a result of the Judgment.
On October 6, 2016, the MINEM issued Resolution No. 212, which provided for the new price of propane to be sold under the Propane Networks Agreement paid by residential users.
As mentioned above, both the New Program and the Propane for Networks Agreement established payment of compensation, calculated as a difference between the price set by the Government and the export parity price. Over recent years, this compensation has been paid with significant delays.
On May 20, 2016, Decree No. 704/2016 provided for the extension of the issuance of Argentine Bonds in US dollars with an annual rate of 8% which will expire in 2020 ("BONAR 2020") which were used to, among others, the cancellation of the compensation due of related to Propane for Networks Agreement. On June 22, 2016, the Company gave written consent and agreement to the terms and conditions of Decree No. 704/2016 (the "Letter of Consent") to the MINEM. Within this letter, TGS accepted the cancellation of the amounts due as compensation for propane networks Agreement until December 31, 2015, according to the methodology of cancellation informed by the SHR, which amounted to Ps. 140,496. On October 5, 2016, TGS received BONAR 2020 for an original nominal value of US $ 8,030,650.92.
As of December 31, 2016, the Argentine Government owes Ps. 156,399 to the Company for these concepts. On September 2, 2016, TGS submitted a note to MINEM demanding payment of the amounts owed on that date. As of the date of the issuance of these Consolidated Financial Statements, the collection of Ps. 17,227 corresponding to compensations due to TGS as of December 31, 2016.
Decree No. 2,067 / 08 (the "Decree")
Through Presidential Decree No. 2,067/08, the Executive Branch created a tariff charge to be paid by (i) the users of regulated services of transportation and / or distribution, (ii) natural gas consumers receiving natural gas directly from producers without making use of transportation systems or natural gas distribution, (iii) the natural gas processing companies in order to finance the import of natural gas. The tariff charge sets forth in the Decree finance the higher price of the natural gas imports required to compensate the injection of natural gas necessary to meet national requirements (the “Charge”). When the Charge was created, TGS paid it in accordance with the provisions of Resolution I-563/2008, at Ps. 0.0492/m3.
The payment of the natural gas processing tariff charge was selectively subsidized from 2008 according to the destination of the natural gas. In November 2011, however, ENARGAS issued Resolution No. 1,982/11 and 1,991/11 (the “Gas Tariff Resolutions”) which modified the list of the subsidy beneficiaries, and thus, involved a cost increase for many of our clients and for us (for certain of our consumption for our own account). The natural gas processing tariff charge increased from Ps. 0.049 to Ps. 0.405 per cubic meter of natural gas effective from December 1, 2011, representing a significant increase in our variable costs of natural gas processing.
In order to avoid this damage, TGS appealed against the Presidential Decree and the Resolutions including National Government, ENARGAS and ex MPFIPyS as defendants. For further information regarding the legal action filed by the Company, see note 18.b.
On March 28, 2016, the MINEM issued Resolution 28, which instructs ENARGAS to take all the necessary measures to derogate the tariff charge created by Decree No. 2,067/08 as from April 1, 2016.
F-59
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
International market
Exports of natural gasoline and LPG have been subject to a withholding regime consistent in the application of a percentage tax on exported amounts varying depending on the FOB price of them. In this context, Resolution No. 394/2007 and No. 127/2008 of the Ministry of Economy and Production disposed this determination.
Under the current framework in which the activities of this business segment are developed, the national government introduced amendments to the rates in force.
On December 30, 2014, the MEF issued Resolution No. 1,077/2014, which modified the nominal rates applicable for the export of oil and oil by-products, including the natural gasoline sold by TGS. The new withholding tax on exports regime considers the price of Brent crude oil less 8 US$/bbl (“IP”) as a reference price to determine the applicable rate. When the IP is less than 71 US$/bbl the nominal rate of the withholding tax on export for the natural gasoline will be 1%. When the IP is greater than 71 US$/bbl, the rate will be (IP- 70) / 70 x 100. Thus far during 2016, IP has been below US$ 71/bbl, so the applicable nominal rate for the exports of natural gasoline has been 1%.
On February 25, 2015, the Ministry of Economy issued Resolution No. 60/2015. This resolution modified the variable export withholding tax regime established under Resolution No. 127/08. According to the new methodology, the minimum tax rate is 1% if the international prices for propane and butane are lower than US$ 464 and US$ 478 (the “reference value”) per metric ton, respectively. If the propane and butane international prices are higher than the reference value, tax rate applicable to the selling price is calculated on a sliding scale according the amount by which the selling price exceeds the cut-off value of US$ 460 and US$ 473 per metric ton, respectively.
Said withholding system provided by the Public Emergency Law and successively extended, the last time by Law No. 26,732, was suspended on January 7, 2017 after the Argentine Government has not issued a new extension to it.
c) Expansion of the natural gas transportation system
Since 2004, the natural gas transportation system expansion works have been carried out under the Gas Trust Fund Program framework, which was created through Executive Branch Decree No. 180/04 and Resolution No. 185/04 issued by the ex MPFIPyS, aimed at financing the expansion of the national natural gas transportation system in a manner different from that established in the License.
Under such framework, the ex MPFIPyS, the Federal Energy Bureau and the natural gas transportation companies, among others, signed in April 2006 a Letter of Intent to carry out the second expansion of the gas pipeline system.
In December 2006, the gas trust fund contracts for the second expansion were signed, and TGS entered into an agreement under which TGS will manage the expansion project.
Expansion works initiated in 2006, which were planned in gradual stages, were executed with the aim to be financed by other gas trust funds, whose trustors are the gas producers and the shippers who subscribed the additional capacity. The works will be repaid with a new tariff charge that will be finally paid by the business and industrial users with firm transportation contracts, except for the distribution companies. In addition, TGS is in charge of the rendering of firm transportation services. For these services, TGS is paid a monthly Charge for Access and Use (“CAU”). As of December 31, 2016, the incremental transportation capacity was 307 MMcf/d after the works came into service.
In May 2011, TGS received Valores Representativos de Deuda (“debt securities”) from the trust fund, date of issue February 2010, which cancelled the account receivable of Ps. 48.1 million related to services rendered for the 247 MMcf/d expansion works. These debt securities amortize principal in 85 monthly, consecutive and equal installments and bear CER interest plus an 8% from their date of issue.
F-60
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
In October 2011, TGS, the Federal Energy Bureau and the trustee of the gas trust funds agreed the terms and conditions under which TGS will render the operation and maintenance services of the assets associated with the incremental transportation capacity of 378 MMcf/d.
Moreover, in October 2011 an amendment to the management agreement corresponding to the works initiated in 2006 was agreed in order to include management services associated with an expansion which will increase firm transportation capacity by 131 MMcf/d and its remuneration, which amounted to Ps. 37 million. Said agreement provided an advance payment equivalent to 20% of the total remuneration, and the remainder 80% through debt securities which amortize principal, in 96 monthly, consecutive and equal installments and bear CER plus a spread of 8% from their date of issue.
As of the date of the issuance of these consolidated financial statements, TGS received debt securities from the trust fund which cancelled the 90% of the mentioned advanced payment and the works that started operating. The principal of said debt securities amounted to Ps. 36.5 million (including accrued interest) as of December 31, 2016 and it is amortized in 96 monthly, consecutive and equal installments which bear CER plus a spread of 8% from their date of issue. The 10% remaining amount was cancelled in cash.
On July 20, 2016, Nación Fideicomiso S.A. ("NAFISA") notified TGS of MINEM´s decision to suspend works to expand the natural gas transportation capacity under the Gas Trusts Program created by Presidential Decree No. 180/04 and its regulations by Resolution No. 185/04 issued by the ex MPFIPyS (the "Program").
TGS is making the necessary arrangements for the collection of amounts owed by NAFISA under the respective management contract for the works. In this sense, in December 2016, a meeting of VRD holders was held in order to analyze the proposal made by NAFISA for the cancellation of the outstanding receivables which, was resumed in January 2017. VRD holders resolved to instruct the Trustee to make partial payments to the extent that there is availability of funds in the Financial Trust of Obra Gasoducto Sur 2006-2008 ("Trust Agreement"), according to the priority order established in the Trust Agreement and their addenda. As of December 31, 2016, these securities were classified as "Other financial assets at amortized cost" in the Statement of Financial Position.
d) Essential assets
A substantial portion of the assets transferred by GdE has been defined as essential for the performance of the natural gas transportation service. Therefore, TGS is required to keep separated and maintain these assets, together with any future improvements, in accordance with certain standards defined in the License.
TGS may not, for any reason, dispose of, encumber, lease, sublease or loan essential assets nor use such assets for purposes other than the provision of the licensed service without ENARGAS´s the prior authorization. Any expansion or improvements that it makes to the gas pipeline system may only be encumbered to secure loans that have a term of more than one year to finance such extensions or improvements.
Upon expiration of the License, TGS will be required to transfer to the Argentine government or its designee, the essential assets listed in an updated inventory as of the expiration date, free of any debt, encumbrances or attachments, receiving compensation equal to the lower of the following two amounts:
i)
the net book value of the essential assets determined on the basis of the price paid by the acquiring joint venture, and the original cost of subsequent investments carried in US dollars and adjusted by the PPI, net of accumulated depreciation according to the calculation rules to be determined by ENARGAS; or
F-61
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
ii.
the net proceeds of a new competitive bidding.
Once the period of the extension of the License expires, TGS will be entitled to participate in the New Bidding, and thus, it shall be entitled to:
(i) that its bid in the New Bidding be computed at an equal and not lower price, than the appraisal value determined by an investment bank selected by ENARGAS, which represents the value of the business of providing the licensed service as it is driven by the Licensee at the valuation date, as a going concern and without regard to the debts;
(ii) to obtain the new License, without payment, in the event that any bid submitted in the new tender exceeds the appraised value;
(iii) to match the best bid submitted by third parties in the new Bidding, if it would be higher than its bid mentioned in (i), paying the difference between both values ​​to obtain the new License;
(iv) if the Licensee has participated in the New Bidding but is unwilling to match the best bid made by a third party, to receive the Appraisal Value as compensation for the transfer of the Essential Assets to the new licensee, any excess paid by the third party shall remain for the grantor.
17.
COMMON STOCK AND DIVIDENDS
a)
Common stock structure and shares’ public offer
As of December 31, 2016 and 2015, TGS’ common stock was as follows:

Common Shares Class (Face value $ 1, 1 vote) |  | Amount of common stock, subscribed, issued, paid in, and authorized for public offer
Class “A” |  | 405,192,594
Class “B” |  | 389,302,689
|  | 794,495,283

TGS's shares are traded on the BCBA and under the form of the ADS (registered in the SEC and representing 5 shares each) on the New York Stock Exchange.
b)
Limitation on the transfer of the TGS’ shares
TGS’ by-laws provide that prior approval of ENARGAS and the unanimous approval of CIESA’s shareholders, under agreements among them, must be obtained in order to transfer Class “A” shares (representing 51% of common stock). The Bid Package states that approval of ENARGAS will be granted provided that:
-
The sale covers 51% of common stock or, if the proposed transaction is not a sale, the transaction that reduces the shareholding will result in the acquisition of a shareholding of not less than 51% by another investment company; and
-
The applicant provides evidence to the effect that the transaction will not impair the operating quality of the licensed service.
In the case of shareholders of CIESA who have qualified to obtain such condition due to the equity, guarantee and/or technical background of their respective parent companies, the sale of shares representing the capital of such subsidiaries by the respective ultimate, direct or indirect parent companies, and/or the cessation of management running TGS, requires the prior authorization of ENARGAS.
F-62
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
In case TGS wishes to reduce its capital, redeem its shares or distribute any part of its equity, except for the payment of dividends, in accordance with the provisions of the Argentine Business Associations Law, it requires prior authorization from ENARGAS.
On July 22, 2016, Law No. 27,260 was enacted, which modifies the investments allowed to the fund managed by the Administración Nacional de la Seguridad Social. (“Fondo de Garantía de Sustentabilidad” or “FGS”), which as of December 31, 2016 held 183,618,632 shares class "B" of TGS. Thus, the FGS may invest in shares of national corporations - among others - whose public offering is authorized by the CNV and which are listed on markets authorized by the CNV. The FGS may invest between the 7% and the 50% of its total assets in these kind of investments. However, it stipulates that the transfer and / or any other act or action that limits, alters, deletes or modifies the destiny, ownership, dominion or nature of the shares of which the FGS is entitled, provided that it results in a less than the previously established FGS, without prior express authorization of the Argentine Congress, with the following exceptions:
-
Public takeover bids addressed to all holders of said assets and at a fair price authorized by the CNV, under the terms of Chapters II, III and IV of Title III of Law 26,831.
-
Exchange of shares for others shares of the same or another company in the framework of merger excision or corporate reorganization processes.
c) Restrictions on distribution of retained earnings
Under current Argentine legal requirements and CNV standards, 5% of each fiscal year net income must be appropriated into a legal reserve, provided that there is no unappropriated retained deficit. In such case, the 5% should be calculated on any excess of the net income over the unappropriated retained deficit. This appropriation is legally binding until such reserve equals 20% of the amount which results from the sum of the “Common stock nominal value” and the balance of “Cumulative inflation adjustment to common stock”.
In addition, the by-laws provide for the issuance of Profit Sharing Vouchers, as defined in Article 230 of the Argentine Business Associations Law, which Vouchers entitle all regular employees to share in 0.25% of TGS’ net income for each year.
According to law No. 25,063, the dividends paid in cash or in kind, in excess of the tax profit, will be subject to a 35% withholding tax of the income tax, as sole and only payment.
Furthermore, TGS is subject to certain restrictions for the payment of dividends, which were contemplated in the outstanding debt agreements (Note 11 – “Covenants”).
Likewise, Resolution No. 31 of MINEM and Resolution No. 4054 limit the distribution and payment of dividends until ENARGAS verified compliance with the Investment Plan associated with the tariff increase established by Resolution 4054, which is scheduled to be finalized in the last quarter of 2017 due to the delay in the implementation of the tariff increase.
18.
LEGAL CLAIMS AND OTHER MATTERS
a) Exemption of the sales of liquids in Turnover Tax
In the framework of the Tax Agreement subscribed by the Argentine Government and the Provinces in 1993, and as from the enactment of provincial Law No. 11,490, TGS required the Tax Bureau of the Province of Buenos Aires (“ARBA”) to exempt the sales of liquids from the turnover tax in its jurisdiction. In September 2003, the Tax Bureau of the Province of Buenos Aires, through Resolution No. 4,560/03, denied the exemption. In October 2003, TGS filed an administrative appeal with the Tax Court of the Province of Buenos Aires.
In February 2007, the Tax Court partially upheld TGS’s complaint. In this ruling, the Tax Court determined that the sale of ethane is exempt from the payment of the turnover tax, not being the case the sale of Propane and butane in the domestic market where they are not intended to be a raw material for an industrial activity.
F-63
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
For the previously mentioned, TGS filed an appeal in May 2007 before the Province of Buenos Aires Court to obtain the exemption alleging that propane and butane sales might be utilized for other uses different from petrochemical industry. On December 14, 2014, the Company was notified of the sentence against its interests. On December 15, 2014, TGS filed an appeal against this sentence. This appeal was partially accepted in April 2016, as the Chamber of Appeals determined the exemption for the production of propane, butane, ethane and natural gasoline, but not for LPG.
Subsequently, TGS and ARBA filed an Extraordinary Appeal of Inapplicability of the law before the Supreme Court of Justice of the Province of Buenos Aires. As of the date of the issuance of these consolidated financial statements, a resolution is pending.
On February 19, 2008, TGS was notified with a formal assessment notice of Ps. 3.6 million (not including interest) regarding the payment of the turnover tax corresponding to the period ranging from August 2003 to December 2004. On March 11, 2008, TGS filed a discharge within the Tax Bureau of the Province of Buenos Aires which was rejected and thus, the Company filed an appeal with the Tax Court of this province in January 2009. On November 23, 2013 the Tax Court partially upheld TGS’s complaint, as of the date of issuance of these consolidated financial statements, the settlement of the debt is pending of approval. On March 16, 2015, TGS proceeded to pay the sum of Ps. 3.3 million corresponding to the fiscal periods between August 2003 and December 2004 in accordance with ARBA's claims under the pending procedure.
On December 4, 2012, TGS was notified with a new formal assessment notice of Ps. 0.8 million regarding the payment of the turnover tax corresponding to the fiscal year 2006 related to the production of liquefied gas, butane, propane and natural gasoline. TGS unsuccessfully argued that the prescribed period was time limit. Subsequently, on August 5, 2015, the Court of First Instance upheld the time limit exception raised by TGS, which was appealed by ARBA. Currently, the record is for judgment by the Supreme Court of Justice of the Province of Buenos Aires.
As of December 31, 2016, TGS maintained no provision of for this concept because under the legal advisors opinion and given the recent decision of the Chamber of Appeals, TGS would not have to pay the tax.
As of December 31, 2015 and 2014, TGS maintains a provision of Ps. 14.9 million and Ps. 21.1 million, respectively.
b) Turnover tax calculated on the natural gas price used by TGS as fuel to render its transportation services
The Company has interpretative differences with several provinces regarding the liquidation of the turnover tax calculated on the natural gas price used by TGS as fuel to render its transportation services. In this framework there have been initiated several lawsuits against TGS, which have adversely concluded by the Company. In this respect, after having paid the amounts claimed in previous years, the Company has begun a tax recovery appeal process to claim to the provinces of Santa Cruz and Tierra del Fuego a total amount of Ps. 8.4 million and Ps. 11.2 million, respectively.
In January 2016, the Company was notified of a new claim initiated by the Tax Bureau of the Province of Santa Cruz for fiscal periods May 2011 to July 2014 claiming for an amount of Ps. 5.0 million. In March 2016, the Company filed a reconsideration petition rejecting the request of the claimant, which was subsequently rejected. In April 2016, TGS filed a hierarchical appeal before the Ministry of Economy and Public Works, which was rejected. On May 24, 2016, Ps. 9.0 million were paid in concept of principal and interest. For the recovery of the amount paid, the Company did not submit a repetition appeal but instead, TGS requested the pass-through to the tariff.
On September 9, 2016, the Supreme Court of Justice of the Province of Tierra del Fuego rejected the recurring appeal initiated by TGS for the recovery of Ps. 11.2 million subscribed in 2013. Consequently, the administrative instance has been extinguished, so that the Company initiated before ENARGAS the corresponding administrative process for the transfer of said amount in order to maintain the tax neutrality guaranteed in the license.
F-64
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
On October 5, 2016, the Company proceeded to pay the settlement made for the period April 2013-June 2014 for the amount of Ps. 18.6 million (including fines and interest).
In 2016, new tax settlements were received by the Tax Bureau of the Province of Tierra del Fuego, which amounts to Ps. 34.9 million plus taxes. The Company presented the corresponding disclaimers which are still pending.
As of December 31, 2016 and 2015, the Company recorded a provision of Ps. 207.7 million and Ps. 127.8 million, respectively, in respect of this contingency under the line item "Provisions", which amounts were determined in accordance with the estimations of tax and interests, that would be payable as of such date, in case this contingency turns out unfavorable for the Company.
c)
Action for annulment of ENARGAS Resolutions No. I-1,982/11 and No. I-1,991/11 (the “Resolutions”)
After the issuance of the Resolutions, TGS filed a judicial action before the National Court of First Instance in Federal Administrative Litigation No. 1 (the "Court") in order to obtain the declaration of nullity of the Decree and the Resolutions as well as the Unconstitutionality of the administrative acts that created the Charge. The probative stage of these proceedings was concluded and the allegations are currently being carried out.
On July 5, 2012, the Court issued in favor of TGS a precautionary measure by which the suspension of the Charge was ordered in the terms set forth in the Resolutions. This decision was appealed in different opportunities by the National Government, by virtue of which the dictating of the precautionary measure was limited to the validity of 6 months. However, at maturity, the Company is entitled to obtain a new precautionary measure for a similar period.
As a result, on September 20, 2016, a new extension of the precautionary measure was obtained (which prevents the National Government from claiming to TGS the payment of the amounts resulting from the new value of the Charge for the period between the November 2011 and March 2016), thus extending its validity until March 2017.
On the other hand, the National Court of Appeals in Contentious Administrative Dismissal rejected the extraordinary appeal filed by the National Government against the judgment of that court that confirmed the rejection made by the Court at the request of ENARGAS to declare abstract the legal action initiated by TGS in accordance with the precedent "Alliance" issued by the Supreme Court in December 2014.
TGS’s Management believes it has sufficient valid arguments to defend its position, and thus, the Company has not recorded the increase of the charge for natural gas consumptions from the date of obtaining the injunction until April 1° 2016, effective date of Resolution 28. In the event this injunction had not been obtained, the impact of the Resolutions for the years ended December 31, 2016 taking into account the possibility of carryforward of the charge to the sales price of the product, would have implied a net loss of Ps. 52.1 million. Meanwhile, the accumulated impact on the retained earnings since obtaining the injunction would have involved a reduction effect of Ps. 601.6 million.
d)
Recovery action of VAT and income tax
On October 9, 2008, TGS signed the 2008 Transitional Agreement with ex UNIREN that contemplated a tariff increase of 20%, which would be retroactively applicable to September 1, 2008. On December 3, 2009, the Executive Branch ratified this transitional agreement through the Presidential Decree No. 1,918/09. By means of this decree, TGS will be able to bill the tariff increase to its clients as soon as ENARGAS publishes the new tariffs schedule and sets the methodology to bill the retroactive effect. Finally, this administrative act did not become effective and therefore in September 2010 TGS filed an acción de amparo (a summary proceeding to guarantee constitutional rights). Due to the passing of time since the enactment of Decree No. 1918/09, on December 16, 2010 the Board of Directors of the Company resolved to discontinue the recognition of the tariff increase revenue and to reverse the credit provision of the tariff increase revenue already accrued in the year ended December 31, 2009. The reversal of the tariff increase does not imply any resignation to the Company´s right resulting from the Decree No. 1,918/09.
F-65
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
On May 24, 2013, TGS filed a tax recovery appeal with respect to the income tax and VAT credits generated by the reversal of the tariff increase credit mentioned above. After the omission to pass judgment on the claim within the three months of the filing of the tax recovery appeal, on October 9, 2013, TGS filed an appeal before the Federal Tax Bureau, which was not solved yet. As of the date of the issuance of these consolidated financial statements, the case is about to dictate sentence.
The total amount claimed by TGS amounted to Ps. 69.4 million plus compensatory interests. The outstanding balance of this credit has been valued at its amortized cost and it has been included in “Other non-current receivables.”
e)
Turnover tax withholding in the Province of Buenos Aires
The Company was notified by ARBA regarding the initiation of various determinative procedures in which TGS is claimed for a total of Ps. 4.9 million (without fine or interest) for the omission as agent of withholding and collection of the turnover tax corresponding to the period July 2009 - June 2011. Given this determination, the Company presented to ARBA various elements of evidence that allow reducing substantially the amount claimed. As of the date of issuance of these consolidated financial statements, the Tax Court has not resolved the issue.
At December 31, 2016, the Company recorded a provision for these items of Ps. 6.9 million recorded in "Provisions", determined based on the estimated tax and interest payable at that date, in the event that this claim is unfavorable to TGS
f)
Others
In addition to the matters discussed above, the Company is a party to certain lawsuits and administrative proceedings which involve taxation, labor claims, social security, administrative and others arising in the ordinary course of business. The Company’s Management and its legal advisors estimate that the outcome of these differences will not have significant adverse effects on the Company’s financial position or results of operations. As of December 31, 2016, 2015 and 2014 the total amount of these provision amounted Ps. 6.5 million, Ps. 7.3 million and Ps. 8.3 million, respectively.
g)
Environmental matters
The Company is subject to extensive environmental regulations in Argentina. TGS’ management believes that its current operations are in material compliance with applicable environmental requirements, as currently interpreted and enforced. The Company has not incurred in any material environmental liabilities as a result of its operations to date. As of December 31, 2016, 2015 and 2014 the total amount of these provision amounted Ps. 0.1 million, respectively.
h)
Arbitral claim
On May 8, 2015, the Secretariat of the International Court of Arbitration of the International Chamber of Commerce notified TGS regarding the request for arbitration initiated by PAE and Pan American Sur SA (the "applicants") related to the execution of three natural gas processing contracts between the applicants and TGS (the “Agreements”). On April 4, 2016, the Company was notified of the beginning of the corresponding demand, which TGS was responded on August 17, 2016. On March 16, 2017, the applicants submitted its response to the arguments filed by us previously.
According to the demand, the applicants allege breach of contracts during the period between February 2006 and February 2016, that would have resulted in a lower allocation of the products obtained (the “Products”), which shortfall at March 31, 2017 is claimed to be equal to US$ 134 million without interest or US$ 306.3 million, including interest (the “Claim”).
TGS considers that the Claim contains inconsistencies resulting from misinterpretations of the contractual provisions and an incorrect application of the mechanisms for calculating the allocation of the Products, and therefore the Company believes that the amount claimed is not supportable. Thus, management, jointly with its legal counsel, considers that there are meritorious arguments of defense that will allow to refute the Claim vigorously.
F-66
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
Given the present stage of the arbitration process, as of the date of issuance of these Financial Statements, TGS cannot predict the outcome of this proceeding.
19.
BALANCES AND TRANSACTIONS WITH RELATED COMPANIES
Technical Assistance Agreement
Pampa Energía is TGS’s technical operator, according to the approval of ENARGAS in June 2004, and subject to the terms and conditions of the Technical Assistance Agreement which provides that Pampa Energía is in charge of providing services related to the operation and maintenance of the natural gas transportation system and related facilities and equipment, to ensure that the performance of the system is in conformity with international standards and in compliance with certain environmental standards. For these services, the Company pays a monthly fee based on a percentage of the operating income of the Company. In October 2014, TGS and Petrobras Argentina approved the renewal of the Technical Assistance Agreement for a three-year term, beginning on December 28, 2014.
Commercial transactions
In the normal course of business, the Company holds with Petrolera Pampa SA and Pampa Energía, agreements to transfer natural gas and richness. The price, which is denominated in US dollars, is determined according to common practices.
In addition, in the normal course of business, TGS carries out liquid sales, natural gas transportation services and other services with its associated companies, Pampa Energía and related companies.
On November 1, 2016, Pampa Energía ceded to YPF the operation of the Río Neuquén area and related contracts, which until that date were exposed as transactions with related parties in the Other Services business segment.
Financial transactions.
Loan agreement with Pampa Energía S.A.
On October 5, 2011, TGS granted a US$26 million loan to Pampa Energía S.A. Proceeds from the loan were used by Pampa Energía to exercise the option contained in the "Call Option Agreement". Additionally, to guarantee compliance with its obligations, Pampa Energy S.A. created a pledge on the rights that correspond to the arbitration actions of Ponderosa Assets LP and Enron Creditors Recovery Corp. against Argentine Government acquired upon exercise of the option mentioned above. For more information, see Note 16.a.
After several extensions of the maturity, on May 7, 2013, the Board of Directors approved the amendments of certain terms and conditions of the loan granted to Pampa Energía S.A., among others:
i)
Extended the expiration date until October 6, 2014, with option of an automatic renewal for one additional period of one year. For this reason, the expiration date was October 6, 2015.
ii.
Previous to the expiration date, the loan should have been paid or prepaid compulsorily by the assignment of rights and obligations to TGS of all assigned to Pampa Energía S.A., mentioned in Note 16.a, Ponderosa Assets LP and Enron Creditors Recovery Corp against Argentina in the event that, on or before the due date: (a) the 20% effective increase on the tariff schedule has been granted to TGS, under the provisions of the Transitional Agreement approved by Presidential Decree No. 1918/09 or (b) it has been granted to TGS: (x) the tariff adjustment as provided by the Adjustment Agreement initialed by TGS approved by the Board of Directors Meeting held on October 5, 2011, or (y) any other compensatory arrangements implemented by any mechanism or system of tariff revision in the future to replace those currently in force under the Public Emergency Law with an equivalent economic effect on TGS.
F-67
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
iii.
The applicable interest rate was equivalent to 6.8% annual plus VAT.
After verifying compliance with clause ii) mentioned above, on September 30, 2015, the Board of Directors of the Company approved the acquisition of the Rights of the arbitration proceedings. For further information, see Note 16.a "Regulatory Framework - General framework of the regulated segment. - Acquisition of the Rights of Arbitration Proceedings"
The evolution of this loan was as follows:

Balances as of December 31,2013 | 194,154
Interest income | 14,941
Foreign exchange gain | 59,016
Balances as of December 31,2014 | 268,111
Interest income | 25,144
Foreign exchange gain | 31,135
Write-off of debt | (324,490)
Balances as of December 31,2015 | -

Financial leasing with Pampa Energía
As mentioned in Note 12 to these Consolidated Financial Statements, on August 11, 2016, the Company entered into a financial lease agreement with Pampa Energía. The outstanding balance of debt cancellation as of December 31, 2016, amounts to Ps. 848,181.
Key management compensation
The accrued amounts corresponding to the compensation of the members of the Board of Directors, the Statutory Committee and the Executive Committee for the years ended December 31, 2016 and 2015 were Ps. 39,409 and Ps. 27,280, respectively.
F-68
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
Balances and transactions with related parties
The detail of significant outstanding balances for transactions entered into by TGS and its related parties as of December 31, 2016 and 2015 is as follows:

| 2016 | 2015
Company | Accounts receivable | Accounts payable | Accounts receivable | Accounts payable
Controlling shareholder: |  |  |  |
CIESA | 44 | - | 74 | -
Associate which exercises joint control on the controlling shareholder: |  |  |  |
Pampa Energía (1) | 114,039 | 883,781 | 29,348 | 18,303
Associate which exercises significant influence on the controlling shareholder: |  |  |  |
Link | 425 | - | 370 | -
EGS | - | 602 | - | 4,564
TGU | - | 2,529 | - | -
Other related companies: |  |  |  |
Petrolera Pampa S.A. | - | 2,634 | - | -
Compañía Mega S.A.(2) | - | - | 12,321 | -
Braskem Netherlands BV (2) | - | - | 35,996 | -
Pampa Comercializadora S.A. | 943 | - | 156 | -
Petrolera Entre Lomas S.A. | 17 | - | 16 | -
Oleoductos del Valle S.A. | 297 | - | 317 | -
Central Térmica Piedrabuena S.A. | 1,224 | - | - | -
Transener S.A. | 727 | - | - | -
Total | 117,716 | 889,547 | 78,598 | 22,867
(1) Accounts payable includes Ps. 848,181 corresponding to the leasing booked as "Loans".
(2) As of July 27, 2016, those companies are not considered as related parties due to the acquisition of Petrobras Argentina shares by Pampa Energía as described in Note 1.

The detail of significant transactions with related parties for the years ended December 31, 2016, 2015 and 2014 is as follows:
F-69
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
Year ended December 31, 2016:
Year ended December 31, 2015:
F-70
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
Year ended December 31, 2014:
20. CONTRACTUAL OBLIGATIONS
As of December 31, 2016, the Company had the following contractual commitments:

Estimated maturity date
| Total | Less than one year | 1-2 years | 3-4 years | More than 5 years
Financial indebtedness(1) | 3,485.4 | 294.5 | 3,190.9 | - | -
Purchase obligations (2) | 264.8 | 264.8 | - | - | -
Other long term purchase obligations(3) | 467.2 | 467.2 | - | - | -
Financial leases(1) | 1,187.0 | 164.9 | 237.8 | 237.8 | 546.5
Total | 5,404.3 | 1,191.4 | 3,428.7 | 237.8 | 546.5

(1) Corresponds to the cancellation of principal and interest of the financial indebtedness. For further information, see Note 12.
(2)Corresponds to purchase of natural gas contracts for the processing of liquids.
(3) Corresponds to the payment related to the Technical Assistance Agreement with Pampa Energía. For further information, see Note 19.
Almost all the financial indebtedness of TGS and the totality of the obligations corresponding to gas purchases are denominated in U.S. dollars which have been translated into Argentine pesos at the exchange rate as of December 31, 2016 (US$ 1.00 = Ps. 15.89). The amounts to be paid in pesos could vary depending on the actual fluctuations in the exchange rate.
Guarantees granted and goods of restricted availability
The Company has not granted any additional guarantees other than those set out in the remaining notes.
Regarding the existence of restricted assets, as mentioned in Note 16.b, on October 5, 2016, TGS received BONAR 2020 for an original face value of US $ 8,030,650.92 in compensation for the cancellation due on December 31, 2015 corresponding to the Propane for Networks Agreement.
Decree No. 704/2015 establishes a restriction on the transferability of such bonds to third parties until December 31, 2017. This restriction implies that up to 3% of the bonds received may be sold on a monthly basis, that amount cannot be exceeding 12% of this total amount (since the percentage is cumulative in case the allowed 3% is not sold in other month). In addition, a monthly information regime is stipulated.
In case of non-compliance with this reporting obligation, a fine of up to 1% of the market value of the bond balance will be applied. In case of breach with the limit of bonds that can be sold, the fine will be up to 10% of the market value of the bonds received. As of the date of issuance of these Consolidated Financial Statements, TGS is complying with all the commitments assumed.
F-71
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
21. SUBSIDIARY AND ASSOCIATES
Link:
Link was created in February 2001, with the purpose of the operation of a natural gas transportation system, which links TGS’s natural gas transportation system with the Cruz del Sur S.A. pipeline. The connection pipeline extends from Buchanan, located in the high-pressure ring that surrounds the city of Buenos Aires, which is part of TGS’s pipeline system, to Punta Lara. TGS’s ownership interest in such company is 49% and Dinarel S.A. holds the remaining 51%.
TGU:
TGU is a company incorporated in Uruguay. This company rendered operation and maintenance services to Gasoducto Cruz del Sur S.A. and its contract terminated in 2010. TGS holds 49% of its common stock and Petrobras Argentina holds the remaining 51%.
EGS (in liquidation):
In September 2003, EGS, a company registered in Argentina, was incorporated. The ownership is distributed between TGS (49%) and TGU (51%). EGS operates its own pipeline, which connects TGS’s main pipeline system in the Province of Santa Cruz with a delivery point on the border with Chile.
In October 2012, ENARGAS issued a resolution which authorizes EGS to transfer the connection pipeline and service offerings in operation to TGS. On December 17, 2013, the sale of all the fixed assets of EGS to TGS for an amount of $ 350,000 was made, the existing natural gas transportation contracts were transferred and the procedures to dissolve the Company were initiated.
The Board of Directors Meeting held on January 13, 2016, approved to initiate the necessary steps for the dissolution of EGS. The Extraordinary Shareholders Meeting held on March 10, 2016 appointed EGS’ liquidator.
On October 13, 2016, the liquidator of EGS resolved the distribution of a dividend in kind of Ps. 4,673 through the partial transfer of the credit that EGS has with TGS as a result of the sale of the Connection Gas Pipeline, which was implemented through TGS and TGU Assignment Agreements, which had full effects on November 4, 2016.
22. SUBSEQUENT EVENTS
The financial statements were authorized for issuance by the Board of Directors on March 7, 2017.
No subsequent events between the end of the fiscal year ended December 31, 2016 and the date of the issuance of these consolidated financial statements have had a material effect on the financial position or the results of operations of the Company, except for those mentioned below:
Collection of Polisur sinister
On November 3, 2015, Polisur (the only customer to whom ethane is sold) suffered a sinister at its plant located in the petrochemical complex of Bahia Blanca, Buenos Aires Province, which brought operational and commercial limitations for the processing of ethane delivered by TGS, affecting the income of the Company.
For this reason, TGS initiated proceedings with its insurance company in order to claim, under the coverage of loss of contingent benefit provided in the policies of all operational risk, the corresponding compensation for the economic loss derived from said circumstance. Finally, in January 2017, this claim was accepted by the insurer company, and the compensation was settled for a total amount of US$ 6.9 million on January 31, 2017.
F-72
TRANSPORTADORA DE GAS DEL SUR S.A.
Notes to the Consolidated Financial Statements as of December 31, 2016 and comparative information
(Stated in thousands of pesos as described in Note 3, unless otherwise stated)
Tariff Increase and Integral Renegotiation Agreement
On March 30, 2017, the National Government and TGS signed the 2017 Transitional Agreement. On the same day and in the same sense as agreed in the 2017 Transitional Agreement, ENARGAS issued Resolution 4362 by which:
●
The RTI process is approved, which will culminate in the signing of the integral agreement, carried out within the framework of Ministry of Energy. From this RTI, a new tariff schedule was set. However, according to the provisions of Resolution 74, the Ministry of Energy provides for a limitation to the tariff increase arising from the RTI process. Accordingly, a new transitional tariff schedule in force as of April 1, 2017, which implies a rate increase of 64.2%, is approved, but none increases for the CAU were approved at this stage.
Resolution 74 provides that the remaining tariff increases resulting from the RTI will be granted as from December 1, 2017 (40% of the total increase) and April 1, 2018 (30% of the total increase). According to said resolution, the ENARGAS should consider the corresponding financial impact of the delay in the implementation of the tariff increase.
●
In addition, Resolution 4362 obliged TGS for the execution of the Five-Years Plan, which requires a high level of essential investments for the operation and maintenance of the pipeline system, to provide quality, safe and reliable service. The Five-Years Plan shall be for the period from April 1, 2017 to March 31, 2022.
●
A non-automatic six-month adjustment mechanism for the natural gas transportation tariff was approved. This adjustment must be approved by ENARGAS and for its calculation, the evolution of the Wholesale Price Index (“WPI”) published by INDEC will be considered.
●
The 2017 Transitional Agreement provides for the inability to pay dividends without the prior authorization of ENARGAS until the final tariff schedule will be in force or the 2017 Integral Renegotiation Agreement was ratified by the Executive Branch.
In addition to the conclusion of the 2017 Transitional Agreement, we have signed the 2017 Integral Renegotiation Agreement, which will conclude the RTI process and the renegotiation of our License. This integral renegotiation agreement is pending approval by the Ministry of Energy, MH, The Office of the Attorney for the National Treasury, The General Office of the Comptroller and the Argentine Congress. Once these governmental approvals are obtained, the Executive Branch must issue a decree to put into effect.
Turnover tax calculated on the natural gas price used by TGS as fuel to render its transportation services
As it is mentioned in note 18.b above, TGS has received new tax settlements from the Tax Bureau of the Province of Tierra del Fuego.
In this regard, on April 18, 2017, the Company entered into an agreement with the Province of Tierra del Fuego for the payment of Ps. 110.1 million corresponding to the settlement of the turnover tax for the period January 2013 to September 2016.
23. INFORMATION REQUIRED BY ARTICLE 26 OF SECTION VII CHAPTER IV TITLE II OF CNV RULES
In order to comply with General Resolution No. 629/2014 of the CNV, TGS informs that by March 7, 2017, supporting and management documentation related to open tax periods is safeguarded by Iron Mountain Argentina S.A. at its facilities are located at 2396 Amancio Alcorta Avenue in the Autonomous City of Buenos Aires.
As for commercial books and accounting records, they are situated in the headquarters of the Company in areas that ensure its preservation and inalterability.
The Company has available in its headquarters to CNV details of the documentation given in safeguard to third parties.
F-73