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TGS Transportadora de Gas del Sur


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, 2019
 
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
Trading Symbol(s)
Name of each exchange on
which registered
   
American Depositary Shares (“ADS”), representing Class “B” Shares
TGSNew York Stock Exchange
Class “B” Shares, par value Ps. 1.00 per sharen/aNew York Stock Exchange*
 
*Not for trading, but only in connection with the registration of American Depositary Shares related to the issuer’s American Depositary Receipts (“ADRs”) 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. 1.00 each  405,192,594 
Class “B” Shares, par value Ps. 1.00 each  389,302,689 
Total(1)
  784,608,528 
(1) Excludes 9,886,755 treasury shares, representing 1.24% of the total shares not deemed outstanding under Argentine law.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
YesNo
 
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.
 
YesNo
 
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.
 
YesNo
 
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files).
 
YesNo
 
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 Securities Exchange Act of 1934.
 
Large accelerated filerAccelerated filer
    
Non-accelerated filerEmerging 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 Securities Exchange Act of 1934. ☐
 
†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 whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
 
YesNo
 
Indicate by check mark which basis 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 17Item 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 Securities Exchange Act of 1934).
 
YesNo


TABLE OF CONTENTS
 
 
Page
   
i
iv
 1
 
Item 1.
1
 
Item 2.
1
 
Item 3.
1
 
Item 4.
54
 
Item 4A.
113
 
Item 5.
113
 
Item 6.
151
 
Item 7.
166
 
Item 8.
172
 
Item 9.
176
 
Item 10.
179
 
Item 11.
197
 
Item 12.
200
201
 
Item 13.
201
 
Item 14.
201
 
Item 15.
202
 
Item 16.
202
 
Item 16A.
202
 
Item 16B.
203
 
Item 16C.
203
 
Item 16D.
204
 
Item 16E.
204
 
Item 16F.
206
 
Item 16G.
206
 
Item 16H.
208
209
 
Item 17.
209
 
Item 18.
209
 
[Item 19.
209

PRESENTATION OF FINANCIAL AND OTHER INFORMATION
 
Certain Defined Terms
 
In this annual report on Form 20-F (“Annual Report”), unless otherwise indicated or the context requires otherwise: (i) references to “we,” “us,” “our” and the “Company” mean Transportadora de Gas del Sur S.A. (“TGS”) and its consolidated subsidiaries, Telcosur S.A. (“Telcosur”) and CTG Energía S.A.U. (“CTG”), (ii) references to “Argentina” are to the Republic of Argentina, (iii) references to the “United States” or “U.S.” are to the United States of America, (iv) references to “pesos” or “Ps.” are to Argentine pesos, the legal currency of Argentina, (v) references to “U.S. dollars,” “dollars” or “U.S.$” are to United States dollars, the legal currency of the United States, (vi) a “billion” is a thousand million, (vii) references to “cf” are to cubic feet, (viii) references to “MMcf” are to millions of cubic feet, (ix) references to “Bcf” are to billions of cubic feet, (x) references to “m3” are to cubic meters, (xi) references to “d” are to days, and (xii) references to “HP” are to horsepower.
 
Financial Statements and Basis of Preparation
 
We maintain our financial books and records and publish our consolidated Financial Statements (as defined below) in pesos, which is our functional currency. This Annual Report includes our audited consolidated statements of financial position as of December 31, 2019 and 2018, and our audited consolidated statements of comprehensive income, changes in equity and cash flows, and the related explanatory notes for the years ended December 31, 2019, 2018 and 2017 (our “Financial Statements”). Our Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and as in effect on the date of preparation of the Financial Statements. IFRS have been adopted by the Federación Argentina de Consejos Profesionales de Ciencias Económicas (“FACPCE”) as its professional accounting standards and are required to be adopted by certain public companies in Argentina (entidades incluidas en el régimen de oferta pública de la Ley de Mercado de Capitales) pursuant to the rules of the Comisión Nacional de Valores (“CNV”), compiled under General Resolution No. 622/2013 (as amended by General Resolution No. 668/2016 and as further amended, the “CNV Rules”).
 
At our shareholders’ meeting held on April 26, 2017, as a result of a proposal made by Compañía de Inversiones de Energía S.A. (“CIESA,” our controlling shareholder), our shareholders voted in favor of having a joint audit on our consolidated financial statements commencing with fiscal year ended December 31, 2017, even though there is currently no legal requirement in Argentina for a joint audit. As a result, our Financial Statements were jointly audited by Price Waterhouse & Co. S.R.L., Buenos Aires, Argentina (“PwC”) member firm of PricewaterhouseCoopers International Limited, and Pistrelli, Henry Martin y Asociados S.R.L., member firm of Ernst & Young Global Ltd. (“EY”). The joint report of PwC and EY, dated April 29, 2020, is included in this Annual Report. Each of PwC and EY is an independent registered public accounting firm, as stated in their reports appearing herein.
 
International Accounting Standard 29 (“IAS 29”) “Financial reporting in hyperinflationary economies” requires that the financial statements of an entity whose functional currency is one of a hyperinflationary economy be expressed in terms of the current unit of measurement at the closing date of the reporting period, regardless of whether such financial statements are based on the historical cost method or the current cost method. This requirement also comprises the restatement of comparative information of the financial statements to be presented in the current currency as of December 31, 2019, without modifying the statutory decisions made based on the financial information corresponding to those fiscal years.

IAS 29 describes characteristics that may indicate that an economy is hyperinflationary. However, it states that it is a matter of judgement when restatement of financial statements becomes necessary. Among other factors, an economy is “hyperinflationary” in accordance with IAS 29 when it has a cumulative inflation rate over three years that approaches, or exceeds, 100%, also taking into consideration other qualitative factors related to the macroeconomic environment.
 
The IASB does not identify specific economies that satisfy the requirements to be deemed hyperinflationary. The International Practices Task Force (“IPTF”) of the Centre for Audit Quality monitors the status of “highly inflationary” countries. The criteria of IPTF for identifying such countries are similar to those for identifying “hyperinflationary economies” under IAS 29. From time to time, the IPTF issues reports of its discussions with the staff of the Securities and Exchange Commission (“SEC”) on the IPTF’s recommendations of which countries should be considered highly inflationary, and which countries are on the IPTF’s inflation “watch list.” The IPTF’s discussion document for its November 19, 2019 meeting states that in the view of the IPTF, Argentina had three-year cumulative inflation rates exceeding 100%.
 
The downward trend in inflation in Argentina observed in 2017 reversed and inflation in Argentina significantly increased during 2018 and 2019, which resulted in an accumulated inflation rate for each of the three-year periods ended December 31, 2019 and 2018, in excess of 100%. In addition, the rest of the indicators do not contradict the conclusion that Argentina should be considered a hyperinflationary economy for accounting purposes. As a result, our management considers that there is sufficient evidence to conclude that Argentina is a hyperinflationary economy in terms of IAS 29, effective as from July 1, 2018.
 
The Financial Statements and the other financial information included in this Annual Report for all the periods reported are presented on the basis of constant pesos as of December 31, 2019 (“Current Currency”). Thus, our audited consolidated statements of financial position as of December 31, 2018, and our audited consolidated statements of comprehensive income, changes in equity and cash flows, and the related explanatory notes for each of the years ended December 31, 2018 and 2017, included elsewhere in this Annual Report have been restated in accordance with IAS 29 for comparative purposes from the original figures reported and supersede any previously disclosed consolidated financial statements relating to such periods.
 
In analyzing the provisions of IAS 29, our management used the inflation rates stated in the official statistics published by the Instituto Nacional de Estadística y Censos (“INDEC”), similar to the criteria adopted by the accounting profession and corporate regulatory bodies in Argentina. In order to restate the Financial Statements, the CNV has established that the series of indexes to be used for the application of IAS 29 is determined by the FACPCE. This series of indexes combines the National Consumer Price Index (“CPI”) as of January 2018 (base month December 2017) with the Domestic Wholesale Price Index (“WPI”), both published by INDEC until that date. For the months of November and December 2015, for which there is no information from the INDEC on the evolution of the WPI, the variation in the CPI of the Autonomous City of Buenos Aires was applied. According to FACPCE, inflation was 53.8%, 47.6%, and 24.8% in the years ended December 31, 2019, 2018 and 2017, respectively.
 
For more information, see note 4(d) to the Financial Statements and “Item 5. Operating and Financial Review and Prospects—A. Operating Results. - Factors Affecting our Consolidated Results of Operations—Effects of inflation and restatement of Financial Statements.” Also, see “Item 3. Key Information—D. Risk Factors—Risks Relating to Argentina—Adoption of hyperinflation accounting in Argentina” and “—High levels of inflation and the lack of credibility regarding Argentina’s official inflation statistics, could negatively affect our business, results of operations, and financial condition, the value of our securities, and our ability to meet our financial obligations.”
 
Currency
 
Solely for the convenience of the reader, certain amounts presented in pesos in this Annual Report as of and for the year ended December 31, 2019, have been converted into U.S. dollars at specified exchange rates. Unless otherwise specified, all exchange rate information contained in this Annual Report has been derived from information published by Banco de la Nación Argentina (“Banco Nación”), without any independent verification by us. See “Item 3. Key Information—A. Selected Financial Data—Exchange Rate Information.” As a result of fluctuations in the peso/U.S. dollar exchange rate, the exchange rate at such date may not be indicative of current or future exchange rates. Consequently, these translations should not be construed as a representation that the peso amounts represent, or have been or could be converted into, U.S. dollars at that or any other rate.
 
Rounding
 
Certain figures included in this Annual Report have been rounded for ease of presentation. Percentage figures included in this Annual Report have not, in all cases, been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this Annual Report may vary from those obtained by performing the same calculations using the figures in our Financial Statements. Certain numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them due to rounding.
 
Available Information
 
The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our telephone number is (54-11) 4865-9050, and our principal executive offices are located at Don Bosco 3672, 5th Floor, C1206ABF City of Buenos Aires, Argentina. Our internet address is www.tgs.com.ar. The contents of our website and other websites referred to herein are not part of this Annual Report.
 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
Some of the information in this Annual Report, including information incorporated by reference herein, may constitute estimates and forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933 (the “Securities Act”) and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). These estimates and forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “can,” “continue,” “estimate,” “expect,” “goal,” “intend,” “may,” “plan” “potential,” “predict,” “projection,” “should,” “will,” “will likely result,” “would” or other similar words. These estimates and statements appear in a number of places in this Annual Report and include statements regarding our intent, belief or current expectations, and those of our officers, with respect to (among other things) our business, financial condition and results of operations. Our estimates and forward-looking statements are based mainly on current expectations and estimates of future events and trends, which affect, or may affect, our business, financial condition and results of operations. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to several risks and uncertainties and are based on information available to us as of the date of this Annual Report.
 
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.
 
Forward-looking statements include, but are not limited to, the following:
 

statements regarding changes in general economic, business, political or other conditions in Argentina and globally, including changes from actions taken by the Government and changes due to natural and human-induced disasters (including the current COVID-19 virus (“COVID”) outbreak), and the impact of the foregoing;
 

estimates relating to future energy demand, 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 (also referred to as liquid petroleum gas or “LPG”), ethane and natural gasoline (collectively “Liquids”) and for products and services respectively produced and provided in our other nonregulated businesses;
 

statements regarding future political developments in Argentina and future developments regarding the license granted to us by the Argentine government (the “Government”) to provide natural gas transportation services through the exclusive use of the southern natural gas transportation system in Argentina (“License”), the impact of the adoption of the new revised scheme of tariffs resulting from the renegotiation process of our License with the Government regulatory actions by Ente Nacional Regulador del Gas (“ENARGAS”) and other agencies of the Government, the legal framework established by the Federal Energy Bureau and any other applicable governmental authority that may affect us and our business;
 

risks and uncertainties with respect to relations with our employees in Argentina;
 

statements and estimates regarding future pipeline expansion and other projects and the cost of, or return to us from, any such expansion or projects;


estimates of our future level of capital expenditures, including those required by ENARGAS or other governmental authorities for the expansion of our pipeline system or other purposes, and unscheduled and unexpected expenditures for the repair and maintenance of our fixed or capital assets;
 

statements regarding the ability of companies engaged in the upstream business in the region where we operate to identify drilling locations and prospects for future drilling opportunities, and drill and develop such locations (such as the Vaca Muerta formation), as well as the Government’s regulations and policies affecting such companies and projects; 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:
 

risks and uncertainties resulting from Government regulations that have affected or may affect our business, financial condition or results of operations, such as the prohibition on tariff increases (or tariff reductions) for our natural gas transportation segment and restrictions on payments abroad and exchange controls;
 

risks and uncertainties resulting from disruptions to commercial activities due to natural and human-induced disasters, such as weather conditions, earthquakes, terrorist activities, social unrest and violence, armed conflicts and health epidemics, including the current COVID outbreak;
 

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 the comparability of our historical financial information;
 

risks and uncertainties associated with our nonregulated 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 adverse changes in the regulation of the Liquids industry;
 

capital expenditures 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 by ENARGAS or other governmental authorities to make investments that are not profitable or not as profitable as other investment opportunities identified by our management, or to take any other action not consistent with our business plan and strategy;
 

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 regulation on our business 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 the tariffs we are allowed to charge; and


risks and uncertainties impacting us as a whole, including changes in general economic, political and social conditions, changes in the 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.
 
These estimates and 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. Additional factors affecting our business emerge from time to time and it is not possible for us to predict all of those factors, nor can we assess the impact of all such factors on our business, operations or financial condition, or the extent to which any factors, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Estimates and forward-looking statements involve risks and uncertainties and do not guarantee future performance, as actual results or developments may be substantially different from the expectations described in the forward-looking statements. In light of the risks and uncertainties described above, the events referred to in the estimates and forward-looking statements included in this Annual Report may or may not occur, and our business performance, financial condition and results of operations may differ materially from those expressed in our estimates and forward-looking statements, due to factors that include but are not limited to those mentioned above. Investors are warned not to place undue reliance on any estimates or forward-looking statements in making any investment decision.
 
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. Our Financial Statements have been prepared in terms of the Current Currency in accordance with IFRS. Our management analyzed the conditions established by IAS 29 and considers that there is sufficient evidence to conclude that Argentina is a hyperinflationary economy in terms of IAS 29, effective from July 1, 2018.
 
The following table presents our selected financial data for each of the four years in the period ended December 31, 2019. The selected consolidated statement of comprehensive income and consolidated statement of cash flow data for each of the three years in the period ended December 31, 2019, and the selected consolidated statement of financial position as of December 31, 2019 and 2018 derived from our Financial Statements included elsewhere in this Annual Report. The selected consolidated statement of comprehensive income for the year ended December 31, 2016 and the selected consolidated statement of financial position as of December 31, 2017 have been restated pursuant to IAS 29 to reflect the effect of hyperinflation in Argentina and superseded any previously disclosed consolidated financial information relating to such periods.
 
The summary financial data as of and for the year ended December 31, 2015 has not been presented as: (i) management determined that such information cannot be provided on a restated basis without unreasonable effort or expense, and (ii) it is not required by CNV.
 
This information should be read in conjunction with and is qualified in its entirety by reference to our Financial Statements 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 the year ended December 31, 
  2019  
2018(3)
  
2017(3)
  
2016(3)
 
  
(in thousands of pesos)(1)
 
Consolidated Statement of Comprehensive Income Data:            
Revenues  48,561,494   52,399,423   30,694,588   22,529,540 
Gas transportation net revenues  22,620,423   23,785,660   11,469,824   6,402,843 
Liquids production and commercialization net revenues  23,138,182   25,578,373   17,189,194   14,467,619 
Other services (midstream and telecommunications) net revenues  2,802,889   3,035,390   2,035,570   1,659,078 
Operating profit  19,758,608   21,931,976   9,545,020   4,480,856 
Net financial results  (2,897,421)  (4,378,468)  (812,762)  (1,091,186)
Net income before income tax  16,829,329   17,581,516   8,765,549   3,397,499 
Net income and total comprehensive income for the year  12,805,118   17,561,255   8,847,199   1,701,840 
Net income and total comprehensive for the year attributable to:                
Owners of the Company  12,805,105   17,561,249   8,847,196   1,701,837 
Non-controlling interest  13   6   3   3 
Per Share Data:(2)
                
Net income per share  16.50   22.27   11.14   2.00 
Net income per ADS  82.49   111.37   55.70   11.00 



 (1)Except per share and per ADS amounts or as otherwise indicated.
 (2)Net income per share and ADS under IFRS has been calculated using the weighted average shares outstanding. Each ADS represents five shares.
 (3)Comparatives figures as of December 31, 2018, 2017 and 2016, have been restated for hyperinflation accounting and are presented in terms of Current Currency.


 As of December 31, 
  2019  
2018(3)
  
2017(3)
  2016 
  
(in thousands of pesos)(1)
 
Consolidated Statement of Financial Position Data:            
Total current assets  20,939,930   35,632,685   16,288,999   n/a 
Property, plant and equipment, net  74,552,728   59,510,863   52,550,238   n/a 
Total non-current assets  74,661,395   59,655,761   52,710,105   n/a 
                 
Total assets  95,601,325   95,288,446   68,999,104   n/a 
Total current liabilities  7,952,199   10,993,418   10,610,885   n/a 
Total non-current liabilities  39,565,657   36,691,122   19,500,020   n/a 
Total liabilities  47,517,856   47,684,540   30,110,905   n/a 
Non-controlling interest  28   15   12   n/a 
Shareholders’ equity  48,083,469   47,603,906   38,888,199   n/a 
Other Data:                
Common stock (nominal value)  784,608   780,894   794,495   n/a 
Additions to property, plant and equipment  18,838,338   10,624,291   3,532,978   n/a 
Depreciation  3,695,615   3,419,820   3,107,747   n/a 
Number of outstanding shares(2)
  784,608,528   780,894,503   794,495,283   n/a 




(1)
Except number of outstanding shares or as otherwise indicated.

(2)
Number of ordinary shares outstanding at year-end (excludes 9,886,755 and 13,600,780 treasury shares, representing 1.24% and 1.71% of the total share capital for the years ended on December 31, 2019 and 2018, respectively).

(3)Comparatives figures as of December 31, 2018 and 2017 have been restated for hyperinflation accounting and are presented in terms of Current Currency.
 
Dividends
 
A summary of the dividends declared and paid during the five most recent fiscal years is set forth below:
 

 Dividends declared and paid 
Year ended December 31, 
(in millions
of Ps.)(1)
  
(in millions of
U.S.$)(2)
  
(Ps. per
share)(1)
  
(U.S.$ per
share)(2)
  
(U.S.$ per
ADS)(2)
 
2015  -   -   -   -   - 
2016(3)
  349.0   7.1   0.440   0.009   0.045 
2017  -   -   -   -   - 
2018(4)
  6,659.7   114.6   8.382   0.142   0.708 
2019(5)(6)
  12,988.9   222.4   16.730   0.286   1.432 



(1)
Stated in Ps. at Current Currency.
(2)
Stated in U.S. dollars translated from pesos at the exchange rate in effect on the payment date.
(3)
At a General Annual Shareholders’ Meeting held on April 23, 2015, our shareholders resolved to create a future dividends payment reserve in an amount equal to Ps. 380.4 million. At its meeting held on January 13, 2016, our Board of Directors approved to release such reserve in full to our shareholders in the form of cash dividend payments up to an amount equal to the aggregate amount of such reserve.
(4)
At the General and Special Annual Shareholders’ Meeting held on April 10, 2018, our shareholders resolved to create a future dividends payment reserve in an amount equal to Ps. 5,789.6 million. At its meetings held on July 6, August 8 and September 6, 2018, our Board of Directors approved to release such reserve in full to our shareholders in the form of cash dividend payments up to an amount equal to the aggregate amount of such reserve.
(5)
At the General Annual Shareholders’ Meeting held on April 11, 2019, our shareholders resolved to create a voluntary reserve for capital expenditures, stock buyback and/or dividends in an amount equal to Ps. 9,154.2 million and a cash dividend payment of Ps. 9,185.8 million. At its meetings held on April 11 and October 31, 2019, our Board of Directors approved the partial distribution of such reserve to our shareholders in an amount equal to Ps. 575.1 million the form of a cash dividend.
(6)
Includes the dividend in kind approved by the General and Special Shareholders´ Meeting held on October 17, 2019 and our Board of Directors´ meeting held on October 31, 2019 consisting in 29,444,795 shares (0.0385 shares per share or 0.1925 per ADS) at a price of Ps. 102.25, calculated by reference to the closing price of our shares in BYMA as of November 12, 2019, the day immediately preceding the date of distribution of such shares to our shareholders.
 
According to Argentina’s General Companies Act, dividends may be lawfully declared and paid only out of retained earnings reflected in the financial statements that have been approved by shareholders, if losses for prior fiscal years have been absorbed, if the applicable payment has been expressly approved by our shareholders and applicable legal reserves have been created, as described below.
 
For additional information regarding dividend payment restrictions see “Item 3. Key Information – D. Risk Factors - 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 ADSs represented by 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.”
 
To that effect, every year our Board of Directors must submit our financial statements for the immediately 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 approve our annual financial statements and determine the allocation of net income for such year, within four months of the close of the fiscal year, that is, for TGS before April 30 of each year. Pursuant to the General Companies Act and the CNV Rules, we are required to allocate a legal reserve (“Legal Reserve”) equal to at least 5% of each year’s net income (as long as there are no losses for prior fiscal years pending to be absorbed) until the aggregate amount of such Legal Reserve equals 20% of the sum of (i) “common stock nominal value” plus (ii) “inflation adjustment to common stock,” as shown in our consolidated statement of changes in equity. If there are any losses pending to be absorbed from prior fiscal years, such 5% should be calculated on any excess of the net income over such losses, if any. Dividends may not be paid if the Legal Reserve has been impaired, nor until it has been fully replenished. The Legal Reserve is not available for distribution as a dividend.
 
Pursuant to our by-laws (“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 statutory employee profit-sharing. 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. For information on dividend taxation, see “Item 10. Additional Information—E. Taxation—Argentine Taxes.
 
In addition, under the General Companies Act, our shareholders may establish additional voluntary reserves from time to time and for different purposes. Once established, the terms and conditions of any voluntary reserve cannot be changed without the prior approval of the shareholders.
 
Further, our ability to make dividend payments may be limited by covenants in our existing debt instruments or in debt instruments we enter into in the future, and by our subsidiaries’ ability to generate income and cash flows to pay dividends to us. In particular, under the indenture dated May 2, 2018 (the “2018 Notes Indenture”), entered into with Delaware Trust Company as trustee, co-registrar, paying agent and transfer agent, and Banco Santander Rio S.A., as registrar, Argentine paying agent, Argentine transfer agent and representative of the trustee in Argentina, relating to the issuance of our class 2, 6.750% senior notes due 2025 (the “2018 Notes”), we may pay dividends as long as immediately after giving effect to such dividend payment we are able to incur at least U.S.$ 1.00 (other than “Permitted Indebtedness” as defined in the 2018 Notes Indenture) under the limitation of debt covenant of the 2018 Notes Indenture. To incur debt (other than Permitted Indebtedness), the 2018 Notes Indenture requires that (i) no default exists under the 2018 Notes Indenture at the time of such incurrence and (ii) (a) the Consolidated Coverage Ratio (as defined in the 2018 Notes Indenture, which is the ratio of our consolidated adjusted EBITDA to our consolidated interest expense) would be greater than or equal to 2.0:1.0; and (b) the Consolidated Debt Ratio (as defined in the 2018 Notes Indenture, which is the ratio of our consolidated total indebtedness to our consolidated adjusted EBITDA) would be less than or equal to 3.50:1.0. See “Item 10. Additional Information—C. Material Contracts—Debt Obligations.
 
Moreover, per CNV Rules the amounts subject to distribution are restricted up to the acquisition cost of treasury shares and the additional paid-up capital accounts balance as discussed elsewhere herein.
 
The General Annual Shareholders’ Meeting held on April 26, 2017 (the “2017 Shareholders’ Meeting”), approved the creation of a voluntary reserve for future dividend payments in an aggregate amount of Ps. 2,364.1 million, which was subsequently increased by Ps. 5,789.6 million pursuant to a resolution passed by our shareholders at the General and Special Annual Shareholders’ Meeting held on April 10, 2018 (the “2018 Shareholders’ Meeting”). The 2018 Shareholders’ Meeting did not allocate any portion of our net income to the Legal Reserve because as of the date of such meeting it was fully funded. During the year 2018, our Board of Directors resolved to distribute (and we paid) a total amount of Ps. 6,659.7 million in cash dividends.
 
The General Annual Shareholders’ Meeting held on April 11, 2019 (the “2019 Shareholders’ Meeting”), approved: (i) to allocate Ps. 922.2 million to the Legal Reserve, (ii) to make a cash dividend payment of Ps. 9,185.8 million (Ps. 11.77 per share), and (iii) to allocate Ps. 9,154.2 million to the “Reserve for capital expenditures, acquisition of treasury shares and/or dividends” (the “Reserve”) and to delegate to the Board of Directors the decision to distribute cash dividends up to an amount equal to 80% of the Reserve, which will be restated in constant pesos at any given time pursuant to CNV Resolution No. 777/2018. To determine such maximum distributable amount, or to allocate such Reserve to future investments, the restated amount of the stock that has actually been repurchased must be determined in advance, since an amount equal to such stock already repurchased cannot be released to shareholders pursuant to the provisions of the CNV Rules. Such resolutions were made by the 2019 Shareholders’ Meeting taking into consideration current CNV regulations (Resolution No. 777/2018) which state that accumulated results have to be adjusted for inflation using the rates as of the month before the meeting was held. In case of the 2019 Shareholders’ Meeting, we used the inflation rate as of February 28, 2019.

During the year 2019, our Board of Directors resolved to distribute (and we paid) a total amount of Ps. 575.1 million (Ps. 11.77 per share) in cash dividends. In addition, the General and Special Shareholders’ Meeting held on October 31, 2019 resolved to distribute (and we paid) a dividend in kind (of Ps. 3,228.0 million) in the form of 29,444,795 shares then held in treasury at a price per share of Ps. 102.25, calculated by reference to the closing price of our shares in BYMA as of November 12, 2019, the day immediately preceding the date of distribution of such shares to our shareholders,

The General Annual Shareholders’ Meeting held on April 21, 2020 (the “2020 Shareholders’ Meeting”) approved to allocate Ps. 690.2 million to the Legal Reserve and (iii) to allocate Ps. 19,759.7 million to the “Reserve for capital expenditures, acquisition of treasury shares and/or dividends” (the “New Reserve”) and to delegate to the Board of Directors the decision to distribute dividends, which will be restated in constant pesos at any given time pursuant to CNV Resolution No. 777/2018. To determine such maximum distributable amount, or to allocate such New Reserve to future investments, the restated amount of the stock that has actually been repurchased and the additional paid-up capital must be determined in advance, since an amount equal to such stock already repurchased cannot be released to shareholders pursuant to the provisions of the CNV Rules.

All the figures mentioned before, according to the CNV Resolution No. 777/2018, were restated by inflation by using the price index corresponding to the month prior to the meeting.
 
Under the General Companies Act, 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 Act 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 Exchange (Bolsas y Mercados Argentinos (“BYMA”)) and, as a result, would likely affect the market price of our American Depositary Shares (“ADSs”) on the New York Stock Exchange (“NYSE”) as well. In addition, such fluctuations will affect the U.S. dollar equivalent of peso amounts included in this Annual Report.
 
Historically, Argentina has been subject to several restrictions imposed on the foreign exchange market. On September 1, 2019, the Central Bank of the Republic of Argentina (Banco Central de la República Argentina or the “BCRA”) issued Communication “A” 6770, which introduced several changes to the then existing foreign exchange control regime. For additional information, see “Item 10. Additional Information—D. Exchange Controls.
 
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 2019  
59.9500
   
59.5000
   
59.7453
   
59.9400
 
December 2019  
59.9900
   
59.8150
   
59.8748
   
59.8900
 
January 2020  
60.3500
   
59.8150
   
60.0326
   
60.3500
 
February 2020  
62.2100
   
60.4700
   
61.3561
   
62.2100
 
March 2020  
64.4690
   
62.2590
   
63.1241
   
64.4690
 
April 2020 (through April 28, 2020)  
66.6300
   
64.5290
   
65.6493
   
66.6300
 
                 
Year ended December 31,                
2015  
13.4000
   
8.5550
   
9.2485
   
13.0400
 
2016  
16.0300
   
13.2000
   
14.7807
   
15.8900
 
2017  
19.2000
   
15.1900
   
16.5717
   
18.6490
 
2018  
41.2500
   
18.4100
   
28.1313
   
37.7000
 
2019  
60.4000
   
36.9000
   
48.234
   
59.8900
 

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 exchange rate reported by Banco Nación on December 31, 2019. 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 28, 2020, the reported selling exchange rate per U.S.$ 1.00 was Ps. 66.6300.


Our results of operations and financial condition are highly sensitive to changes in the peso-U.S. dollar exchange rate because a significant portion of our revenues (46.6% of our total consolidated revenues from sales for the year ended December 31, 2019), most of our capital expenditures, almost all of our debt obligations and the cost of natural gas used in our Liquids business are denominated in U.S. dollars, but substantially all of our assets are located in Argentina and our functional currency is the peso.
 
Currency fluctuations would also affect the U.S. dollar amounts received by holders of our ADSs upon conversion (by us or by Citibank N.A. (the “Depositary”), pursuant to the deposit agreement for the issuance of the ADSs entered into between the Depositary and us (the “Deposit Agreement”)) of the cash dividends paid in pesos on the underlying Class “B” Shares. 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 Class “B” Shares on the BYMA and, as a result, the market price of the ADSs.
 
In 2018 and 2019, the peso experienced a rapid devaluation against major foreign currencies, particularly against the U.S. dollar. See “D. Risk Factors—Risks Relating to Argentina—Economic volatility in Argentina has adversely affected and may continue to adversely affect our business, results of operations and financial condition, the value of our securities, and our ability to meet our financial obligations” and “—Fluctuations in the value of the peso may also adversely affect the Argentine economy, our financial condition and results of operations.”
 
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 and financial condition, the value of our securities and our ability to meet our financial obligations.
 
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
 
We are a stock corporation with limited liability (sociedad anónima) incorporated and organized under the laws of Argentina. 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 because a significant portion of our revenues (46.6% of our total consolidated revenues from sales for the year ended December 31, 2019), most of our capital expenditures, almost all of our debt obligations and the cost of natural gas used in our Liquids business are denominated in U.S. dollars, but substantially all of our assets are located in Argentina, and our functional currency is the peso.
 
Argentina’s public debt may not be sustainable in the near future.
 
After the primary elections results of August 2019, the international markets casted doubt on Argentina’s debt sustainability. In view of this, the country risk indicator raised to 2,200 basis points, topping-off a depreciation of bond prices. Also, on August 29, 2019 by Decree No. 596/2019 the Government announced a debt profiling consisting of (i) an extension on the payment term for short-term local bonds, only for institutional investors that will receive the full payment over terms of three and six months (15% on the original maturity date, 25% and 60% at 3rd and 6th month of the original maturity date, respectively), but not for natural persons who acquired the bonds before July 31, 2019, who will receive full payment on the maturity date; (ii) a proposal to the Argentine Congress of a bill to extend maturity dates of other local bonds, without reduction on the capital or interest; (iii) a proposal to extend the maturity dates of foreign bonds; and (iv) after achieving fiscal goals, the start of talks with the International Monetary Fund (the “IMF”) in order to reprofile the deadlines to reduce the default risk in 2020 and 2023.
 
As a result of the foregoing, Argentina’s credit rating was downgraded in August 2019 and further downgraded in December 2019 to near-default status by both Fitch and S&P after the Government publicly stated that it would delay payments on its short-term dollar-denominated local debt.
 
Fitch cut Argentina’s long-term issuer rating two notches to “restricted default” from CC, after the Government announced by decree that it would extend payments on U.S.$ 9.1 billion in dollar-denominated Treasury bills until August 31, 2020. According to Fitch’s criteria, Argentina has defaulted on its sovereign obligations, and this development constitutes a “distressed debt exchange.” S&P also downgraded Argentina’s credit rating to “selective default” from CCC-, while Moody’s foreign issuer rating for Argentina is Caa2.
 
The government’s decision to extend payments on its short-term notes constitutes the second such delay of payments in five months. In February 2020, the IMF has also publicly stated its concerns about the sustainability of Argentina’s public debt and suggested that a definitive debt operation—yielding a meaningful contribution from private creditors—is required to help restore debt sustainability with high probability. As of the date of this Annual Report, Argentina’s public debt load stands at U.S.$ 323 billion, including loans from the IMF. Outstanding debt with private bondholders is approximately U.S.$ 121 billion.
 
Without access to the international financial markets the Government may not have the financial resources to implement reforms and boost growth, which could have a significant adverse effect on the country’s economy and, consequently, on our activities. Failure of Argentina to restructure its debt could cause Argentina to default in the payment of its public debt, which could materially and adversely affect our business, financial condition and results of operation, and our ability to meet our financial obligations, as it could have a direct impact on our customers’ ability to pay for our products and services, the demand for energy and our ability to access local and international markets to finance our operations and our growth. In addition, we cannot predict the outcome of any future restructuring of Argentine sovereign debt.
 
High levels of public spending in Argentina could generate long-lasting adverse consequences for the Argentine economy.
 
During recent years, the Government has substantially increased public spending. In 2015, government spending increased by 34.4% as compared to 2014, resulting in a primary fiscal deficit of 3.8% of GDP for 2015. In 2016, government spending increased by 42.8% as compared to 2015, resulting in a primary fiscal deficit of 4.2% of GDP for 2015. In 2017, government spending increased by 25.9% as compared to 2016, resulting in a primary fiscal deficit of 3.8% of GDP for 2017. In 2018, government spending increased by 13.1% as compared to 2017 resulting in a primary fiscal deficit of 2.4% of GDP for 2018, but while the primary fiscal deficit decreased compared to 2017, the financial deficit (interest rates of the international debt with IMF) increased to 2.8%, resulting in a total deficit of 5.2% for the year 2018. In 2019, government spending increased by 36.2% as compared to 2018 resulting in a primary fiscal deficit. If government spending continues to outpace fiscal revenues, the fiscal deficit is likely to increase, and the utilization of past sources of funding to address such deficit may be required.
 
The Government’s ability to access the long-term financial markets to finance such deficit is limited given the high levels of public sector indebtedness. The inability to access the capital markets to fund its deficit or the use of other sources of financing may have a negative impact on the economy and could limit the access to such capital markets for Argentine companies, which could adversely affect our business, financial condition and results of operations.
 
Adoption of hyperinflation accounting in Argentina
 
Argentina has confronted and continues to confront inflationary pressures. According to inflation data published by the INDEC, in 2019 the CPI and the WPI increased by 53.8% and 58.5%, respectively, and the three-year cumulative inflation rate has exceeded 100%, causing Argentina to be considered a hyperinflationary economy.
 
IAS 29 requires financial statements of an entity whose functional currency is the currency of a hyperinflationary country to be restated into their current purchasing power at the end of the reporting period. Therefore, transactions in 2019 and non-monetary balances at the end of the period should be restated to reflect a price index that is current at the balance sheet date. The comparatives and the opening statement of financial position at the beginning of the earliest period presented should also be restated to reflect a price index that is current at the balance sheet date. Consequently, in this Annual Report we are presenting our financial information applying hyperinflation accounting.
 
Adjustments to reflect inflation, such as those required by IAS 29, were initially prohibited by the Argentine Convertibility Act. Decree No. 664/03, issued by the Government (the “664/03 Decree”), instructed regulatory authorities, such as public registries of commerce, the Superintendency of Corporations of the City of Buenos Aires and the CNV, to accept only financial statements that comply with the prohibition set forth by the Convertibility Act. However, on December 4, 2018, Act 27,468 abrogated the 664/03 Decree and amended the Convertibility Act to that effect. Certain authorities, such as the CNV, have required that financial statements for periods ended on and after December 31, 2018, be restated for inflation, following the guidelines set forth in IAS 29.
 
In order to restate financial statements, the CNV has established that the series of indexes to be used for the application of IAS 29 is determined by the FACPCE. This series of indexes combines the CPI as of January 2018 (base month: December 2017) with the WPI, both published by INDEC until that date. For the months of November and December 2015, for which there is no information from the INDEC on the evolution of the WPI, the variation in the CPI of the Autonomous City of Buenos Aires was applied. In the past, official inflation statistics in Argentina have been challenged by supranational organizations and deemed not to be reliable. Also, there are no consistent statistics on inflation for periods prior to 2016. As a result, inflation adjustments may affect the comparability of our historical financial information. See “—High levels of inflation and the lack of credibility regarding Argentina’s official inflation statistics, could negatively affect our business, results of operations and financial condition, the value of our securities, and our ability to meet our financial obligations.
 
In addition, inflation may negatively affect income tax payable. For example, under hyperinflationary contexts, the existence of higher monetary liabilities over monetary assets will mean an increase in income tax payable. Act 27,468 substituted the WPI for the CPI for the calculation of the indexation adjustments for tax purposes, and modified the standards for triggering the tax indexation procedure. During the three periods commencing on January 1, 2018, tax indexation will apply if the variation of the CPI exceeds 55% in 2018, 30% in 2019 and 15% in 2020.
 
For the year ended December 31, 2019, the CPI exceeded the 30% threshold mentioned above, so we measured the tax charge to earnings for the year ended December 31, 2019, considering the application of the tax inflation adjustment. On December 23, 2019, the National Congress enacted Law No. 27,541 - Social Solidarity and Productive Reactivation Law (the “Solidarity Law”), which, among other things, amends the years during which the tax indexation should be allocated. According to the Solidarity Law, one sixth of the positive or negative result generated by the application of the inflation adjustment corresponding to the first and second fiscal year beginning on January 1, 2019, will be charged in such fiscal period and the remaining five-sixths will be charged equally in the following five fiscal periods.
 
In 2019, we recorded a loss of Ps. 1,998,487 in income tax as a result of the application of this inflation adjustment.
 
We cannot predict the full future impact that changes in the application of the tax indexation procedure and related adjustments will have on our financial statements, or the effects on our effective tax rate or on our business, results of operations and financial condition.
 
Certain risks are inherent in any investment in a company operating in an emerging market such as Argentina.
 
Argentina is an emerging market economy, and investing in emerging markets generally carries risks. These risks include political, social and economic instability that may affect Argentina’s economic results, which can stem from many factors. In general, Argentine economic conditions are dependent on a variety of factors, including, but not limited to, the following: (i) domestic production, international demand and prices for Argentina’s principal export commodities, (ii) the competitiveness and efficiency of domestic industries and services, (iii) the stability and competitiveness of the peso against foreign currencies and exchange controls, (iv) high interest and inflation rates, (v) Argentina’s fiscal and trade deficits, (vi) Argentina’s public debt level, (vii) foreign and domestic investment and financing, (viii) governmental policies and the legal and regulatory environment, including import and export contracts and tax provisions, (ix) levels of consumer consumption, (x) wage and price controls and (xi) political uncertainty and social unrest.
 
Any of these factors, as well as volatility in the capital markets, may adversely affect our business, results of operations and financial condition, the value of our securities and our ability to meet our financial obligations.
 
Economic volatility in Argentina has adversely affected and may continue to adversely affect our business, results of operations and financial condition, the value of our securities and our ability to meet our financial obligations.
 
Our business, results of operations and financial condition, the value of our securities and our ability to meet our financial obligations depend to a significant degree on macroeconomic, political, regulatory and social conditions in Argentina. 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 interest rates 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 the high volatility in Argentina, which primarily results from 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 tariffs, spending and investment, and other regulatory initiatives increasing government involvement with economic activity and international conflicts, social unrest and insecurity concerns.
 
In 2018 and 2019, the peso experienced a rapid devaluation against major foreign currencies, particularly against the U.S. dollar. In particular, in 2019, immediately after the preliminary presidential elections (elecciones primarias, abiertas, simultáneas y obligatorias), the peso suffered a significant devaluation. According to the exchange rate information published by the Banco Nación, the peso depreciated by 58.9% against the U.S. dollar during the year ended December 31, 2019 (compared to 102.2% and 17.4% in the years ended December 31, 2018 and 2017, respectively). As a result of the peso’s increased volatility, in 2019, the Government announced several measures to control and restrict the ability of companies and individuals to exchange pesos for foreign currencies. Those measures include the requirement to obtain prior approval from the BCRA, which could eventually restrict the ability to exchange pesos for other currencies. Moreover, restrictions also apply to the acquisition of any foreign currency for holding as cash within Argentina. Additionally, the Government implemented a new tax at a rate of 30% on certain transactions involving the acquisition of foreign currency. For additional information see “Item 10. - C. Additional Information. - Exchange Controls.”

The ability of the Government to stabilize the foreign exchange market and restore economic growth is subject to uncertainty. The continued depreciation of the peso and the failure to meet its obligations with IMF could have a material adverse effect on Argentina’s economy and, consequently, our business, results of operations and financial condition.
 
In addition, this rapid devaluation has confronted inflationary pressures, evidenced by significantly higher fuel and food prices, among other indicators. Inflation in Argentina has contributed to a material increase in our operating costs, in particular labor costs, and negatively affected our business, results of operations and financial condition, the value of our securities, and our ability to meet our financial obligations. 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 business, results of operations, financial condition, the value of our securities, and our ability to meet our financial obligations” and “-High levels of inflation and the lack of credibility regarding Argentina’s official inflation statistics, could negatively affect our business, results of operations and financial condition, the value of our securities, and our ability to meet our financial obligations.
 
The Argentine economy remains vulnerable, as reflected by the following economic conditions:
 

inflation, which remains high, and may continue to be high in the future;
 

volatility in real GDP, which according to the restated information released by INDEC decreased by 2.5% in 2014, grew by 2.7% in 2015, decreased by 2.1% in 2016, grew by 2.7% in 2017, decreased by 2.5% in 2018 and decreased by 2.2% in 2019;
 

Argentina’s public debt as a percentage of GDP, which remains high, and as of September 30, 2019, represented approximately 90% of the GDP;
 

the discretionary increase in public expenditures that has resulted (and continues to result) in a fiscal deficit;
 

high unemployment and informal employment rates;
 

high exchange rate volatility;
 

high fiscal and trade deficits;
 

an inability to pay public debt and the reperfilation of debt maturities;
 

limited access to funding in the local and international capital markets;
 

agricultural exports, which fueled the economic recovery, have been affected by drought and lower prices than in prior years;
 

fluctuations in international oil prices;
 

unavailability of long-term credit to the private sector;
 

the effects of a restrictive U.S. monetary policy, which could generate an increase in financial costs for Argentina;
 

fluctuations in the BCRA’s foreign currency reserves;
 

uncertainty with respect to the imposition of exchange and capital controls;
 

the abrupt fall in the value of sovereign bonds and a decline in consumer confidence or foreign direct investment;
 

the public health concerns derived from COVID and its scale and duration discussed below, which remain uncertain, but could impact our earnings, cash flow, liquidity, and financial condition; and
 

other political, social and economic events abroad that adversely affect the current growth of the Argentine economy.
 
After assuming office in December 2019, President Alberto Fernández announced that his administration would continue with the BCRA’s zero currency issuance policy and increased taxes to finance the fiscal deficit. However, after COVID and the emergency measures taken by Fernandez’s administration, it is, as yet, uncertain if these policies can be sustained and the effects that these measures will have on the fiscal deficit and on the economy in general.
 
As of the date of this Annual Report, the impact of the policies and measures adopted by the Government on the Argentine economy as a whole cannot be predicted. The factors described above, among other factors, may materially and adversely affect the development of the Argentine economy, which could adversely affect our business and financial condition and results of operations.
 
The ongoing political instability in Argentina may adversely affect the Argentine economy.
 
Argentina’s political and social environment has historically influenced, and continues to influence, the performance of the country’s economy. Political and social crises have affected and continue to affect the confidence of investors and the general public, which has historically resulted in economic deceleration and heightened volatility in securities with underlying Argentine risk. The recent political instability in Argentina has contributed to a decline in market confidence in the Argentine economy. Weak macroeconomic conditions in Argentina may continue in the upcoming years.
 
In March 2020, as a consequence of the COVID, the Government has taken several measures in order to reduce its impact on public health. These measures intensified the slowdown in the Argentine economy. In the current context of recession and considering the weak financial situation of the country that is renegotiating the terms of its financial indebtedness with creditors, these measures could mean a further deterioration in Argentina’s public accounts and its macroeconomic and financial situation.
 
We cannot provide any assurance that future economic, social and political developments in Argentina, over which we have no control, will not impair our business, results of operations and financial condition, the value of our securities and our ability to meet our financial obligations.
 
The impact of reforms and measures taken or to be taken as a result of the change of administration are uncertain.
 
Similar to the primary elections held in August 2019, following the announcement of the result of the elections held in October 2019, in which the coalition of the Frente para Todos party was elected over the coalition in which Mauricio Macri was a part, the peso suffered a significant depreciation against the U.S. dollar, and Argentine companies’ shares listed on the BYMA fell on the order of 38%. There was also an abrupt escalation of the country default risk above 2000 basis points. All the above-mentioned events set off a critical, negative shockwave in Argentine financial markets and generated economic instability which resulted in the adoption of several measures, taken not only by the former administration but also by the ruling party:
 

Alleviation measures. On August 14, 2019, in order to reduce the effects of the worsening economic situation, the Government took the following measures: (i) a minimum wage increase of 20% and a special deduction for retirees and formal employees, together with an increase in the minimum income amount for federal income taxes, now at Ps. 55,376 for single filing status and Ps. 70,274 for “married with children”; (ii) a deduction of 50% in taxable fees for self-employed workers; (iii) an exemption from employee contributions for salaried employees with a net salary below Ps. 60,000 (personal contributions 11% of net salary) during September and October with a maximum of Ps. 2,000 monthly; (iv) an exemption from tax contributions for simplified filers (Monotributistas) during September; (v) an increase of Ps. 1,000 per child during September and October, for beneficiaries of the universal child allowance (asignación universal por hijo); (vi) the establishment by the Administración Federal de Ingresos Públicos, of a 10-year moratorium for small- and medium-sized companies (as well as for self-employed workers and simplified filers); and (vii) a 90-day freeze on gas prices. The fiscal cost of these measures reaches Ps. 40,000 million.
 

Rate of 0% on the value-added tax of “basic food basket. By Decree No. 567/2019 published in the Official Gazette on August 16, 2019, the Government enacted that the sale of items in the “basic food basket” (canasta básica de alimentos) would be exempt from value added tax to final consumers. The products that are part of this basic food basket are: sunflower oil, corn and mix, rice, sugar, preserved fruits, vegetables and beans, corn flour, wheat flour, eggs, whole milk, skim milk, bread, bread-crumbs, dry pasta, yerba mate, mate cocido, tea, whole yoghurt and non-fat yoghurt. The exemption was in place until December 31, 2019.
 

Public Debt Reprofiling. On August 29, 2019, the Executive Branch published Decree No. 598/2019, pursuant to which certain exceptional measures were adopted to relieve tension in the financial and foreign exchange markets. The measures consist of (i) an extension on the payment term for short-term local bonds, only for institutional investors that will receive the full payments in terms of three and six months (15% on original maturity date, 25% and 60% at 3rd and 6th month of the original maturity date, respectively) and not for natural persons who acquired the bonds before July 31, 2019, who will receive full payment on the maturity date; (ii) a proposal to the Argentine Congress of a bill to extend the maturity dates of other local bonds, without reduction on the capital or interest; (iii) proposal to extend of the maturity dates of foreign bonds; and (iv) after achieving fiscal goals, the start of talks with the IMF in order to reprofile the deadlines to reduce the default risk in 2020 and 2023.
 

Exchange control restrictions. The Executive Branch reinstated restrictions on the foreign exchange market through the Emergency Decree No. 609/2019 (“Decree 609”), published in the Official Gazette on September 1, 2019, stating that until December 31, 2019, foreign currency proceeds from the export of goods and services must be transferred and sold in the Argentine foreign exchange market and the purchase of foreign currency in the Argentine foreign exchange market and its transfer abroad will require prior approval, distinguishing between individuals and legal entities and empowering the BCRA to enact the relevant regulations in connection thereto. These exchange control restrictions remain in place, because of Emergency Decree No. 91/2019. For additional information see “Item 10.C. Additional Information. Exchange Controls.”
 

Occupational Emergency. Through Executive Order No. 34/2019, on December 13, 2019, the Government of Alberto Fernández declared a public emergency in occupational matters for a term of 180 days. In case of dismissal without cause during said period, the affected worker will have the right to receive double compensation in accordance with current legislation.
 

Solidarity Law. On December 23, 2019, the National Congress enacted the Solidarity Law. This law declared a public emergency in economic, financial, fiscal, administrative, pension, tariff, energy health and social matters, and pursuant to the Argentine Constitution, the Solidarity Law delegates legislative powers to the Executive Branch. For additional information see “Item 5. Operating and Financial Review and Prospects. A. Operating Results. Factors affecting our consolidated results and operations.”
 
The current administration also took several other measures to reduce the impact of public service tariffs on the economy. These measures included: the freezing of tariffs, the pesification of electricity generation rates, and defferal of the payment of natural gas bills for certain consumers, among others. For additional information see “Item 4. Our information. B. Business overview. Natural gas transportation.”
 
As of the date of this Annual Report, the impact that the aforementioned measures have had or will have on the Argentine economy and on our business, results of operations and financial condition, the value of our securities and our ability to meet our financial obligations as a whole cannot be fully assessed or predicted. In addition, we cannot predict how the current administration will address certain political and economic issues that were central during the Macri administration, or the impact that any measures taken or to be taken by the Fernández administration in connection with these issues will have on the Argentine economy as a whole. Also, we cannot assure that the Government or any of its political divisions will not adopt additional changes and reforms in tax matters, or that these reforms and those that may be adopted in the future will not adversely affect our business, results of operations or financial condition.
 
The Solidarity Law and the measures that the new administration has implemented could adversely affect our results of operations and financial condition.
 
The Solidarity Law declares, among other issues, the tariff and energy emergency, delegates to the Executive Branch broad legislative powers to ensure the sustainability of the public debt, regulates the tariff restructuring of the energy system through a renegotiation of the current Integral Tariff Renegotiation (“RTI”) and reorders the regulators of the energy system, among others. Likewise, the rates of public utilities for natural gas will remain unchanged for a maximum period of 180 days (since December 23, 2019).
 
This law also modified certain tax aspects previously modified by the administration of Mauricio Macri. As a result, the tax rate on personal property has been increased, a new 30% currency purchase tax has been created, and the previous changes in the income tax rates have been reversed, suspending the 25% reduction for the next years and providing that the result of the tax inflation adjustment must be paid in six installments, instead of three installments, as previously established. Additionally, and in order to meet the fiscal deficit, the pension adjustment system has been suspended for 180 days.
 
It is not possible to foresee the impact of this law or the measures that could be taken by the new administration at the national or provincial level, and the effect that such measures could have on the Argentine economy and on Argentina’s ability to meet its financial obligations, which could negatively affect our business, financial condition and results of operations. In addition, we cannot assure you that economic, regulatory, social and political events in Argentina will not affect business, financial condition or the results of our operations.
 
Failure to comply with the terms of the agreement with the IMF may adversely affect the Argentine economy and, as a result, our business.
 
In June 2018, the Government agreed with the IMF to implement a stand-by program for U.S.$50,000 million for a period of 36 months.
 
The economic plan presented by the former administration to access this program sought to strengthen the country’s economy by restoring market confidence through a coherent macroeconomic program that would reduce financing needs, place Argentina’s public debt on a firm downward trajectory and strengthen the plan of inflation reduction through more realistic inflation targets and the strengthening of the BCRA’s independence. The main parts of the economic plan were: (i) the restoration of market confidence, (ii) protection of the most vulnerable segments of society by adjusting the national budget for social protection, (iii) a strengthening of the credibility of the BCRA inflation targeting framework, and (iv) a progressive reduction of the impossibility of payment.
 
In February 2020, the IMF held a round of meetings with the Government to discuss the recent macroeconomic developments and learn more about the economic plans and policies of the Fernandez Administration. The Argentine authorities are moving to address the difficult economic and social situation facing the country and have implemented a set of policies to address the rise in poverty, while also taking steps to stabilize the economy and secure a sustainable and orderly resolution of Argentina’s debt situation.
 
The staff of the IMF have stated that Argentina’s debt and debt service capacity have deteriorated decidedly compared to the IMF’s last debt sustainability analysis published in July 2019, in the context of the fourth review of Argentina’s economic performance under the 36 month stand-by arrangement with the IMF. Since July 2019, the peso has depreciated by over 40.0% against the U.S. dollar, sovereign spreads have suffered a significant increase, international reserves have declined by about U.S.$20 billion, and real GDP has contracted more than previously projected. As a result, gross public debt rose to nearly 90.0% of GDP by the end of 2019, which is 13 percentage points higher than the projection at the time of such fourth review.
 
In light of these developments, the IMF staff has assessed Argentina’s debt as unsustainable. Accordingly, a definitive debt operation—yielding a meaningful contribution from private creditors—is required to help restore debt sustainability with high probability.
 
The outcome of negotiations with the IMF and Argentina’s private creditors is uncertain and could have a material adverse effect in our business, results of operation and financial condition. The IMF and the authorities have stated that they will continue to engage closely, and further discussions are planned as the authorities continue defining their economic plans and policies.
 
As of the date of this Annual Report, we cannot predict exactly the outcome of such negotiations, what measures will be adopted to comply with the directives of the IMF or the consequences of these measures on the Argentine economy in general, or on our business, results of operations and financial condition, the value of our securities, and our ability to meet our financial obligations. Furthermore, we cannot predict that the measures that will be adopted in the future will enable Argentina to have sufficient funds to comply with its commitments to the IMF.
 
Public health threats could have an adverse effect on the Argentine economy and on our business, financial condition or results of operations.
 
Argentina could be adversely affected by the effects of a widespread outbreak of contagious diseases, including the recent outbreak of respiratory illness caused by the COVID. The COVID is currently impacting countries, communities, supply chains and markets. As the outbreak is still evolving, much of its impact remains unknown. The extent to which the COVID may impact Argentina, or our business, financial condition, results of operations, liquidity and prospects, will depend on future developments, which are highly uncertain and cannot be predicted, including new information concerning the severity of the COVID, its continued spread, fear of its continued spread, and the actions taken to contain it or mitigate its impact, among others. As of the date of this Annual Report, COVID has caused significant volatility in global markets, including the market prices of securities issued by Argentina and of our securities. As a result, access to capital markets has been adversely affected by COVID. Measures implemented by the Government to control the spread of the COVID include quarantines or closures of office spaces, travel and transportation restrictions and/or import and export restrictions, all of which has contributed to a general slowdown in the Argentine economy, and may adversely impact our ability to operate our business and the businesses of our customers and counterparties. The global and local recession scenario due to the effect of COVID has caused a rapid drop in the price of the main commodities exported by Argentina, which has considerably affected the country’s tax collection and economic activity, generating a high degree of uncertainty regarding its economic development and the possibility of renegotiating its financial indebtedness.
 
In addition, governmental authorities may recommend or impose additional measures that could cause further significant disruptions to business activity in general. We have also modified certain of our business activities by changing our cleaning procedures, implementing remote work capabilities and suspending certain business activities. The impact of the COVID on the financial markets has also adversely affected the cost of borrowing, hedging activities, liquidity and access to capital in general, which could limit our ability to obtain financing to fund our operations in a timely manner, on acceptable terms or at all. For additional information regarding the impact of COVID on our results and financial situation see “Item 5. –Operating and Financial Results Review and Prospects - A. Operating Results.”
 
In addition, the slowdown in economic activity caused by the COVID and other internal factors and permanent changes in customer habits may result in a decrease in the demand for energy even after any governmental measures have been lifted.
 
While the impact on our business from the recent outbreak of the COVID is unknown at this time and difficult to predict, any of the foregoing events or other unforeseen consequences of public health problems could materially adversely affect Argentina and various aspects of our business, financial condition, results of operations and liquidity.
 
We will continue to monitor the situation and adjust our current policies and practices as more information and guidance become available.
 
High levels of inflation and the lack of credibility regarding Argentina’s official inflation statistics could negatively affect our business, results of operations and financial condition, the value of our securities, and our ability to meet our financial obligations.
 
Pursuant to Argentine law, the INDEC is the only institution in Argentina entitled to publish official nationwide statistics. In addition, inflation has undermined the Argentine economy and the Government’s ability to stimulate economic growth. In the past, there have been concerns 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 IMF has requested several times that Argentina clarify the information on inflation rates published by the INDEC.
 
Despite consultations between the Government and the IMF regarding the reliability of the INDEC’s statistics, in February 2013, the IMF Executive Board issued a declaration of censure against on Argentina in connection with Argentina’s breach of its obligations to provide information 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 measured prices on goods across the country, replacing the previous index that only measured inflation in the urban sprawl of the City of Buenos Aires. The IPCNu, together with the GDP calculation, was reviewed by the IMF. During 2015, the IMF ruled that these indicators did not comply with its statutes, so it maintained an ongoing review process. Concerns regarding statistics in Argentina remained until January 8, 2016, when Decree No. 55/2016 and the declaration of a state of administrative emergency in the national statistical system and in the INDEC until December 31, 2016, was issued. Following this declaration, the INDEC ceased publishing statistical data until a rearrangement of its technical and administrative structure was finalized on December 31, 2016.
 
On June 29, 2016, the INDEC published recalculated historical GDP data, modifying the previously released data and substituting the IPCNu. Following the publication of revised data, on November 9, 2016, the Executive Board of the IMF concluded consultation with, and lifted its censure of, Argentina.
 
According to inflation data published by the INDEC, in 2013 and 2014, the CPI increased 10.9% and 23.9%, respectively. In 2013 and 2014, the WPI increased 14.7% and 28.3%, respectively, and further increased 10.6% in the ten-month period ended October 31, 2015. The INDEC discontinued the publication of data from November 2015 through May 2016 following the declaration of a state of administrative emergency in the national statistical system. During that period, the INDEC 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 31.6% and 26.9%, respectively, for 2015. For the first four months of 2016, these same alternative indexes showed an increase in CPI of 13.9% and 19.2%, respectively.
 
In June 2016, the INDEC resumed publication of monthly data. The reported increase in CPI for the period from May through December 2016 was 16.9%. In 2018 and 2017, CPI registered an increase of 47.6% and 24.8%, respectively. In 2018, 2017 and 2016, the WPI increased by 73.5%, 34.5% and 18.8%, respectively, according to information published by the INDEC.
 
Certain private economists have estimated significantly higher inflation rates than those published by the INDEC for the period from 2007 to 2015. The uncertainty relating to the inaccuracy of the economic indexes and rates may lead to a lack of confidence in the Argentine economy and may, in turn, limit our ability to access credit and capital markets, which could adversely affect our business, results of operations and financial condition, the value of our securities and our ability to meet our financial obligations.
 
The INDEC in 2019 reported that the CPI increased 53.8% compared to 2018, while the WPI increased 58.5% compared to 2018. Additionally, in 2019, the CPI increased, 2.8%, 3.8%, 4.8%, 3.2%, 3.0%, 2.6%, 2.1%, 3.9%, 5.8%, 3.2%, 4.1% and 3.8% in January, February, March, April, May, June, July, August, September, October, November and December, respectively, and the WPI increased 0.6%, 3.4%, 4.1%, 4.6%, 4.9%, 1.7%, 0.1%, 11.2%, 4.2%, 3.6%, 5.4% and 3.7% during the same months. During January, February and March 2020, inflation remained at high levels, where the CPI increased by 1.9%, 1.8% and 3.3%, respectively, on a month-to-month basis.
 
High inflation rates affect Argentina’s foreign competitiveness and social and economic inequality; negatively impact employment, consumption and the level of economic activity; and undermine confidence in Argentina’s banking system, which could further limit the availability of and access by local companies to domestic and international credit. Inflation rates could escalate in the future, and there is uncertainty regarding the effects that the Government´s measures to control inflation may have. Increased inflation could adversely affect the Argentine economy, which in turn may have an adverse effect on our business, financial condition and results of operations.
 
Inflation has, in the past, materially undermined the Argentine economy and the government’s ability to foster conditions that would permit stable growth. Currently, Argentina faces inflationary pressures, evidenced by significantly higher fuel, energy and food prices, among other factors. Increases in inflation rates could accelerate in the future, and there is uncertainty regarding the effects that the measures adopted, or that may be adopted in the future, by Argentina to control inflation may have.
 
As discussed elsewhere in this Annual Report, given that the Argentine economy has been considered as hyperinflationary, since July 1, 2018, we have applied IAS 29 in our Financial Statements, which 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 measurement at the reporting date of the reporting period. See “—Presentation of Financial and Other Information Financial—Statements and Basis of Preparation.”
 
Because Natural Gas Transportation business segment sales represented 46.6% of our total revenues during the year 2019, and are denominated in pesos, any further increase in the rate of inflation not accompanied by a parallel increase in our tariffs would decrease our revenues in real terms and adversely affect our results of operations. Further, as a consequence of the application of IAS 29, maintaining monetary assets generates loss of purchasing power; provided that such items are not subject to an adjustment mechanism that compensates to some extent such loss. This loss is booked in the statement of comprehensive income.
 
The implementation of exchange controls, the tightening of restrictions on transfers abroad or capital inflow restrictions could limit the availability of international credit and could threaten the financial system, which may adversely affect the Argentine economy.
 
From 2011 until the Macri administration assumed office in December 2015, Argentina increased controls on the sale of foreign currency, limiting transfers of funds abroad. Together with regulations established in 2012 that subjected certain foreign exchange transactions to prior approval by Argentine tax authorities or the BCRA, the measures taken by the previous administration significantly curtailed access to the foreign exchange market by individuals and private sector entities. These measures included informal restrictions, which consisted of de facto measures restricting local residents and companies from purchasing foreign currency through the foreign exchange market to make payment abroad, such as dividends and payment for the importation of goods and services. Since assuming office, the Macri administration has gradually implemented a series of reforms related to these foreign exchange restrictions in order to provide greater flexibility and access to the foreign exchange market.
 
In September 2018, the BCRA established a new monetary policy with the aim of reducing the inflation rate. The BCRA committed not to increase the monetary base until June 2019 and defined the ranges for an intervention zone and a non-intervention zone applicable to the exchange rate through the end of 2018. On December 5, 2018, BCRA announced that the limits of the non-intervention zone would be updated daily at a monthly rate of 2% between January 1 and March 31, 2019. On April 29, 2019, the BCRA’s Monetary Policy Committee (Comité de Política Monetaria del Banco Central) introduced changes in monetary policy, aiming to reduce the volatility of the foreign exchange market.
 
In the context of the economic and social emergency declared by the Solidarity Law, and of a critical situation regarding access to voluntary foreign debt, the BCRA considers it necessary to exceptionally assist the Treasury, in regard to both foreign debt payments and financing in domestic currency. Considering that the Government is focused on reestablishing public debt sustainability, the Executive Branch delayed the presentation of the National Budget for the 2019 fiscal year, until progress can be made on those issues. Thus, according to the BCRA, it is not possible to devise a monetary policy strategy with specific objectives about the expansion of monetary aggregates or inflation.
 
Additionally, due to the sudden devaluation of the peso since August 15, 2019, and in order to preserve the foreign exchange market in Argentina, the Executive Branch issued Decree 609 which provides that exporting companies must sell their proceeds in the local market. Decree 609 states that the BCRA shall issue all necessary rules to organize the foreign exchange market. These exchange control restrictions remain in place, because of Emergency Decree No. 91/2019.
 
Through communications “A” 6770, 6765, 6768, 6776, 6780, 6844, 6869 and 6915, the BCRA established new exchange controls for companies and individuals, which limit their ability to access the foreign exchange market, requiring BCRA’s consent for all purchases of foreign currency. These measures restrict the movement of capital, in response to capital flight and a significant depreciation of the peso.
 
Such measures could undermine Argentina’s public finances, which could limit access to the international capital markets. This could adversely affect Argentina’s economy, which, in turn, could adversely affect our business. Any restrictions on transferring funds abroad imposed by the Government could undermine our ability to pay dividends on our ADSs or make payments (of principal or interest) under our outstanding indebtedness in U.S. dollars, as well as to comply with any other obligations denominated in foreign currency. As of the date of this Annual Report, it is uncertain whether these measures will be temporary, or if the Government will take further measures to restrict the foreign exchange market, which could adversely affect Argentina’s economy.
 
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 the international reserves of the BCRA between 2012 and 2015. In the past, a 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.
 
After several years of moderate fluctuations in the exchange rate, on December 17, 2015, Macri’s administration implemented certain measures including the lifting of most of the 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 17, 2015. After these measures were taken, the value of the peso could freely fluctuate against the U.S. dollar. The period-end exchange rate published by Banco Nación for the years 2016 and 2017 was Ps. 15.8900 and Ps. 18.6490 per U.S.$ 1.00, respectively.
 
Subsequently, in May 2018, the peso experienced a rapid devaluation against the main foreign currencies, particularly the U.S. dollar. As a result of the greater volatility of the peso, the Government announced several measures to restore market confidence and stabilize the value of the peso. In this regard, on December 31, 2018, the exchange rate of the U.S. dollar increased by 102.1%, from Ps. 18.649 to Ps. 37.7.
 
After the primary elections (elecciones primarias, abiertas, simultáneas y obligatorias) held in August 2019, the peso experienced again a rapid devaluation against the main foreign currencies, particularly the U.S. dollar. Between August 9, 2019 and August 16, 2019, the exchange rate increased by 21.5%. Since the Government imposed several restrictions on the foreign exchange market on September 1, 2019, the official exchange rate depreciated only 1.7% between such date and December 31, 2019. Since then, an unofficial U.S. dollar trading market has developed in which the peso/U.S. dollar exchange rate is significantly higher than the rate in the foreign exchange market.
 
As of December 31, 2019, the total amount of principal and accrued but unpaid interest under our consolidated U.S. dollar-denominated indebtedness was U.S.$ 560.7 million.
 
We cannot predict the future exchange rate between peso and the U.S. dollar, or how any fluctuation may affect our operational costs denominated in U.S. dollars.
 
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 higher inflation, reduce real wages and adversely affect the Government’s ability to honor its foreign debt obligations. Conversely, a significant appreciation of the peso could harm the competitiveness of companies domiciled in Argentina and lead to reduced exports.
 
A lack of a transparent and rigorous framework for awarding and managing public contracts in Argentina and corruption allegations have affected and continue to affect Argentina.
 
Argentina is ranked 85 out of 180 in Transparency International’s 2018 Corruption Perceptions Index and 117 of 190 in the World Bank’s Doing Business 2018 report. As of the date of this Annual Report, there are various ongoing investigations into allegations of money laundering and corruption being conducted by the Office of the Argentine Federal Prosecutor, including one of the largest investigations known as the Notebooks Investigation (Los Cuadernos de las Coimas) (the “Notebooks Investigation”). Numerous former members of different agencies of Argentina as well as senior officers and owners of companies holding government contracts or concessions have confessed to committing allegedly prohibited acts or have faced or are currently facing allegations of corruption and money laundering as a result of the Notebooks Investigation. Certain former government officials have confessed or are alleged to have accepted bribes by means of kickbacks on contracts granted by the government to several infrastructures, energy and construction companies. The proceeds from these kickbacks allegedly financed the political campaigns of political parties forming the previous government led by former Presidents Nestor Kirchner and Cristina Fernandez de Kirchner. In addition, these funds were unaccounted for or not publicly disclosed and were allegedly used to personally enrich certain individuals. Several senior politicians, including former members of the Argentine Congress, the former Vice President of Argentina and high-ranking executives and officers and owners of major companies in Argentina have been arrested on account of various charges relating to corruption, have entered into agreements with prosecutors (Acuerdos de Colaboración) to confess and/or provide sensitive information in exchange for a possible reduction of sentences upon conviction, and have resigned or been removed from their positions. The potential outcome of the Notebooks Investigation as well as other ongoing corruption and money laundering investigations is uncertain, but the Notebooks Investigation has already had an adverse impact on the image and reputation of those companies whose owners or officers have been implicated, and more generally on international investors’ perception of the Argentine economy, political environment, capital markets and the infrastructure sector in Argentina.
 
Recognizing that the failure to address these issues could increase the risk of political instability, distort decision making processes and adversely affect Argentina’s international reputation and ability to attract foreign investment, the Macri administration announced several measures aimed at strengthening Argentina’s institutions, enhancing the integrity of public officials and reducing corruption. These measures include the reduction of criminal sentences in exchange for cooperation with the government in corruption investigations, increased access to public information, the seizing of assets from corrupt officials, increasing the powers of the Anticorruption Office (Oficina Anticorrupción) and the passing of a new public ethics law, among others. The government’s ability to implement these initiatives is uncertain as they would be subject to legislative support or resistance from certain parties, as well as independent review by the judicial branch.
 
There can no be any assurance that the implementation of these measures by Argentina will be successful or even sufficient in strengthening Argentina’s institutions, enhancing the integrity of public officials, stopping institutional deterioration and preventing corruption. We cannot control or predict whether such investigations or allegations will lead to further political or economic instability or whether new allegations against government officials, members of the Argentine Congress, judges or owners or officers of other companies will arise, nor can we predict the outcome of any such allegations and their effect on the Argentine economy, which may be adverse.
 
Government intervention in the Argentine economy could adversely affect our business, results of operations and financial condition, the value of our securities, and our ability to meet our financial obligations.
 
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, forced divestiture of assets, amendments to or renegotiation or revocation of a license, 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.
 
There have been examples of government intervention in the economy, including through the implementation of expropriation and nationalization measures, price controls and exchange controls.
 
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”). ANSES is entitled to designate government representatives to the boards of directors of these companies. ANSES currently holds 24.0% of our outstanding capital stock and has two representatives on 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. For additional information regarding rules and regulations that govern our relationship with FGS see “Item 7. Major Shareholders and Related Party Transactions.
 
In May 2012, the Argentine Congress passed Law No. 26,741, which declared hydrocarbons, 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”). 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, if we are not permitted to pass increases in the costs of our services and labor along to customers through the tariffs we charge due to the imposition of price controls, those costs could negatively affect our business, results of operations and financial condition, the value of our securities, and our ability to meet our financial obligations. See “—Risks Relating to Our Business— Failure or delay in the implementation of anticipated tariff increases could have a material adverse effect on our business, results of operations and financial condition, the value of our securities, and our ability to meet our financial obligations. 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.”
 
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 free access to these markets and imposing the obligation to repatriate and sell within the local foreign exchange market all foreign currency revenues obtained from exports. These regulations have been recently reinstated preventing or limiting us from offsetting the risk derived from our exposure to the U.S. dollar and the access to foreign exchange market.
 
In 2012 and again in 2013, the Argentine Congress established new regulations providing for increased intervention in the capital markets by the Government. On May 9, 2018, the Macri administration approved an amendment to the Law of Productive Financing, including amendments to the Capital Markets Law of Argentina No. 26,831 (the “Capital Markets Law”), which would, among other things, limit the scope of intervention by the CNV in public companies.
 
More recently, due to the economic and political instability in Argentina, the Government took certain measures, for example, it issued Decree No. 566/2019, which affects fuel prices for a period of 90 days. As of the date of this Annual Report, we cannot predict the results of such measures or the impact of these measures on the hydrocarbons development in Argentina. We are also unable to predict whether the Government will take any additional measures that may negatively affect Argentina’s hydrocarbons market.
 
A low-growth and high-inflation rates scenario continues and 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 condition, the value of our securities, and our ability to meet our financial obligations.
 
Argentina is an emerging market economy that is highly sensitive to local political developments that 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, financial condition, the value of our securities and our ability to meet our financial obligations.
 
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 setting of certain exchange controls and other future economic, social and political developments in Argentina, over which we have no control, may adversely affect our business, results of operations and financial condition, the value of our securities and our ability to meet our financial obligations. For additional information on developments relating to exchange controls, see “Item 10 –Additional Information— D. Exchange Controls.
 
The Argentine economy may be adversely affected by economic developments in other markets and by more general 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 and emerging markets. 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, economic slowdowns, especially in Argentina’s major trading partners, have 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, has experienced rising negative pressure because of political uncertainty. After two years of retreat, in 2017, 2018 and 2019, the Brazilian economy grew by 1.1%, 1.3% and 1.1%, respectively. Since January 1, 2020, the Brazilian real depreciated against the U.S. dollar by approximately 17.5%, putting pressure on the products that Argentina exports to that country and its competitiveness. Argentine foreign trade is highly dependent on the Brazilian economy; thus, a poor performance of Brazil’s economy could lead to the deterioration of Argentina’s trade balance. Additional Brazilian political and economic crises could negatively affect the Argentine economy.
 
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 the loss of taxes on exports, causing an imbalance in the country’s exchange market.
 
On June 23, 2016, the United Kingdom voted in favor of exiting the European Union. On March 29, 2017, UK Prime Minister Theresa May triggered the Brexit process. The United Kingdom left the European Union on January 31, 2020, on the terms of the withdrawal agreement concluded between the United Kingdom and the EU Council. The withdrawal agreement allows for a transition period during which the United Kingdom’s trading relationship with the European Union will remain largely unchanged. This transition period is due to end on December 31, 2020. As of the date of this Annual Report, uncertainty remains over the United Kingdom’s future relationship with the European Union after 2020. The continued uncertainty over the Brexit process has caused, and is anticipated to continue to cause, volatility in the financial markets, which may in turn have a material adverse effect on our business, financial condition and results of operations.
 
At the end of 2015, the U.S. Federal Reserve began increasing its reference interest rate following more than five years of an interest rate close to zero, moving away from its post-2008 crisis stimulus campaign. In September 2018, the U.S. Federal Reserve increased the federal funds interest rate by a quarter point (it set the repo rate at 2.0% and the interest on excess reserves at 2.25%, the highest range in more than a decade) and indicated that this is part of a broader plan to increase rates in order to control inflation in the United States. This substantially increased the cost of financing in international markets, while motivating the migration of investors from risk and emerging economies to central economies (fly to quality). Although the U.S. Federal Reserve reduced the reference rate three times in 2019 lowering the benchmark rate to 1.5% to 1.75%, if the U.S. Federal Reserve reverses its policy and resolves to continue with its policy of increasing the reference rate, this could have a profound impact on the sovereign and corporate financing of Argentina.
 
In addition, the current United States presidential administration has created uncertainty regarding United States policies related to trade, tariffs, immigration and foreign affairs. This uncertainty has generated instability and adversely affected Argentina’s economy. Any changes in United States trade policy could trigger retaliatory actions by affected countries and trading blocs, including China and the European Union, resulting in “trade wars,” increased costs for goods exported to the United States and additional volatility and instability globally.
 
Commercial disputes between the U.S. and China have negatively affected international trade, commodities prices and financial markets, generating uncertainty and volatility, which mainly affect emerging countries. China is the main importer of Argentine commodities, and the slowdown of the Chinese economy, the adoption and expansion of trade restrictions, changes in the state of China‑U.S. relations, including the current trade tensions, or other governmental actions related to tariffs or trade agreements or policies are difficult to predict, and could adversely affect our business, our costs, our customers, our suppliers, and the Chinese and U.S. economies, which in turn could have a material adverse effect on our cash flows, competitive position, financial condition or results of operations.
 
Since October 18, 2019, protests and unrest have unfolded in Chile, sparked by a metro fare hike, and fueled by anger over rising living costs and inequality. The military and police quelled protesters who took to the streets, and a curfew was imposed in major cities in Chile. As of the date of this Annual Report, the curfew had been suspended but the unrest and protests remain latent and we cannot anticipate what the consequences and results of these protests will be.
 
On January 3, 2020, a United States drone strike near Baghdad International Airport targeted and killed Iranian major general Qasem Soleimani. This decision represented a grave escalation in hostilities between the United States and Iran. While both sides have signaled a desire to pull back since these strikes, there is no assurance that future hostilities will not have an adverse effect on the global economy.
 
Besides, in March 2020, after a failure to reach an agreement between the members of the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia to stabilize the oil market, Saudi Arabia decided to increase its oil production. This decision, at a time when oil demand is falling due to the impact of COVID in the global trading and economy, has triggered the most important decline in the oil price since 1991, of around 30%. This fall in the international prices of oil and its derivatives has added to the fragile macroeconomic situation in Argentina, generating uncertainty regarding the production and development of natural gas in the country, especially in the Vaca Muerta area. On April 12, 2020 Saudi Arabia, Russia and the members of the OPEC agreed to decrease oil production production by 9.7 million barrels a day in May and June 2020, the deepest cut ever agreed to by the world’s oil producers. After that, the group will steadily ramp up production until the agreement expires in April 2022. There can be no assurances about the impact of this agreement or about measures that the Government may take in response to key macroeconomic variables and particularly on the energy sector.
 
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 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 an 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, results of operations and financial condition, the value of our securities and our ability to meet our financial obligations.
 
Argentina’s past default and litigation 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 business, results of operations and financial condition, the value of our securities and our ability to meet our financial obligations.
 
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 almost all of its holdout creditors.  As required by the settlement, on March 31, 2016, the Argentine Congress voted to repeal Law No. 26,017 (known as Ley Cerrojo) and Law No. 26,984 (known as Ley de Pago Soberano), which prohibited Argentina from offering to the holdouts better conditions than those offered in the debt swaps of 2005 and 2010. On April 13, 2016, Argentina announced that it would proceed with a new bond offering of up to U.S.$12.5 billion to repay the holdouts. After issuing U.S.$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. Although the size of the claims involved has decreased significantly, litigation initiated by bondholders that have not accepted Argentina’s settlement offer continues in several jurisdictions.
 
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 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 economic growth over time 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 with the International Centre for Settlement of Investment Disputes (“ICSID”), alleging that the emergency measures adopted by the Government in 2002 did not meet the just and equal treatment requirements of several bilateral investment treaties to which Argentina is a party. Several of these claims have been resolved against Argentina. Claimants have also filed claims before arbitral tribunals under the rules of the United Nations Commission on International Trade Law (UNCITRAL) and under the rules of the International Chamber of Commerce. Several awards have been issued against Argentina and several cases are still ongoing.
 
As of December 31, 2019, Argentina’s public debt amounted to U.S.$ 323 billion. The Solidarity Law, among other things, delegates to the Executive Branch legislative powers to create conditions to ensure the sustainability of public debt. On February 12, 2020, the Argentine Congress enacted the Law No. 27,544 for the Restoration of the Sustainability of the Public Debt issued under Foreign Law, which granted the Ministry of Economy the power to restructure the Government external public debt.
 
On February 13, 2020, U.S.$1.6 billion of dual currency bonds issued by Argentina’s government matured. During February 2020, the Government launched an offer to exchange the dual currency bonds with new peso-denominated bonds due in 2021, but only about 10% of the aggregate principal amount of the dual currency bonds was tendered. Following the failure of the exchange offer, the Government sought to sell another peso-denominated bond, but ultimately terminated that plan. The Government then issued Decree No. 141/2020, pursuant to which it postponed the payment of principal and suspended the accrual of interest under the dual currency bonds until September 30, 2020.
 
On March 10, 2020, Decree No. 250/2020 was issued. It confirms the proposal of the Government to restructure approximately U.S.$ 69 billion of public debt. Issued on April 6, 2020, Decree No. 349/2020 postpones until December 31, 2020 principal and interest payments of certain Argentine public local debt. Finally, on April 17, 2020 the Government made a proposal for the debt restructuring to foreign bondholders. As of the issuance of this Annual Report, the outcome of Argentine debt restructuring is uncertain.
 
If the Government does not restructure its sovereign bonds with the required majority of holders (at least 75% in principal amount) Argentina may default on its sovereign debt again.  Also, ongoing situations, such as the lawsuits with creditors that did not accept the debt exchange, the claims before the ICSID, and the economic policy measures adopted by the Government, or any future default of Argentina regarding its financial obligations may harm Argentine companies’ ability to obtain financing. Financial conditions of such access could be disadvantageous to Argentine companies and, therefore, may adversely affect our business, results of operations and financial condition, the value of our securities and our ability to meet our financial obligations.
 
A sustained deterioration in the terms of trade given a decline in the global prices for Argentina’s main commodity exports or an increase in the global prices for Argentina’s main commodity imports, as well as adverse weather conditions affecting the production of Argentina’s main commodity exports, could have an adverse effect on Argentina’s economic growth.
 
High commodity prices have contributed significantly to an increase in Argentine exports, which has in turn led to an increase in government revenues received from export taxes. However, the reliance on the export of certain commodities, such as soybeans, has made the Argentine economy vulnerable to fluctuations in commodity prices, and, consequently, the Argentine economy could be adversely affected if trading conditions decline.
 
In addition, adverse weather conditions, such as floods or droughts, could affect the production of the main agricultural commodities produced by Argentina, which account for a significant portion of its export revenues. Moreover, higher oil prices could lead to an increase in government expenditures. The drought experienced during the summer months of 2018 dramatically reduced the yield from Argentina’s soybean crop. Most recently, after the outbreak of the COVID and the slowdown in the demand for and supply of products around the globe, stock markets and the prices of the main commodities have declined dramatically.
 
On March 7, 2020, Saudi Arabia, the world’s largest oil exporter drastically reduced the price of its crude. At the same time, Saudi Arabia has decided to increase its production, reaching a record of 12 million barrels per day. These decisions were taken after the talks between the OPEC participants and Russia had failed. On March 9, 2020, oil markets opened showing significant reductions, for example, the reference oil for the local market (Brent) had lost 35% so far this year and collapsed U.S.$11 more per barrel. On April 12, 2020 Saudi Arabia, Russia and the members of OPEC reached an agreement on oil production.
 
Decisions relating to international oil prices could have a negative impact on Argentina’s economy as, to achieve a fiscal surplus, the country should develop new production projects, such as Vaca Muerta formation, increase its revenues and maintain its ability to service its sovereign debt. Either of these results would adversely impact Argentina’s economic growth and, therefore, our financial condition and results of operations.
 
High public expenditures could result in long-standing adverse consequences for the Argentine economy.
 
In recent years, Argentina has substantially increased public expenditure. The Government’s primary fiscal balance could be negatively affected in the future if public expenditure continues to increase at a rate higher than revenues due to, for example, social security benefits, financial assistance to provinces with financial problems and increased spending on public works and subsidies, including subsidies to the energy and transportation sectors. Further deterioration in fiscal accounts could negatively affect the government’s ability to access the long-term financial markets.
 
In connection with the agreement entered into with the IMF in 2018, the Macri administration committed to address fiscal solvency and, thus, undertook steps to curb the fiscal deficit by reducing gas and transport subsidies and other expenses. However, these policies have led to higher prices and thus had a negative impact on consumer purchasing power. After assuming office, the new government authorities, within the framework of the Solidarity Law, taking care of the most vulnerable sectors, have taken a series of measures that have halted the reduction in public spending.
 
The implementation of new measures in the future could also have negative effects. Furthermore, the federal government’s primary fiscal balance could be negatively affected if public expenditure increases faster than revenues in the future. Moreover, weaker fiscal results in Argentina than those envisaged could have a material adverse effect on Argentina’s economy.
 
Further downgrades in the credit rating or rating outlook of Argentina could impact the rating of our securities or adversely affect the market price of our securities.
 
In August 2018, Moody’s revised its outlook of Argentina’s long-term and short-term sovereign credit rating to Caa2, primarily as a result of the sharply weaker economic activity and uncertain prospects for multiyear fiscal consolidation and market financing availability as IMF funds are used up, posing risks to sovereign debt sustainability. In addition, on August 29, 2019, S&P downgraded Argentina’s long-term and short-term sovereign credit ratings from “B” to “SD,” primarily as a result of an erosion of the Argentine debt profile, the economic growth trajectory and the dynamics of inflation against the backdrop of the implementation of a challenging economic adjustment program. There can be no assurance that Argentina’s credit rating or rating outlook will not be downgraded in the future, which could have an adverse effect on the rating of our securities or adversely affect the market price of our securities.
 
Risks Relating to Our Business
 
Failure or delay in the implementation of tariff increases could have a material adverse effect on our business, results of operations and financial condition, the value of our securities, and our ability to meet our financial obligations. 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.
 
All of our net revenues from the Natural Gas Transportation public service (which represented 46.6% of total net revenues during 2019) are attributable to contracts, which are subject to Government regulation. Prior to the enactment of the Public Emergency and Foreign Exchange System Reform Law No. 25,561 (the “Public Emergency Law”), our tariffs were stated in U.S. dollars, adjusted on a semiannual basis by reference to the U.S. Producer Price Index (“PPI”), and further adjusted every five years, based on the efficiency of, and investments in, our gas transportation business. The Public Emergency Law, however, eliminated tariff indexation, and public service tariffs were converted into pesos and fixed at an exchange rate of Ps. 1.00 per U.S.$1.00, even though the peso was devaluating significantly against the U.S. dollar.
 
Sustained 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 all of our debt is denominated in U.S. dollars, significant devaluations of the peso may adversely affect our business, results of operations and financial condition, the value of our securities, and our ability to meet our financial obligations.
 
On March 30, 2017, ENARGAS issued Resolution No. 4362/2017 (“Resolution 4362”), which 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 Ps. 6,786.5 million (in nominal value at December 31, 2016, adjustable by the WPI) 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 will be subject to fines to be calculated on the value of the work pending execution.
 
On March 27, 2018, through Decree No. 250/2018 (the “Decree 250”), the Executive Branch ratified the tariff structure under Resolution 4362, following the approval of several governmental authorities, including the Argentine Congress. Decree 250 concludes the renegotiation process of our License with the Government which lasted more than 17 years.
 
In addition, Resolution 4362 contemplates a non-automatic semiannual adjustment mechanism for the natural gas transportation tariff to reflect changes in WPI, which must be approved by ENARGAS evaluating the evolution of the economic circumstances. On April 1, 2019, ENARGAS analyzed the evolution of the WPI adjustment index for the period August 2018–February 2019 in order to establish the biannual adjustments applicable to our tariffs.
 
As a consequence of Argentina’s economic condition, and together with other measures taken by the Government, on September 3, 2019, the Secretary of Hydrocarbon Resources (“SHR”) (formerly the Federal Energy Bureau) issued Resolution No. 521/2019 (“Resolution 521”), which defers the semiannual adjustment corresponding to October 1, 2019, to January 1, 2020. During 2019, and according to the RTI, we were entitled to receive two tariff increases in order to compensate us for inflation, which affects our operating costs.
 
In addition, the Solidarity Law froze our natural gas transportation tariffs and authorized the Executive Branch to initiate a renegotiation process of the current RTI or to initiate an extraordinary review, under the terms of the current regulatory framework, for a maximum period of up to 180 days.
 
Also, on June 21, 2019, the Energy Secretariat (”SGE”) issued Resolution No. 336/2019 (“Resolution 336”), which ordered the deferral of payment of 22% on invoices issued between July 1, 2019, and October 31, 2019, for services provided to residential users of natural gas. The deferrals described are recovered from the invoices issued since December 1, 2019, in five equal and consecutive monthly installments.
 
See “Item 4. Our Information—B. Business Overview—Natural Gas Transportation—Regulatory Framework” below for more information.
 
Moreover, as of the date of this Annual Report, we are unable to predict which measures will be taken by the Fernández administration in connection with the tariff system, or if such system will be amended, adversely affecting our financial situation and our results of operations.
 
In the past, we have suffered from our inability to receive tariff increases, which meant the deterioration of our financial and economic condition. Also, we have received insufficient tariff increases to compensate for the increases in our operating costs due to inflation. Our inability to bill these increases, as stipulated in our License, in a timely manner, and to obtain future tariff adjustments in line with the increase in our costs could adversely affect our economic and financial condition. Moreover, we cannot assure you that the current negotiations with the Government under the framework of the Solidarity Law will provide us with a tariff schedule that permits us to compensate the increases in our operating costs. Failure by the Government to timely comply with agreements resulting from the RTI process could negatively affect our results of operations and financial condition.
 
Further, we cannot predict whether additional operating restrictions or mandatory investments could be imposed on us in the future nor the outcome from the renegotiation process of the current RTI stated by the Solidarity Law. If such outcome is adverse to us, our results of operations and financial condition could be negatively affected.
 
Our operations are subject to extensive regulation.
 
The Argentine oil and gas industry is subject to extensive government regulation and control. As a result, our business is to a large extent dependent upon regulatory and political conditions prevailing in Argentina and our business, results of operations and financial condition, the value of our securities, and our ability to meet our financial obligations may be adversely affected by regulatory and political changes in Argentina. Therefore, we face risks and challenges relating to government regulation and control of the energy sector, including those set forth below and elsewhere in these risk factors:
 

limitations on our ability to increase prices or to reflect the effects of higher domestic taxes, increases in operating costs or increases in international prices of natural gas and other hydrocarbon fuels and exchange rate fluctuations on our domestic prices;
 

risks in connection with the former and current incentive programs established by the Government for the oil and gas industry, such as the natural gas additional injection stimulus program and cash collection of balances with the Government;
 

legislation and regulatory initiatives relating to hydraulic stimulation and other drilling activities for non-conventional oil and gas hydrocarbons, which could increase our cost of doing business or cause delays and adversely affect our operations; and


the implementation or imposition of stricter quality requirements for hydrocarbon products in Argentina.
 
In recent years, the Government has made certain changes in regulations and policies governing the energy sector to give absolute priority to domestic supply at stable prices in order to sustain economic recovery. As a result of the above-mentioned changes, for example, on days during which a gas shortage occurs, exports of natural gas (which are also affected by other government curtailment orders) and the provision of gas supplies to industries, electricity generation plants and service stations selling compressed natural gas are interrupted for priority to be given to residential consumers at lower prices. The Expropriation Law of Argentina has declared the achievement of self-sufficiency in the supply of hydrocarbons as well as in the exploitation, industrialization, transportation and sale of hydrocarbons, a national public interest and a priority for Argentina. In addition, its stated goal is to guarantee socially equitable economic development, the creation of jobs, the increase of the competitiveness of various economic sectors and the equitable and sustainable growth of the Argentine provinces and regions. Moreover, we cannot assure you that changes in applicable laws and regulations, or adverse judicial or administrative interpretations of such laws and regulations, will not adversely affect our business, results of operations and financial condition, the value of our securities and our ability to meet our financial obligations.
 
Failure to maintain our relationships with labor unions may have an adverse effect on our business, financial condition, results of operations and prospects.
 
A significant portion of our workforce is represented by labor unions and the majority of our non-unionized employees have the same employment benefits as unionized employees. While we believe we have enjoyed satisfactory relationships with all of the labor organizations that represent our associates and we believe our relationships with labor organizations will continue to be satisfactory, labor-related disputes may still arise. In particular, labor lawsuits are common in the energy sector in Argentina, and industry-wide organized actions by unionized employees in the industry, such as blockages in the access to facilities and route cuts have occurred in the past. We have suffered interruptions as a result of our employees joining such organized activities. We cannot assure you that future business interruptions resulting from strikes and other organized activities by our employees would not have a significant adverse effect on our business, financial condition, results of operations and prospects.
 
The collective bargaining agreements with our unions are valid for one year. Currently, we have a collective bargaining agreement in effect for the period from April 2020 to October 2020.
 
However, we cannot assure you that we will not suffer business interruptions or strikes in the future as a result of collective actions by our employees. We have insurance that covers terrorism and organized actions against our assets, among other items, for a total insured amount of U.S.$. 50,000,000 with a deductible per event of U.S.$. 500,000, but we cannot assure you that our insurance coverage will be sufficient to cover damages and losses caused by the organized actions of our employees.
 
In addition, 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 wages 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 adversely affect 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;
 

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;
 

cessation and abandonment of the provision of the licensed service, an attempt to assign or unilaterally transfer our License in full or in part without the prior authorization of ENARGAS, or relinquishing 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. Additionally, certain changes to the License could result in a default under our outstanding debt instruments.
 
Our creditors may not be able to enforce their claims against us in Argentina.
 
We are a stock corporation with limited liability (sociedad anónima), incorporated and 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 a 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.
 
The Government’s strategies, measures and programs with respect to the natural gas transportation industry could materially adversely affect our business, results of operations and financial condition, the value of our securities and our ability to meet our financial obligations.
 
Since 1992 and after the privatization of several state companies until the economic crisis in 2002, the Government reduced its control over the natural gas transportation industry. After the economic crisis in 2002 and until the Macri administration took office, the Government increased its role in the energy sector implementing strict regulations and increasing its intervention. Intervention included the expansion of our pipeline through the creation of trust funds and the interruption and redirection of natural gas firm transportation services (including the diversification of natural gas supply from our liquids processing plant located at General Cerri Complex, in the Province of Buenos Aires (“Cerri Complex”)).
 
In the past, natural gas distribution companies, including the Company, were prohibited from passing through price increases to consumers. Producers of natural gas, therefore, had difficulty implementing wellhead natural gas price adjustments that would increase the costs of distribution companies, which caused such producers to suffer a sharp decline in their rate of return on investment activities. As a result, natural gas production was not sufficient to meet the increasing demand. Likewise, until 2016, the lack of tariff adjustments for natural gas transportation companies caused a decrease in the profitability of such companies.
 
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 Expansions.” 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 have a system of priority pursuant to the demand of natural gas customers, regardless of whether those customers have contracted under a firm transportation contract or a firm natural gas supply contract. Pursuant to ENARGAS Resolution No. 1,410/2010, due to the lack of sufficient natural gas provision, natural gas transportation service (including to those with firm transportation contracts) may be interrupted and/or relocated in order to service priority demand customers.
 
On June 1, 2016, the former Ministry of Energy issued Resolution No. 89/2016, which required ENARGAS to develop a procedure to amend and supplement ENARGAS Resolution No. 1,410/2010 and establish daily operating conditions for the transportation and distribution systems. It also established a methodology to satisfy the demand for 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 in order to address such shortage, considering the availability of natural gas and the demands of residential consumers and power plants.
 
On June 26, 2018, ENARGAS issued Resolution No. 124/2018, which replaced Resolution No. 716/1998 and incorporated content from the repealed Resolution No. 1,410/2010 and Resolution No. 3,833/2016. Additionally, this resolution established the Internal Rules of Dispatch Centers (Reglamento Interno de los Centros de Despacho).
 
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 business, results of operations and financial condition, the value of our securities and our ability to meet our financial obligations. 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, through Resolution No. 306/2009, 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 effect on our business, results of operations and financial condition, the value of our securities and our ability to meet our financial obligations.
 
Additionally, we cannot predict whether new measures requiring the interruption or relocation of the natural gas transportation service will be taken. If such measures are implemented, we could be subject to legal actions initiated by those affected by such measures.
 
A significant portion of our revenues is generated under natural gas transportation contracts that must be renegotiated and/or extended periodically.
 
In 2019, 79% of our average daily natural gas deliveries were made under long-term firm transportation contracts. As of December 31, 2019, our long-term firm natural gas transportation contracts had a remaining weighted average life of approximately 11 years; our long-term firm natural gas transportation contracts with our top five costumers had a remaining weighted average life of approximately eight years. We cannot assure you that we will be able to extend or replace these contracts when they expire or that the terms of any renegotiated contracts will be as favorable as the existing contracts. In particular, our ability to extend and/or replace contracts could be adversely affected by factors we cannot control, including:
 

Argentine natural gas transportation regulations;
 

international oil and gas prices;
 

timing, volume and location of new market demand;
 

competition from alternative energy sources;
 

supply and price of natural gas in Argentina;
 

demand for natural gas in the markets we serve; and
 

availability and competitiveness of alternative gas transportation infrastructure in the markets we serve.
 
Additionally, most of our transportation contracts include a clause allowing for the termination of the relevant contract before the expiration of its term by any of the parties, in case of (i) breach of the other party, or (ii) an extended event of force majeure.
 
We commercialize ethane through a long-term agreement recently concluded with PBB Polisur S.A. (”PBB”) for a ten-year period. We have short-term contracts with international traders for LPG and natural gasoline sales.
 
If we are unable to renew, extend and/or replace these contracts, if we renew them on less favorable terms or if any such contract is terminated before the expiration of its term, our business, results of operations and financial condition, the value of our securities and our ability to meet our financial obligations may be negatively affected.
 
Our business may require substantial capital expenditures for ongoing maintenance requirements and the expansion of our installed transportation capacity; we could be unable to make such expenditures due to the lack of financing.
 
Resolution 4362 states that we must execute the Five-Year Plan involving capital expenditures of Ps. 6,786.5 million (in nominal value at December 31, 2016, adjustable by WPI) for the period from April 2017 to March 2022.
 
According to Resolution 521, which postpones until February 1, 2020 the tariff increase that we should have received since October 1, 2019 to compensate us for the deferral of the adjustment, established the revision and adjustment of the mandatory investments included in the Five-Year plan. For this reason, we should file to the ENARGAS the proposals for adaptation of the investment plan to be evaluated by the ENARGAS. At the time of this Annual Report, we have presented the relevant documentation that supports the adjustments to the mandatory investment plan.
 
In addition, as part of the measures adopted to reduce the impact of COVID and in order to adapt our business plan to the economic expectations of Argentina, we have implemented a reduction in the current investment plans, without affecting those security measures, which allows us to guarantee continuity in the development of our activities.
 
The natural gas transportation service is an activity involving significant amounts of capital expenditures in order to improve the operation and maintenance of the pipeline system. Incremental capital expenditures may be required to fund maintenance of our pipeline system. Furthermore, capital expenditures will be required to finance current and future expansions of our transportation capacity. If we are unable to finance any such capital expenditures in terms satisfactory to us or at all, our business, results of operations and financial condition, the value of our securities, and our ability to meet our financial obligations may be adversely affected. In addition, our financing ability may be limited by market restrictions on financing availability for Argentine companies. See “—Argentina’s past default and litigation with holdout bondholders may limit our ability to access international markets.
 
In the past, expansion projects by the Government have not had adverse effects over our results of operations and financial condition. However, we cannot assure you that future expansion projects will not adversely affect our business.
 
Our Liquids production depends on the natural gas that arrives at the Cerri Complex through three main pipelines from the Neuquina, Austral and San Jorge 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. Despite the decline in 2015 and 2016, the volume of natural gas that has been produced from the Neuquina basin has increased. Although production volume increased in recent years, it had previously decreased between 2009 and 2013 and it is possible that natural gas production will again decrease in the future, 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 services.
 
In 2019, 51.8% of the natural gas transported by our system originated in the Neuquina basin with the remainder primarily from the Austral basin. Since 2009, the quality and 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 reducing our profit from these activities. In addition, competition might affect the volume and quality (i.e., gas with lower liquids content) of natural gas arriving at the Cerri Complex.
 
In 2009, nonconventional natural gas was discovered in the Vaca Muerta field of the Neuquina basin by YPF. Exploration and exploitation of this natural gas reserve involved high extraction costs. Argentina’s national natural gas production has steadily increased over the past three years, largely due to the increased production of shale from the Vaca Muerta formation. Because of the measures taken by the Government to ensure production levels throughout the country, during 2016 and 2015, natural gas production increased approximately 4.9% and 3.4%, respectively. However, in 2017 natural gas production slightly declined by 0.9% primarily as a result of the termination of certain incentive programs implemented. In 2018 natural gas production increased by 5.3% with respect to 2017, and on December 31, 2019 it reached its peak production compared to the last 10 years.
 
However, after the freezing of fuel prices and the current economic situation that Argentina is experiencing, there is uncertainty regarding the investments that natural gas producers can make in that area. In the same way, the recent fall in the price of oil to below U.S.$30 per barrel raises certain doubts regarding the possibility of recovery of the investments that they can make.
 
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 supply, will be successful in increasing Argentine natural gas reserves or production and if unsuccessful our midstream or Liquids Production and Commercialization businesses could be adversely affected.
 
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.
 
Due to regulatory, economic and government policy factors, our domestic gasoline, diesel, natural gas and other fuel prices and related services have differed substantially from prevailing international and regional market prices for such products and services. Our ability to increase prices in connection with international price or domestic cost increases, including those resulting from the peso devaluation, has been limited from time to time. The prices that we are able to obtain for our products and services affect the viability of investments in expansion capacity and processing facilities and, as a result, the timing and amount of our capital expenditures for such purposes.
 
Although our Liquids production and commercialization activities are not subject to regulation by ENARGAS, with the aim to give priority to domestic supply, 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 SHR may establish regulations 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 SHR periodically publishes 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—B. Business Overview—Liquids Production and Commercialization.
 
On March 24, 2020, after COVID outbreak, the Executive Branch issued Decree No. 311/2020, which determines that the maximum reference price for LPG sold in the domestic market will remain at their values in force at such date for a 180-day period.
 
Also, 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 business, results of operations and financial condition, the value of our securities, and our ability to meet our financial obligations. Similarly, we cannot assure you that LPG prices in Argentina will track increases or decreases in the international or regional markets.
 
Our Liquids business is highly dependent on the supply of natural gas to the Cerri Complex at reasonable prices that allow for reasonable profit margins. In past years, the Federal Energy Bureau 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–B. Business Overview–Liquids Production and Commercialization.
 
During 2017, the Government initiated a process to converge natural gas prices with those in the international market, which finally occurred in October 2017 when prices were liberalized. However, during 2018, due to a combination of internal and external factors, the increase in natural gas and fuel prices was significant which meant that the intended liberalization was unsuccessful.
 
During 2018, the Government introduced several changes to the process by which the natural gas is acquired for the electric energy generators. Among them, modifications were introduced to the regulations through which Compañía Administradora del Mercado Mayorista Eléctrico S.A. (“CAMMESA”), a government-controlled company, had to provide this supply to the power plants. Finally, on November 6, 2018, the Secretary of Energy issued Resolution No. 70/2018, which returned to power generators the ability to purchase their own natural gas supply. Most of the power generators recovered the ability to do so, therefore, the price of natural gas purchased under the bidding processes decreased further because of the competition for demand in the low consumption season and in an environment with oversupply and economic recession.
 
Since December 2018, the government again decreased the natural gas price reference for power generation based on the supply basin of origin. As a result, during 2019, CAMMESA called for several bidding processes under the same conditions which resulted in even lower natural gas prices for generation.
 
The prices at which power plants or CAMMESA acquire natural gas can be considered a reference to determine the price of natural gas acquired as shrinkage gas (“RTP”) by us, which is why any additional increase in the costs of our Liquids Production and Commercialization segment may adversely affect our business, results of operations and financial condition, the value of our securities and our ability to meet our financial obligations.
 
As described above, actions taken by the Government during winter periods of recent years resulted in natural gas being redirected away from certain users, including the Cerri Complex, toward priority users, including residential customers. See “—The Government’s strategies, measures and programs with respect to the natural gas transportation industry, could materially adversely affect our business, results of operations, financial condition, the value of our securities and our ability to meet our financial obligations.” To a lesser extent, during the winter of 2016 and 2017, processing at the Cerri Complex was interrupted because of continued governmental actions to ensure natural gas supply to the domestic market, but thanks to the development of Vaca Muerta formation, during 2018 and 2019, we did not register any interruption in the supply of natural gas in the Cerri Complex.
 
In addition, regarding natural gas producers, the Government has recently introduced measures to moderate the impact of fuel prices in the economy. The prices that natural gas producers are able to obtain for oil and natural gas affect the viability of investments in new exploration, development and refining and, as a result, the timing and amount of our projected capital expenditures for such purposes. 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.
 
It is uncertain whether in the future measures taken by the Government or other measures that could adversely affect our business, results of operations and ability to meet our financial obligations will be implemented. It is also uncertain the impact of the Solidarity Law, regulations to be issued under its framework or whether our regulatory obligations may be increased, which could result in higher taxes, amendments to the tariff structure, or any other obligations that could increase our costs and adversely affect our financial situation.
 
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. 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 between 2004 and 2017. Since 2009, the international market for Liquids generally has been favorable, driven by strong international prices for LPG and natural gasoline. However, in 2015, as a consequence of weaker demand from emerging markets as well 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.
 
Regarding the price of energy, during 2019, the price of oil (WTI) remained volatile, recovering from the minimum levels of U.S.$45 per barrel in the month of January until reaching the peak of U.S.$65 per barrel in April. From that moment the price decreased by 13% mainly due to record production in the United States and the fall in demand, which managed to mitigate the impact of the shortage of supply linked to the sanctions imposed by the United States on Iran, the production cuts from the OPEC and conflicts in Venezuela and Libya.
 
This meant that the international average price of natural gasoline suffered a fall of approximately 16%. Given the stock of propane and butane registered in the United States, the average international prices (Mont Belvieu) of propane and butane were reduced by approximately 39% and 35%, respectively, compared to the year 2018.
 
Most recently after the disagreement between OPEC members and Russia and the COVID outbreak, in March 2020 the price of oil suffered a sharp decrease, reaching the WTI U.S.$30 per barrel. As of March 31, 2020, the price of natural gasoline, propane and butane declined 74.2%, 41.6% and 56.2%, from December 2019´s prices, respectively. Although this situation is temporary, it is uncertain to predict how long it will extend and the impact it would have on the results of our operations and financial situation.
 
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 regulatory modifications, in March 2008, the Government introduced a “sliding-scale” regime for LPG and natural gasoline, where the withholding tax rate applicable to exports of LPG and natural gasoline (as a percentage) would vary in the same proportion as the variation in the international reference prices.
 
At the beginning of 2015, 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 until January 7, 2017. Finally, on September 3, 2018, the Executive Branch issued Decree No. 793/2018, which set a new tax on exports framework.
 
For further information, see “Item 4. Our Information—B. Business Overview—Liquids Production and Commercialization.
 
In addition, after the issuance of Resolutions Nos. 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 the former Ministerio de Producción y de Planificación Federal, Inversión Pública y Servicios (the “MPFIPyS”) as defendants.
 
On March 28, 2016, the former Ministry of Energy issued Resolution No. 28 (“Resolution 28”), which instructs ENARGAS to take all the necessary measures to reduce to zero the Natural Gas Processing Charge starting April 1, 2016. Since that date, we have not been required to pay for the Natural Gas Processing Charge. However, Resolution 28 did not invalidate the Natural Gas Processing Charge or Gas Charge Resolutions for the period in which they were in force, for which reason the judicial action is still ongoing. On March 26, 2019, we were served notice of the first instance judgment rendered in the proceedings, which upholds the legal action filed by us and declares the unconstitutionality of Executive Decree No. 2,067/08, MPFIPyS Resolution No. 1451/08 and the Gas Charge Resolutions and Section 53 and 54 of Act No. 26,784 (General budget of the National Public Administration for the fiscal year 2013), as well as of any other act aimed at enforcing Executive Decree No. 2,067/08, and therefore declares invalid said regulations. On March 29, 2019 the National Secretariat of Energy appealed the judgment, which appeal was granted on April 3, 2019. On October 29, 2019, the judge resolved to extend the injunction (medida cautelar) for six months, or until the award becomes final. For additional information, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal and Regulatory Proceedings—Tax Claims.
 
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 business, results of operations, financial condition, the value of our securities, and our ability to meet our financial obligations. In addition, the Government could modify the current taxes and export/import regulations in a manner that could adversely affect our financial condition and results of operations.
 
The continued spread of the COVID may continue to negatively affect the global economy, energy demand and our business.
 
The recent COVID outbreak has introduced uncertainty in a number of areas of our business, including our operational, commercial and financial activities. It has also impacted negatively, and may continue to impact negatively, global economic activity, demand for energy including LNG and funds flows and sentiment in the global financial markets. The long-term effects to the global economy and the Company of the COVID pandemic are difficult to assess or predict, and may include a further decline in the market prices of our Shares and ADSs, risks to employee health and safety, risks for the deployment and logistic of our services and reduced sales mainly in the Liquids business segment. Our share price has recently declined significantly, due in part to the impact of the COVID. The ongoing spread of the COVID may continue to negatively affect our business, our operations, including the development of natural gas in Argentina, and our financial position and prospects which will depend on the severity of the health emergency and the success of the measures taken and those that will be taken in the future.
 
We also could not assure the duration and consequences of COVID or any other disruptions that may arise in government intervention or other measures, or the possibility of other economic effects on the stock market, foreign exchange rates and otherwise. Any such negative impact could result in a material adverse effect on our business, liquidity, financial conditions, results of operations and trading price of our common shares and ADSs.
 
Our ethane sales depend on the capacity of 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, which was subsequently renewed on an annual basis until May 1, 2018, and then on a monthly basis until September 6, 2018, the date on which we entered into a new agreement with PBB. The agreement is retroactive as of May 1, 2018, and will expire on December 27, 2027.
 
Pursuant to this agreement, the ethane price is calculated in U.S. dollars and is 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.
 
During 2019, PBB 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 or that PBB will be able to satisfy its obligations under the new purchase agreement.
 
The delay in the collection of our sales receivables with customers and/ or subsidies owed by the Government for the supply of LPG in the domestic market could adversely affect our business, results of operations and financial condition, the value of our securities, and our ability to meet our financial obligations.
 
Our main natural gas transportation customers are natural gas distribution companies whose tariff increases are set in accordance with the renegotiation processes of their licenses. Also, in some cases, their collections may depend on governmental regulations requiring them to finance the collections of their customers or even to recover their receivables from the Government.
 
Through Resolution No. 336, the payment of 22% of the bills issued from July 1, 2019 to October 31, 2019 to residential customers of natural gas was deferred. Also, with the issuance of the Solidarity Law, which suspended for a maximum period of 180 days the increase of rates, natural gas distribution companies could have difficulties complying with the increase in their operational costs, including the natural gas transportation services provided by us.
 
The failure of our clients to recover their receivables may cause them to incur delays or default in their payment obligations with us under our natural gas firm transportation contracts. In the future, we may be subject to delays in collections and payment obligations. We cannot assure you that our natural gas distribution customers in Argentina will not default on or otherwise breach their obligations to us in the future, and therefore negatively impact our financial situation.
 
In addition, we participate in the programs created by the Government to guarantee the supply of LPG at reasonable prices in the domestic market. Participation in these programs implies that the Government must compensate us when resources are allocated to the domestic market instead of us. Over recent years, this compensation has been paid with significant delays and there is no certainty about the continuance of such programs under the Fernandez administration.
 
During the fiscal years 2018 and 2019, we received the amount of Ps. 625.7 million and Ps. 468.5 million, respectively, as subsidies of the programs mentioned above. Pursuant to the programs referred to above, as of December 31, 2019, the Government is required to pay to us Ps. 143.8 million.
 
If the SHR were (i) not able to pay or redeem such accrued compensation in cash or cash equivalents, or (ii) not able to make such payments or redemptions according to our estimated schedule, our business, results of operations and financial condition, the value of our securities, and our ability to meet our financial obligations would be adversely affected.
 
More recently, as a consequence of COVID and the measures adopted by the Government to lessen its impact, we have suffered delays in the collection of our credit receivables, either due to the stoppage of activities, or to the measures adopted by the BCRA regarding the making of bank payments and compensations. Although these circumstances may be temporary, as of the date of issuance of this annual report, it is not possible to predict when they will normalize and their real impact on our financial situation and results of operations. If the cash flow generated by operations significantly declines, we may face difficulties in achieving our capital expenditures plans and projects, or may experience delays in the payments to our suppliers or financial debt which could negatively impact our financial condition and result of operations.
 
Our failure to renew firm transportation contracts could adversely affect our business, results of operations and financial condition, the value of our securities, and our ability to meet our financial obligations.
 
We cannot assure you that our natural gas firm transportation contracts will be renewed in whole or in part in our existing routes or by our current customers. We may not be able to renew some natural gas transportation contracts in light of the changes in the supply of natural gas from the Neuquina basin. The terms of our gas firm transportation contracts vary based on different factors. If we are unable to renew our natural gas firm transportation contracts as they mature, our business, results of operations and financial condition, the value of our securities, and our ability to meet our financial obligations would be adversely affected. See “—Our Liquids production depends on the natural gas that arrives at the Cerri Complex through three main pipelines from the Neuquina, Austral and San Jorge 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.
 
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 outstanding indebtedness provide for numerous affirmative and restrictive covenants that limit our ability to, among other things:
 

incur or permit to exist certain liens;
 

incur additional indebtedness;
 

pay dividends or make other restricted payments;
 

make capital investments and other investments;
 

enter into sale and lease-back transactions;
 

enter into transactions with affiliates;
 

sell, transfer or otherwise dispose of assets; and
 

consolidate, amalgamate, merge or sell all or 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 the 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, 2019, our physical assets are insured for up to U.S.$. 2,162.9 million and for the loss of profit resulting from the material damages by an amount of U.S.$ 528.4 million, these coverages being subject to certain deductibles for both material damages and loss of profit.
 
We maintain insurance policies intended to mitigate our losses due to customary risks. These policies cover our assets against loss for physical damage and 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.
 
Changes in the interpretation by the courts of labor laws that tend to favor employees could adversely affect our business, results of operations and financial condition, the value of our securities, and our ability to meet our financial obligations.
 
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 toward 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 on by any such third-party service provider. Therefore, our labor costs may increase as our indemnification responsibilities and costs expand, adversely affecting the results of our operations.
 
We may be exposed to risks related to litigation and administrative proceedings that could materially and adversely affect our business, results of operations and financial condition, the value of our securities, and our ability to meet our financial obligations in the event of an unfavorable ruling.
 
We are part of administrative proceedings and judicial claims, some of which have been pending resolution for several years. 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 be required to pay fines or money damages and we 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.
 
For additional information on the material proceedings in which we are involved, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal and Regulatory Proceedings.
 
Our operations are subject to environmental, occupational health and safety regulations.
 
We operate an extensive network of natural gas pipelines, including numerous compressor plants, the Cerri Complex and the logistic and storage facilities of Puerto Galván. All these facilities are located throughout the territory of Argentina and are subject to federal and provincial laws, as well as to the supervision of governmental agencies and regulatory authorities in charge of enforcing environmental laws and policies. We operate in compliance with applicable laws and in accordance with directives issued by ENARGAS. For this reason, it is possible that we could be subject to controls, which could result in penalties imposed on us.
 
We utilize a certified safety, occupational health, environment and quality management system in accordance with international standards ISO 14001, ISO 9001 and OHSAS 18001. It includes operational controls that are documented and monitored regularly. However, we cannot assure you that these controls will be effective or that our time of response to incidents will be adequate.
 
In addition, future regulation may require us to comply with additional safety, occupational health, environmental and quality controls or standards. We cannot assure you that, in the future, additional regulation could be issued requiring us to make new investments in order to comply with such safety, health and environmental laws and regulations.
 
We may face competition.
 
Historically, the construction and operation of natural gas processing plants located in the Province of Neuquén has increased competition in our Liquids sector as our customers could satisfy their product demand with alternative suppliers. In the past, we have been able to mitigate this competition by entering into agreements with natural gas producers that limited their ability to make investments in natural gas processing plants.  For example, at the end of 2000, Compañía MEGA S.A. (“MEGA”), a sociedad anónima owned by YPF, Petrobras International Braspetro B.V. and Dow Investment Argentina S.A., 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 the MEGA plant. However, there is a risk that additional gas processing at the MEGA plant could result in lower volumes or lesser quality gas 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.
 
Although the construction of gas processing plants upstream of the Cerri Complex requires significant investments, additional gas processing facilities may be constructed that similar to the MEGA plant, could result in lower volumes or inferior natural gas quality of the natural gas arriving at the Cerri Complex in the future. Therefore, the development of these new projects could adversely affect our revenues from Liquids production and commercialization services. In order to guarantee access to natural gas to be processed in the Cerri Complex we have 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.
 
Regarding our other services business segment, we operate in a market with strong participants, many of which may have extensive and diversified know-how or operating experience and financial resources similar to or significantly greater than ours. While it is still unclear the future measures to be taken by the current administration regarding its energetic policy, the development of the natural gas industry in Argentina is essential for the country’s economic growth. All future business that our competitors or we can develop will depend on the production of natural gas. The Government (or any other entity on its behalf) might not issue the necessary regulations to encourage natural gas producers to develop new projects involving natural gas output.
 
As a result of the above, an increased number of competitors could reduce their prices which could make our investments not profitable. In addition, an increase in competition could affect our business, results of operations, financial condition, the value of our securities, and our ability to meet our financial obligations. This would adversely affect our business, results of operations and financial condition.
 
Additionally, our principal competitor in the gas transportation business is Transportadora de Gas del Norte S.A. (“TGN”). 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 which both we and TGN are either directly or indirectly connected (Camuzzi Gas Pampeana S.A., Metrogas S.A. and Naturgy Argentina S.A.). We compete directly with TGN for the transportation of natural gas from the Neuquina basin to the greater Buenos Aires area.  In addition, in the future other participants may successfully penetrate our market and connect with our main customers which could affect our business, results of operations and financial condition, the value of our securities, and our ability to meet our financial obligations.
 
The Secretary of Energy published, on March 7, 2019, Resolution No. 82/2019 (“Resolution 82”), which sets the terms and conditions for future tenders that aim to increase the transportation capacity of natural gas. Additionally, through Resolution 437, the Federal Energy Bureau started a public tender process to grant a new license for the construction of a pipeline and all necessary facilities to provide natural gas services between the Neuquén Province and Argentina’s coastline. The construction of a new pipeline by a third party could affect our results of operations as the interruptible natural gas transport volumes and the availability of natural gas that arrives at the Cerri Complex for processing could be diminished.
 
Downgrades in our credit ratings could have negative effects on our funding costs and business operations.
 
Our credit ratings are assigned to us based on information furnished by us or obtained by the credit rating agencies from independent sources and are also influenced by the credit ratings of Government bonds and general views regarding the Argentine financial system as a whole. The credit ratings are subject to revision, suspension or withdrawal by the credit rating agencies at any time. A downgrade, suspension or withdrawal in our credit ratings could result in, among other things, the following: (i) increased funding costs and other difficulties in raising funds, (ii) the need to provide additional collateral in connection with financial transactions, and (iii) the termination or cancellation of existing agreements.  As a result, our business, financial condition and results of operations could be materially and adversely affected.
 
Our business has become increasingly dependent on digital technologies to conduct day-to-day operations and we may be subject to cyberattacks or other risks related to new technologies.
 
We depend on a variety of internet-based data processing, communication, and information exchange platforms and networks. Although we have extended our security policy to cover industrial systems, reinforcing our defenses in case of denial of service and increasing the monitoring of suspicious activities, our technologies, systems and networks and those of our business associates are exposed to cyberattacks and other cybersecurity incidents in the normal course of business, which could lead to disruptions in critical systems (such as our electronic flow measurement (“SCADA/EFM”) system and distributed control systems), the unauthorized release of confidential or protected information, corruption of data or other disruptions of our business operations.
 
Additionally, we enter into contracts with several third parties to provide our customers with data processing and communication services. Therefore, if information security is breached, or if one of our employees or external service providers’ breaches compliance procedures, information could be lost or misappropriated, which may affect us, damage others or result in potential litigation.
 
There has recently been an increased level of attention focused on cyberattacks against large corporations that include, but are not limited to, obtaining unauthorized access to digital systems for purposes of misappropriating cash, other assets or sensitive information, corrupting data, or causing operational disruption. Cybersecurity incidents, such as computer break-ins, “phishing,” identity theft and other disruptions, could negatively affect the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us in excess of insurance coverage and may cause existing and potential customers to refrain from doing business with us.
 
In addition, the methods used to obtain unauthorized access, disable or degrade service or sabotage systems are constantly evolving and may be difficult to anticipate or to detect. Thus certain cyber incidents, such as surveillance, may remain undetected for an extended period. To our knowledge, we have not experienced any material losses relating to cyberattacks; however, as cyberattacks continue to evolve, there can be no assurance that we will not suffer any cyberattack in the future that could affect our operations and/or our financial condition.
 
Our information technology infrastructure is critical to the efficient operation of our business and is essential to our ability to perform day-to-day operations. Breaches in our information technology infrastructure or physical facilities, or unauthorized access or other loss of information or other disruptions, could result in damage to our assets, safety incidents, legal claims, potential liability or the loss of contracts, damage of reputation, and could have a material adverse effect on our operations, financial position and results of operations.
 
Our natural gas transportation systems and processing facilities are subject to the risk of mechanical or electrical failures and any resulting unavailability may affect our ability to fulfill our contractual and other commitments and thus adversely affect our business, results of operations and financial condition, the value of our securities, and our ability to meet our financial obligations.
 
Our natural gas transportation systems and processing facilities are at risk of mechanical or electrical failures and may experience periods of unavailability affecting our ability to comply with our contracts with customers.  Any unplanned unavailability of our natural gas transportation systems and processing facilities may adversely affect our business, results of operations, financial condition, the value of our securities, and our ability to meet our financial obligations, as we may be subject to fines or penalties under our contracts with customers.
 
Our business is subject to risks arising from natural disasters, catastrophic accidents and terrorist attacks.
 
Our transportation systems and processing facilities or the third-party infrastructure that we rely on may be damaged by flooding, fires and other catastrophic disasters arising from natural or accidental or intentional human causes. We could experience severe business disruptions, significant decreases in revenues based on lower demand as a result of catastrophic events, or significant additional costs to us not otherwise covered by business interruption insurance clauses. There may be a significant time lag between a major accident, catastrophic event or terrorist attack and our definitive recovery from our insurance policies, which typically carry nonrecoverable deductible amounts, and in any event are subject to caps per event. In addition, any of these events could adversely affect the demand of natural gas by some of our customers and of consumers generally in the affected market. Some of these considerations, among others, could materially and adversely affect our business, results of operations, financial condition, the value of our securities, and our ability to meet our financial obligations.
 
We are subject to anti-trust, anti-corruption, anti-bribery and anti-money laundering laws. Failure to comply with these laws could result in penalties, which could harm our reputation and have an adverse effect on our business.
 
We are subject to anti-trust, anti-corruption, anti-bribery and anti-money laundering laws.  Although we maintain policies and processes intended to comply with these laws, including a review of our internal control over financial reporting, we cannot ensure that these compliance policies and processes will prevent intentional, reckless or negligent acts committed by our officers or employees.  If our officers or employees fail to comply with any applicable anti-trust, anti-corruption, anti-bribery or anti-money laundering laws, they may be subject to criminal, administrative or civil penalties and other remedial measures, which could have material adverse effects on our business, financial condition, results of operations and prospects.
 
In addition, we are subject to economic sanctions regulations that restrict our dealings with certain sanctioned countries, individuals and entities. There can be no assurance that our internal policies and procedures will be sufficient to prevent or detect all inappropriate practices, fraud or violations of law by our affiliates, employees, directors, officers, partners, agents and service providers or that any such persons will not take actions in violation of our policies and procedures. Any violations by us of anti-bribery and anti-corruption laws or sanctions regulations could have a material adverse effect on our reputation, business, financial condition, results of operations and prospects.
 
Our ability to operate our business may suffer if we are unable to retain our employees or attract other skilled employees or contractors.
 
Our current and future performance and the operation of our business are dependent upon the contributions of our senior management and our skilled team of engineers and other employees. We depend on our ability to attract, train, motivate and retain key management and specialized personnel with the necessary skills and experience. There is no guarantee that we will be successful in retaining and attracting key personnel and the replacement of any key personnel could be difficult and time-consuming. The loss of the experience and services of key personnel or the inability to recruit suitable replacements and additional staff could have a material adverse effect on our business, financial condition and results of operations.
 
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 ADSs represented by 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 amount 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. In September 2019 the Government reinstalled the above previous measures. 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 uninvested 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.
 
In the event that the BCRA does not grant the requested authorization, we reserve the right to agree with the Depositary to arbitrate the reasonable legal measures that allow effective payment of dividends to ADR holders who reside abroad. As a result, the ADR holder may lose part of the value of the dividend distribution.
 
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 this Annual Report, our controlling shareholder is CIESA, which holds 51% of our common stock. FGS holds 24.0% of our common stock. Local and foreign investors hold the remaining ownership of our common stock. CIESA is under co-control of: (i) Pampa Energía S.A. (“Pampa Energía”), which holds 10% of CIESA’s common stock, (ii) PHA S.A.U., a wholly-owned company by Pampa Energia, (“PHA”) which holds 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 the 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”), 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 ADRs 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 Act and Law No. 26,831, 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.
 
As a foreign private issuer we are exempt from certain rules that apply to domestic U.S. issuers.
 
We are subject to the informational requirements of the Exchange Act applicable to foreign private issuers. Under U.S. securities laws, as a foreign private issuer we are exempt from certain rules that apply to domestic U.S. issuers with equity securities registered under the Exchange Act, including rules regarding proxy statements and short-swing profits.  We are also exempt from many of the corporate governance requirements of the New York Stock Exchange.
 
Changes in Argentine tax laws may adversely affect the tax treatment of our Class B Shares or ADSs.
 
Pursuant to Law No. 26,893, the sale, exchange or other transfer of shares and other securities is subject to capital gains 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 gains 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.
 
On December 29, 2017, the Macri Administration enacted, through Decree No. 1112/2017, a tax reform (the Tax Reform”). The Tax Reform provides that only the results from sales, transfers or dispositions of shares, securities representing shares and certificates of deposit of shares that are carried out through stock exchanges or stock markets authorized by the CNV under conditions that guarantee the principle of price/time priority of the offers obtained by individuals and undivided estates resident in Argentina shall be exempted.
 
The foregoing exemption shall also be applicable to foreign beneficiaries to the extent that said beneficiaries do not reside in and the funds do not come from non-cooperative jurisdictions. Decree No. 279/2018 provides that until the decree of the Income Tax Law of Argentina regulates the definition of non-cooperative jurisdiction, the white list established in Decree No. 589/2013 (dated 05/27/2013) will be applicable to determine if a jurisdiction is non-cooperative jurisdiction.
 
The Tax Reform also establishes an exemption for such foreign beneficiaries on the sale of share certificates issued abroad that represent shares issued by Argentine companies which have been granted with a public offering authorization by the CNV (i.e., ADRs). The exemptions will only apply if the foreign beneficiaries do not reside in and the funds do not arise from “non-cooperating” jurisdictions.
 
Pursuant to Decree No. 279/2018, if the foreign beneficiary resides in a non-cooperative jurisdiction or the funds come from a non-cooperative jurisdiction, the capital gains tax rate is 35%.
 
Whereas, previously, if the sale was carried out between non-Argentine residents the non-Argentine resident purchaser was responsible for paying the tax when the seller was a non-resident, currently it is the seller, through their legal representative domiciled in Argentina, who is responsible for paying the tax, except when the purchaser is a resident individual or legal entity. If the seller does not have a legal representative, the tax should be paid by the seller according to Decree No. 279/2018.
 
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 the 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. 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.
 
Holders of ADRs may be unable to exercise preemptive, accretion or other rights with respect to the Class B shares underlying the ADSs.
 
Holders of ADSs may not be able to exercise the preemptive or accretion rights relating to the shares underlying the ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the shares relating to these preemptive rights, and we cannot assure you that we will file any such registration statement. Unless we file a registration statement or an exemption from registration is available, holders may receive only the net proceeds from the sale of their preemptive rights by the depositary or, if the preemptive rights cannot be sold, they will be allowed to lapse. As a result, U.S. holders of Class B Shares or ADSs may suffer dilution of their interest in our company upon future capital increases.
 
In addition, under the General Companies Act, foreign companies that own shares in an Argentine corporation are required to register with the Superintendency of Corporations (Inspección General de Justicia or the “IGJ”) in order to exercise certain shareholder rights. Voting rights in a Shareholder meeting can be exercised through duly instituted agents, as is regulated by Law No. 26,831. If you own our Class B Shares directly (rather than in the form of ADSs) and you are a non-Argentine company and you fail to register with the IGJ, your ability to exercise your rights as a holder of our Class B Shares may be limited.
 
The NYSE and/or the Buenos Aires Stock Exchange (by delegated authority of BYMA) may suspend trading and/or delist our ADSs and common shares, respectively, upon occurrence of certain events relating to our financial situation.
 
The NYSE and/or the BYMA may suspend and/or cancel the listing of our ADSs and common shares, respectively, in certain circumstances, including upon the occurrence of certain events relating to our financial situation.
 
The NYSE may in its sole discretion determine on an individual basis the suitability for continued listing of an issue in the light of all pertinent facts. Some of the factors mentioned in the NYSE Listed Company Manual, which may subject a company to suspension and delisting procedures, include: “unsatisfactory financial conditions and/or operating results,” “inability to meet current debt obligations or to adequately finance operations,” and “any other event or condition which may exist or occur that makes further dealings or listing of the securities on the NYSE inadvisable or unwarranted in the opinion of NYSE.”
 
We cannot assure you that the NYSE and/or BYMA will not commence any suspension or delisting procedures. A delisting or suspension of trading of our ADSs or common shares by the NYSE and/or BYMA, respectively, could adversely affect our results of operations and financial conditions and cause the market value of our ADSs and common shares to decline.
 
The price of our Class B Shares and the ADSs may fluctuate substantially, and your investment may decline in value.
 
The trading price of our Class B Shares is likely to be highly volatile and may be subject to wide fluctuations in response to factors, many of which are beyond our control. Such factors include:
 

fluctuations in our periodic operating results;
 

changes in financial estimates, recommendations or projections by securities analysts;
 

changes in conditions or trends in our industry;
 

events affecting equities markets in Argentina;
 

legal or regulatory measures affecting our financial conditions;
 

departures of management and key personnel; or
 

potential litigation or the adverse resolution of pending litigation against us or our subsidiaries.
 
The stock markets in general have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the companies involved. We cannot assure you that trading prices and valuations will be sustained. These broad market and industry factors may materially adversely affect the market price of our Class B Shares and the ADSs, regardless of our operating performance. Market fluctuations, as well as general political and economic conditions in Argentina, such as recession or currency exchange rate fluctuations, may also adversely affect the market price of our Class B Shares and the ADSs. In particular, currency fluctuations could impact the value of an investment in Argentina. Although our ADSs listed on the NYSE are U.S. dollar-denominated securities, they do not eliminate the currency risk associated with an investment in an Argentine company.
 
For example, due to various factors (including, but not limited to, the abrupt variation in the exchange rate in Argentina) prices of equity securities in Argentina decreased substantially in 2018, which prompted investors to dispose of their investments in Argentina resulting on further downward pressure on the price of equity securities. Future sales of substantial amounts of our Class B Shares and ADSs, or the perception that such future sales may occur, may result in additional pressure to the price of our Class B Shares and ADSs. Also, future sales of treasury shares, may also have a negative impact on the price of our Class B Shares and ADSs.
 
Following periods of volatility in the market price of a company’s securities, that company may often be subject to securities class-action litigation. This kind of litigation may result in substantial costs and a diversion of management’s attention and resources, which would have a material adverse effect on our business, results of operations and financial condition.
 
The relative volatility and illiquidity of the Argentine securities markets may substantially limit the ability to sell the Class B Shares underlying the ADSs on the BYMA at the price and time desired by the shareholder.
 
Investing in securities that trade in emerging markets, such as Argentina, often involves greater risk than investing in securities of issuers in the United States, and such investments are generally considered to be more speculative in nature. The Argentine securities market is substantially smaller, less liquid and more concentrated and can be more volatile than major securities markets in the United States, and is not as highly regulated or supervised as some of these other markets. There is also significantly greater concentration in the Argentine securities market than in major securities markets in the United States. The ten largest companies in terms of market capitalization represented approximately 92.1% of the aggregate market capitalization of the BYMA as of December 31, 2019. Accordingly, although shareholders are entitled to withdraw the Class B Shares underlying the ADSs from the depositary at any time, the ability to sell such shares on the BYMA at a price and time shareholders might want may be substantially limited.
 
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, the integrated operations of which included natural gas transportation and distribution. GdE was divided into ten companies: two transportation companies and eight distribution companies.
 
Our legal name is Transportadora de Gas del Sur S.A. We are a limited liability company (sociedad anónima), incorporated under the laws of Argentina 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.
 
We are currently the largest transporter of natural gas in Argentina and operate the most extensive pipeline system in Latin America in terms of length, delivering approximately, as of December 31, 2019, 60% of the total natural gas transported in Argentina, through 5,736 miles of pipeline, of which we operate 4,775 miles on an exclusive basis pursuant to the License (the “Natural Gas Transportation”). We operate the remaining 961 miles, which are owned by the Gas Trusts, and receive compensation based on a regulated tariff. Our transportation system connects the Neuquén, San Jorge and Austral basins, the major natural gas fields located in the south and west of Argentina, to the greater Buenos Aires area and the major consumption centers of southern Argentina. Substantially all of our transportation capacity, approximately 79% of our aggregate transportation capacity as of December 31, 2019, 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 46.6%, 45.4% and 37.4% of our total net revenues for the years ended December 31, 2019, 2018 and 2017, respectively.
 
We conduct our Natural Gas Transportation business pursuant to the License, which is currently scheduled to expire in 2027 and which is extendable for an additional ten-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 for the extension of our License. If ENARGAS determines that we are in substantial compliance with all our obligations arising under the Natural Gas Law No. 24,076 (the “Natural Gas Law”), related regulations and our License, the extension 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, that the extension of the License should not be granted. To the extent that we were found not to have satisfied the conditions described above or chose not to seek the extension of our License, we would be entitled to certain specified compensation. See “—B. Business Overview—Natural Gas Transportation—Regulatory Framework 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 the natural gas pipeline system in Argentina as of December 31, 2019:
 
 
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 logistics and storage facilities of Puerto Galván located in Bahía Blanca in the Province of Buenos Aires where Liquids are separated from the natural gas transported through our pipeline system and stored for delivery. Due to its strategic location within the Argentine natural gas transportation system, our Cerri Complex can process gas proceeding from the Neuquén, San Jorge and Austral basins. This provides the plant with great versatility in terms of natural gas availability, and the possibility to select the gas that is processed according to its quality (liquid contents). Revenues from our Liquids Production and Commercialization business represented 47.6%, 48.8% and 56.0% of our total net revenues during the years ended December 31, 2019, 2018 and 2017, 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, we provide telecommunications services. Aggregate net revenues from our midstream and telecommunications business segment represented 5.8%, 5.8% and 6.6% of our total net revenues during the years ended December 31, 2019, 2018 and 2017, respectively.
 
Within the framework of the agreements signed with the former Ministry of Energy, Mining and Hydrocarbons of the Province of Neuquén and Gas y Petróleo de Neuquén S.A. in April and November 2018, we timely completed the construction of a catchment and gathering pipeline and a natural gas conditioning plant in the Vaca Muerta field that will allow the gathering of non-conventional gas from the Neuquina basin and its subsequent injection into the main gas pipeline systems, ensuring its supply to all of Argentina’s regions.
 
The Vaca Muerta system has two gathering pipes: the first has a length of 71 miles, a 36” diameter and a 1.2Bcf/d transportation capacity (the “Northern Section”) and the second has a 20 mile extension, a 30” diameter and a 882.3 MMcf/d transportation capacity (the “Southern Section”). The gas transported through this pipeline system will be treated at a new conditioning plant that we built at Tratayén, Province of Neuquén with an initial capacity of 176.6 MMcf/d, which is foreseen to be expanded as the volumes of gas transported in the Vaca Muerta system increase. This project consolidates our position as the first midstream services provider in the Vaca Muerta field and required an investment of approximately U.S.$260 million in the aggregate. On April 29, 2019, the assembly and pressurization works on the connection of the Vaca Muerta pipeline to Neuba II were completed, which led to revenues from the month of May 2019 derived from firm natural gas transportation contracts of 28.2 MMcf/d in the aggregate. On August 22, 2019, the SHR issued Resolution No. 491/2019, which declared this project as “critical” on the terms of Law No. 26,360. This will allow us to obtain certain tax benefits from the investments in this project.
 
Controlling shareholders
 
As of the date of issuance of this Annual Report, 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 24% of our common stock. CIESA is under co-control of Pampa Energía, which directly and indirectly through PHA hold 50% of the share capital of CIESA, and GIP and PCT, which directly and together with WST and indirectly through PEPCA hold 50% of the share capital of 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, 2017, through December 31, 2019, our aggregate capital expenditures, in Current Currency, amounted to Ps. 32,995.6 million. Such capital expenditures include Ps. 15,447.7 million related to improvements to our gas transportation system, Ps. 2,147.2 million related to liquids production and commercialization activities and Ps. 15,400.7 million related to other services activities.
 
For the years 2019, 2018 and 2017, capital expenditures mostly include works performed for the execution of the Five-Year Plan and the construction and ramping-up of the Northern Section and Southern Section of the Vaca Muerta pipeline. Information relating to the size and financing of future investments is included in “Item 5. Operating and Financial Review and Prospects.
 
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.  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 46.6%, 45.4% and 37.4% of our total net revenues in the years ended December 31, 2019, 2018 and 2017, respectively. In 2019, 79% 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 2019, the amount of net revenues derived from natural gas firm transportation contracts was Ps. 18,521.2 million, representing 81.9% 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 as to whether they have natural gas firm or interruptible contracts. See “Regulatory Framework—Industry Structure” below for more information.
 
Expansions of the system. In February 2017, the Ministry of Mines and Energy called for a national public tender for the purchase of pipelines to extend the natural gas network in some areas of the Province of Santa Fe, the Patagonian Andes and the coast of the Province of Buenos Aires. This tender consists of four projects that will benefit 140,500 households. One of these projects is the extension of the Cordillerano gas pipeline, which will be connected to our natural gas pipeline system. The capacity expansion will be carried out from the two points that feed our system from the area called El Zorro and we will assume the role to audit the works executed. This project also includes the installation of the Río Senguer compressor plant in Neuquén. Due to the current macroeconomic environment, as of the date of issuance of this Annual Report the execution of these works is uncertain.
 
Within this framework, we entered into a Transitional Union Agreement (“UT”) with SACDE Sociedad Argentina de Construcción y Desarrollo Estratégico S.A. (“SACDE”), a related company, for the purpose of participating jointly in the National Public Bid No. 452-0004-LPU17: Assembly of Pipes for the Construction of the Project “Expansion of the Natural Gas Transportation and Distribution System.” In this regard, the Ministry of Mines and Energy awarded to the aforementioned UT the construction of the Regional II-Recreo/Rafaela/Sunchales Regional Gas Pipeline. As of the date of issuance of this Annual Report, the construction work is almost completed, and the project will finally be put into service after the UT and the Government agree the final terms of the project.
 
On September 5, 2018, through Resolution No. 125/2018 of the former Ministry of Energy, such Ministry resolved to discontinue the execution of works under the “Northern Work Trust 2006-2008” and the “Southern Work Trust 2006-2008,” formed on December 6, 2006, under the regime of Decree No. 180/2004 of February 13, 2004 and Resolution No. 185/2004 of April 19, 2004, of the former MPFIPyS. Likewise, such resolution instructed Nación Fideicomiso (“NAFISA”) and TGN, as trustees, respectively, of the “Northern Work Trust 2006-2008” and of the “Ampliación Norte 2004-2005 Trust” to consolidate the assets of both, in the “Northern Work Trust 2006-2008,” to continue with the repayment of the contributions and pending investments, without prejudice to the rights of third parties. Also, such resolution instructed NAFISA and us, as trustees, respectively of the “Trust of South Work 2006-2008” and the “Trust Expansion South 2004-2005” to consolidate the assets of both in the “South Work Trust 2006-2008,” which will continue with the repayment of contributions and pending investments, without prejudice to the rights of third parties. Furthermore, the resolution entrusts NAFISA to carry out the residual projects of the “Northern Work Trust 2006-2008” and of the “Southern Work Trust 2006-2008” and to carry out the timely liquidation of the “Ampliación Norte 2004-2005 Trust” and the “Fideicomiso Ampliación Sur 2004-2005,” giving the former Ministry of Energy the appropriate authority in accordance with the provisions of Decree No. 180/2004 and Resolution No. 185/2004.
 
Additionally, since April 2019, the Government has been developing a regulatory framework to replace the current LNG and liquid fuels imports with nonconventional natural gas from the Vaca Muerta area, which requires to be transported to urban areas. For this purpose, on July 30, 2019, the SHR issued Resolution 437, which includes the rules for a public tender process to grant a new license, including the design and construction of a pipeline, for the operation of a new natural gas transport system, which will be completed in two stages: (i) first, by connecting the area of Tratayén in the Neuquén Province with the area of Salliqueló in the Buenos Aires Province, and (ii) second, by connecting the area of Salliqueló with the city of San Nicolás de los Arroyos in the Buenos Aires Province. The first stage of the project is expected to be working in part within 18 months from the date the license is granted, and should be fully operational within 24 months from the date of the license. The second phase of the project shall be operative within 60 months from the date the license is granted.
 
The license will be granted for a period of 35 years, renewable for ten years according to the Natural Gas Law. Additionally, during the first 17 years of license a special temporary registry (Régimen Especial Temporario or “Special Temporary Registry”) will be created, which will allow the holder of such license to negotiate the compensation payable to the carriers without restrictions. Such compensation cannot be transferred to the final tariffs of residential clients. The regime of the Natural Gas Law will become effective after such 17-year period.
 
Before granting the license, the winning bidder should incorporate a special purpose company (sociedad anónima) pursuant to the General Companies Act, under the name “Transportadora de Gas del Centro S.A.”.
 
The open bidding for this new natural gas transportation license was issued by the SGE on July 30, 2019. On April 2, 2020, the Secretary of Energy postponed the opening until December 30, 2020. As of the date of the issuance of this Annual Report we are currently analyzing our participation in it.
 
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, 2019, our service area contains 6.2 million end users, including 4.1 million customers in the 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 S.A., Naturgy Argentina S.A., Camuzzi Gas Pampeana S.A. and Camuzzi Gas del Sur S.A. These natural gas distribution companies serve, in the aggregate, 68.0% 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 2019, as it relates to the distribution companies that are connected to our pipeline system:
 
Company 
Annual
deliveries (Bcf)
  
Volume of
market
served (in %)
  
No. of end-
users
(in millions)
  
Deliveries
received from
us (in %)
 
Metrogas (1)
  245.4   22.6%  2.4   87%
Camuzzi Pampeana (1)
  208.0   19.1%  1.4   96%
Camuzzi Sur  165.8   15.2%  0.7   100%
Naturgy Argentina (1)
  120.4   11.1%  1.7   62%
       68.0%  6.2     



(1)
Also connected to the TGN system.
Source: ENARGAS
 
The firm average contracted capacity for our four largest distribution customers, Pampa Energía and for all other customers, as a group, as of December 31, 2019, 2018 and 2017, 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, 
  2019  2018  2017 
  
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)
 
Firm:                  
Metrogas  590   5,847.3   590   5,991.0   590   2,942.4 
Camuzzi Pampeana  558   4,277.3   558   4,365.8   558   2,129.7 
Naturgy Argentina…  417   3,484.0   417   3,574.9   364   1,553.6 
Camuzzi Sur  388   878.0   388   895.6   388   443.3 
Pampa Energía  162   792.9   92   652.6   49   51.4 
Others  802   3,241.7   840   3,354.9   844   1,851.0 
Total firm  2,917   18,521.2   2,885.0   18,834.8   2,793   8,971.4 
Interruptible and others:
  -   4,099.2   -   4,950.9   -   2,498.4 
Total  2,917   22,620.4   2,885.0   23,785.7   2,793   11,469.8 

We play a leading role in the natural gas industry in Argentina and satisfy 68 direct customers and 6.2 million indirect customers. The graph below shows a breakdown of the total firm capacity hired as of December 31, 2019 per type of client:

 
Pipeline Operations
 
Pipeline Deliveries. The following table sets forth our average daily natural gas firm and interruptible transportation deliveries for 2019, 2018 and 2017:
 
  For the year ended December 31, 
  2019  2018  2017 
Firm: 
Average daily
deliveries (MMcf/d)
  
Average daily
deliveries (MMcf/d)
  
Average daily
deliveries (MMcf/d)
 
Metrogas  494   487   533 
Camuzzi Pampeana  350   371   378 
Camuzzi Sur  233   244   247 
Naturgy Argentina  240   223   208 
Others  547   569   512 
Subtotal firm  1,864   1,893   1,879 
Subtotal interruptible  498   569   448 
Total  2,362   2,462   2,327 
Average annual load factor (1)
  81%  85%  83%
Average winter heating season load factor (1)
  90%  98%  90%


(1)
Average daily deliveries for the period divided by average daily firm contracted capacity for the period, expressed as a percentage.

Natural gas’ daily average injection to the pipeline system operated by us amounted to 2,605 MMcf/d, 6% higher than the average 2,462 MMcf/d injected in 2018. In 2019, our effective administration of natural gas dispatch and the cooperative interaction among the different industry actors and the Government, combined with a more intensive maintenance plan, allowed us to operate our pipeline at high levels of efficiency. During such year, there were no restrictions to the supply of natural gas to the industrial and generation customers to redirect such natural gas to the priority users, mainly residential and commercial ussers, and compressed natural gas stations.
 
The chart below shows the evolution of average daily injections during 2019.
 



To renew all firm transportation capacity agreements that were expire in the years 2020 and 2021 (448.5 MMcf/d), in 2019 we conducted an open season, achieving an average additional term of 12 years.
 
Natural Gas Transportation System Improvements. In 2019, 2018 and 2017, we made capital expenditures aimed at the enhancement of our natural gas transportation system’s safety and reliability in the aggregate amount of Ps. 5,847.1 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. Based on the pipeline inspection reports we have received to date and the current operation of the pipeline system, we do not foresee any significant safety risks. In order to identify changes in the safety regulations that our pipeline system 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 area comprises the City of Buenos Aires and its surrounding area. One end of our natural gas transportation system (the “Buenos Aires ring”) is located in the greater Buenos Aires area, where we transfer natural gas for further delivery to major natural gas distribution companies.
 
During 2019, we experienced two pipeline failures, one in the General San Martín pipeline — between the San Julián and Río Seco compressor plants, in the Province of Santa Cruz and one event caused by third parties in the Cordillerano pipeline— between the Plaza Huincul and Picún Leufú compressor plants. Neither of such failures resulted in material service interruptions, significant damages, or casualties. Despite such incidents, our pipeline system met the natural gas dispatch demand and was in accordance with the requirements of ENARGAS and other relevant authorities. Except for the rupture described above there was no any other major safety related incident in our system in 2019.
 
In 2019, 2018 and 2017, our pipeline system satisfactorily met the demands generated by the winter season and the requirements of ENARGAS. To that effect, we carried out several maintenances, prevention and inspection works.
 
For example, we conducted integrity assessment tasks, such as in-line inspections along 682 miles and direct assessment through Close Interval Survey (CIS) and Direct Current Voltage Gradient Survey (DCVG) techniques (sections with no scraper traps) over 115 miles of pipelines. These tasks have been conducted to identify, assess and control threats to the integrity of our pipelines, such as external and internal corrosion, geometrical defects, manufacture and/or construction anomalies, and recoating failures, among others.
 
With reference to our recoating program and in line with our commitment outlined in the Five-Year Plan, in 2018 and 2019 we successfully concluded 23 miles and 18 miles, respectively of recoating replacement works in several sections of the General San Martín pipeline. Specifically, during 2019 these works were performed in the General San Martín pipeline, at the Bajo del Gualicho, and San Antonio Oeste plants discharges and the General Conesa’s plant suction. This program, being the most relevant of the works involved in the RTI was the most important ever faced by us not only because of its economic scope but also due to the technical deployment it entails along three times as many kilometers as the average programs carried out over the last five years.
 
Moreover, in these works we have continued performing nondestructive testing (NDT) such as magnetic particles and ultrasound testing for the identification of manufactured anomalies and Stress Corrosion Cracking (“SCC”) in the body of the pipeline, longitudinal weld seams and girth welds, by means of which we have been able to detect severe anomalies that could be removed through 66 pipe replacements.
 
We conducted recoating works on surface facilities, reconditioning pipes buried in the scraper trap in Dolavon in the Province of Chubut, to preserve the integrity of the facility and ensure the rendering of our services.
 
As part of the stress corrosion cracking assessment and mitigation plan, we continued an inline inspection plan with “EMAT” technology to detect cracks over 813 miles in the General San Martín pipeline, 354 miles in the Neuba I pipeline and 51 miles in the greater Buenos Aires ring pipeline.
 
Pursuant to an analysis and planning performed by our pipeline integrity team, we conducted the assessment of 140 external corrosion defects, geometrical defects, anomalies in longitudinal or circumferential seams, which required immediate reparation through the installation of 27 reinforcement sleeves and 29 pipe replacements.
 
In the field of cathodic protection, to mitigate the advance of corrosion and improve reliability, we continued strengthening the system with the installation of nine new units, the installation of 17 anode reinforcement and the renewal of 31 obsolete facilities. Said measures were reinforced with the execution of a remote monitoring plan, which we started with the enhancement of 31 remote measurement units and the enlargement of further 8 units, which is foreseen to be completed by 2020. Additionally, to guarantee the safety of our staff during field operations, we concluded earth connection works in 27 cathodic protection units.
 
Finally, we have concluded the filling of 12 sleeve pipes in the pipeline crossing with access ways, which contributes to the facilities’ reliability and the safety of the population.
 
We continued with the implementation of works to mitigate third parties’ damages around the Buenos Aires ring area to minimize the risks derived from high population concentration. Accordingly, we finished the installation of an optical fiber intruder detection system in 25 miles of pipeline, distributed as follows: 20 miles between the cities of Cañuelas and San Vicente and 5 miles between Cañuelas and Ezeiza. The final outcome of this job represents a total of 50 miles. We have also reinforced the signaling of our facilities all along the pipeline system in populated areas, among other measures.
 
Upon the detection of population advances in the proximities of the Neuba I pipeline section near Neuquén, we conducted works to change the pipeline class location through pipeline replacement for an extension of 5 miles.
 
Lastly, we conducted alluvial recomposition works in our pipelines. These works aim at mitigating and repairing the effects of external forces such as heavy rainfall, which erode and expose pipeline segments. Thus, we have concluded the recomposition of the San Martín pipeline in the Gualicho and Pico Truncado areas. We have also carried out works to restore pipeline coverage in a section that feeds the pumping station YPF-San Román, mitigating exposure risks and damages to facilities. To monitor these kind of abnormalities throughout the whole pipeline system, we have concluded aerial tasks over the San Martín Pipeline from Bahía Blanca to San Sebastián in Tierra del Fuego, covering an extension of 1,231 miles.
 
Pipeline Expansions. In light of the lack of expansion of the natural gas transportation system and of growing natural gas demand in all segments of the Argentine economy, the Government established in April 2004, through Decree No. 180/04, the framework to create the Gas Trusts to support investments in the natural gas transportation and distribution systems. In addition, Resolution No. 185/04 issued by MPFIPyS sets the specific guidelines to develop such expansions under the framework of Decree No. 180/04. These vehicles enabled the financing of the expansion works mentioned below.
 
In 2005, the first Gas Trust was constituted to carry out the first expansion (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 U.S.$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 U.S.$40 million in the First Expansion (including Value Added Tax (“VAT”) in the amount of U.S.$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 rates 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 increased the aggregate transportation capacity of our system by 378 MMcf/d. It involved 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. 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 NAFISA and the investment is financed by other gas trust funds whose trustors are the natural gas producers and the shippers that have subscribed to the additional capacity. The works are being 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, and maintenance (together with the assets related to the First Expansion) through an operation and maintenance 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 debt securities (valores representativos de deuda) from the Gas Trust, issued February 2010, which canceled the account receivable 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 equal monthly installments, and bear interest at the Coeficiente de Estabilización de Referencia established by Decree No. 214/2002 (“CER”), or Reference Stabilization Ratio as published by the BCRA, plus a fixed spread of 8% from their date of issue.
 
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 received 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 20% of the total remuneration, which was paid, 10% in cash and 90% in the form of additional debt securities from the Gas Trust. Those debt securities valued at Ps. 8.7 million (including accrued interest) as of December 31, 2019, are recorded in the “Other financial assets at amortized cost” caption in our Financial Statements. The securities are being amortized in 96 monthly, consecutive equal installments and bear interest at CER plus a fixed spread of 8% from their date of issue.
 
On July 20, 2016, NAFISA notified us of the former Ministry of Energy’s decision to suspend works for the Second Expansion. We took measures for the collection of the amounts owed by NAFISA to us. Subsequently, on February 2017, NAFISA resumed repayment of the promissory notes it issued to us evidencing NAFISA’s payment obligations to us for the work we completed on the Second Expansion. During 2018 and 2019, we did not have significant delays in the collection of these credits.
 
Technical Assistance Services 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 Corp. (“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. (“Petrobras Argentina”) as part of a master settlement agreement. Since July 2004, Petrobras Argentina was our technical operator and was 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.
 
On July 27, 2016, Petrobras Argentina was acquired by Pampa Energía. For further information, see “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders.
 
With the prior approval of ENARGAS and our Board of Directors, in December 2017, we and Pampa Energía agreed to a technical, financial and operational assistance service agreement (the “SATFO”) for a three-year term, expiring on December 28, 2020. The SATFO substantially contains the same terms as the Technical Assistance Agreement, as amended. However, the scope of the contract was extended to include a greater number of services that Pampa Energía must render us. Any amendment, assignment or even termination of the SATFO has to be authorized by ENARGAS. Pursuant to the SATFO, the currency for the technical assistance fee paid to Pampa Energía is U.S. dollars. The Audit Committee also expressed its favorable opinion to such proposal, as required by the Capital Markets Law, because Pampa Energía is a related party.
 
The SATFO sets out the services to be provided by Pampa Energía to us, at the request of our Chief Executive Officer. Between December 2017 and October 2019 we received from Pampa Energía technical, financial and operational assistance and we paid for such services, in monthly basis, an annual fee in amounts equal to the greater of (i) U.S.$3 million and (ii) an amount equal to 7% of the difference between our net income before interests and income taxes of the most recently ended twelve-month period and U.S.$3 million.
 
For the year ended December 31, 2019, we recorded a charge of Ps. 1,144.8 million for services rendered by Pampa Energía pursuant to the SATFO.
 
The services provided by Pampa Energía to us under the SATFO 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 analysis, 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 industrial hygiene, pollution and environmental protection of the system; (v) routine and preventive maintenance of the system; (vi) staff training; (vii) design and implementation of the necessary procedures to provide with the aforementioned services; (viii) financial and insurance advice; (ix) advice on operational improvements such as risk analysis, generation and commercialization of electric energy, operative management of the “midstream,” human resources management, legal and supply management; (x) advice on non-regulated businesses such as midstream, electric, petrochemical, processing, construction, among others; and (xi) design and implementation of all major aspects of natural gas transportation and liquids production, as well as administrative information and control system to adequately inform our management group.
 
Our Board of Directors, at its meeting held on September 17, 2019, approved a proposal for Pampa Energía, as technical operator of the SATFO, for a significant reduction in the compensation it receives under the SATFO. The General and Special Shareholders Meeting held on October 17, 2019 ratified such proposal. The Audit Committee also expressed its favorable opinion to such proposal, as required by the Capital Markets Law, because Pampa Energía is a related party.
 
According to such amendment, we extended the term of the SATFO and replaced the provisions relating to the calculation of the fee payable to Pampa Energía. Pursuant to the amended SATFO, we will pay to Pampa Energía, in monthly basis, an annual fee equal to the greater of: (i) U.S.$ 0.5 million and (ii) an amount equal to percentage specified below for the corresponding period applied to the difference between our net income before interests and income taxes of the most recently ended twelve-month period and U.S.$0.5 million:


From 12/28/2019 to 12/27/2020: 6.5%

From 12/28/2020 to 12/27/2021: 6%

From 12/28/2021 to 12/27/2022: 5.5%

From 12/28/2022 to 12/27/2023: 5%

From 12/28/2023 to 12/27/2024 and onwards: 4.5%.
 
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, 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. Currently there are nine authorized companies to distribute natural gas in Argentina. The ninth concession was added in 1998 and covers the Mesopotamian provinces, Formosa, Chaco, Entre Rios and Misiones which previously had no network for natural gas service. The license for the Mesopotamian region was awarded to GasNea.  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 U.S.$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 former 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. 1,080/2008 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 SHR. As compensation, we received a fixed fee determined by the SHR.
 
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 implemented 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 Integración Energética Argentina S.A. (“IEASA,” formerly 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;
 

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 IEASA, in Bahía Blanca (2008) and Escobar (2011), to inject natural gas into the pipeline. The tanker located at Bahía Blanca, which was retired in November 2018, was 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;


creation of trust funds (Resolution No. 185/04 of the former MPFIPyS) in order to finance infrastructure works in transportation and distribution of natural gas;
 

importation of natural gas from Bolivia and Chile, which has increased significantly over the past two years;
 

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; and
 

under Law No. 26,741, a stimulus program was created to encourage new investments in exploration and exploitation.
 
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 based on 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 Argentine Hydrocarbon Investments Planning and Coordination Commission (Comisión de Planificación y Coordinación Estratégica del Plan Nacional de Inversiones Hidrocarburíferas) was dissolved and the functions and powers of federal jurisdiction were transferred to the former Ministry of Energy. Meanwhile the provincial authorities preserve the powers that correspond to their jurisdictions.
 
On March 16, 2016, the former Ministry of Energy enacted Resolution No. 24/2016 which delegates to the SHR the following functions, among others:
 

resolving appeals filed against ENARGAS resolutions;
 

acting as the enforcement authority of Laws No. 17,319 and No. 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.
 
Since the beginning of the Macri administration, in December 2015, a series of measures were taken to guarantee supply to meet the growing energy demand. These measures are also aimed at encouraging private investment in the exploration and exploitation of new areas of natural gas production. Such measures include the following:
 

the completion of the RTI processes were prioritized to provide a framework of certainty to the operation of public utility companies;
 

the Ministry of Energy and the Unidad de Renegociación y Análisis de Contratos de Servicios Públicos (“UNIREN”) were reorganized in order to streamline the aforementioned efforts; and
 

the increase of the prices of natural gas at the supply point (PIST”) and the tariffs of the public transport and distribution of natural gas service have been propitiated in order to correct the deterioration in the supply of this fluid and to reduce the burden that the public subsidies have on the national budget.

During 2016, the Ministry of Energy issued Resolutions 28 and 31. These resolutions (i) increased the 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 effect 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 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.
 
On August 19, 2016, ENARGAS issued Resolution No. 3,953/2016, 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 to be implemented in April and October of each year.
 
After the September 2016 Public Hearing, the Ministry of Energy issued Resolution No. 212 – E/2016 through which, among other things:
 

fixes the natural gas prices in PIST;
 

provides 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 most vulnerable sectors;
 

establishes the new propane prices for the distribution of undiluted 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; and
 

provides that adjustments will be implemented in the months of April and October of each year, until the total elimination of the subsidies, at which time PIST will be freely determined by the market.
 
In January 2017, the Government announced the implementation of certain benefits 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 Neuquina 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; and
 

the creation of a program (regulated by Resolution No. 46-E/2017), 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, originally scheduled to be effective until December 31, 2021, included a sliding-scale schedule for the minimum price to be paid per MMBtu: U.S.$7.50 for 2018, U.S.$7.00 for 2019, U.S.$6.50 for 2020 and U.S.$6.00 for 2021. In 2019, such program was modified by the Energy Secretary, and such decision of the Government resulted in conflicts between the Government and natural gas producers which led to a sharp decline in the number of investments made by natural gas producers since the second half of 2019.
 
In November 2017, within the framework of the process of normalization of the energy sector, the former Ministry of Energy held meetings with the natural gas producers, IEASA, and the natural gas distributors to discuss and establish basic conditions that served as a framework for the supply agreements that they celebrated on January 1, 2018.
 
During 2018, due to the increase in the exchange rate between the peso and the U.S. dollar, natural gas producers and distribution companies began a process of renegotiation of the agreements signed with prices denominated in U.S. dollars, and the Government assumed, as an exceptional measure, the sums owed by the distributors of natural gas to the producers.
 
On February 11, 2019, the Energy Ministry issued Resolution No. 32/2019 which sets a new mechanism for price competitions for the provision of natural gas that are developed within the framework of the Mercado Eléctrico de Gas and that will cover the demand for the period from April 1, 2019 to March 31, 2020.
 
On March 2020, after the COVID outbreak and geopolitical tensions among OPEC+ members and Russia, the oil and LNG prices have fallen sharply. In addition, the quarantine measures taken by the Government to slow down COVID spread have caused a significant decrease in the consumption of natural gas and gasoline. The demand for natural gas in the industrial sector is affected by a reduction of small industries that have been paralyzed especially in the Great Buenos Aires, and some large industries that have reduced their activity.
 
Additionally, the domestic demand for fuels decreased considerably due to the contraction in consumption and the paralysis of the country. Likewise, important restrictions were verified by the main exporting companies as a consequence of the restrictions imposed by the different countries for the unloading of products.
 
The extension of the current situation will force producers to reduce their production. The production that does not find a buyer must be exported at considerable losses, or stored. All these situations will mean a reduction in the profitability of new and existing projects.
 
This unprecedented situation will mean a change in the way in which the activity of production and commercialization of natural gas in Argentina will be developed. Since at the date of issuance of this Annual Report it is not possible to estimate the scope and impact of both the events mentioned above and the measures adopted by the government to mitigate this situation, we are unable to ascertain the impact upon the sector at this time.
 
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 breakdown of natural gas consumption in Argentina in 2004 and 2019 by type of consumer:
 
 
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 in 2003, (ii) the 2002 devaluation of the peso as well as the 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, (iii) the growth of GDP between 2003 and 2013 and (iv) the energy policy that seeks to be one of the main producers of natural gas that allows not only to replace the import of natural gas but also to generate the necessary resources for its export. 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 for 2003 and the five consecutive years to 2019, in Bcf:
 


  2003  2015  2016  2017  2018  2019 
Residential (1)
  704.3   1,091.0   1,153.8   1,030.4   1,026.8   987.9 
Commercial  98.8   129.1   132.4   123.0   121.6   140.9 
Industries (2)
  1,033.6   1,222.2   1,169.2   1,210.9   1,276.5   1,330.6 
Power plants  846.7   1,443.2   1,548.3   1,671.7   1,663.1   1,461.5 
CNG  255.4   288.4   273.5   246.9   232.3   238.2 
Others (3)
  37.7   41.7   46.3   43.1   41.8   41.5 
Total  2,976.5   4,215.5   4,323.4   4,326.0   4,362.0   4,200.5 


(1)
Includes subdistributors.
(2)
Includes shrinkage natural gas from the Cerri Complex, which is included in Others.
(3)
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 decrease in domestic natural gas production and in an effort to maintain supplies at similar levels to the previous years.
 
Demand for natural gas dropped by 3.7% in 2019 compared to the previous year, mainly driven by the slowdown of the economic activity in Argentina.  The decrease in consumption from power generation plants, resulting from the increase in supply of energy from renewable sources and more efficient thermal plants, was offset by higher exports to Chile.
 
Gas Supply. There are 24 known sedimentary basins in the country, 12 of which are located entirely onshore, six of which are combined onshore/offshore and eight 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 2019, 46.6% 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 San Jorge Gulf basin. We are not connected to the Cuyo or Northwest basin.
 
The graph below shows the evolution of gross natural gas production from 2009 to 2019 in MMcf/d:
 
 
Source: Secretary of Energy
 
Set forth in the table below is the location of the principal natural gas producing basins by province, their proved natural gas reserves, reserve life and production as of December 31, 2018 and 2017 (the most recent years for which information is available):
 
Basin Location by province 
Proved Gas
Reserves(Bcf)(1)(2)
  Production (Bcf)  
Reserve Life
(years)(3)
 
    2018  2017  2018  2017  2018  2017 
Neuquina Neuquén, Río Negro, La Pampa, Mendoza (south)  7,001.2   5,826.7   1,002.7   924.4   7   6 
Austral Tierra del Fuego, Santa Cruz (south), and offshore  3,545.9   3,871.8   406.9   377.2   9   11 
San Jorge Gulf Chubut, Santa Cruz (north)  1,496.6   1,501.9   174.7   188.9   9   8 
Cuyo Mendoza (north)  10.6   8.2   1.7   1.7   6   5 
Northwest Salta, Jujuy, Formosa  452.6   539.6   74.5   84.8   6   6 
Total    12,506.9   11,748.2   1,660.5   1,577.0   8   7 


(1)
Estimated as of December 31, 2018 and 2017, 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 2018 or 2017 production levels, respectively.
Source: Ministry of Energy.
 
In May 2019, as a result of the development of the Vaca Muerta field, Argentina reached its peak natural gas production in the last ten years. In 2019, total natural gas production increased by 5.0% with respect to the previous year, from 1,661 Bcf to 1,743 Bcf. This increase was mainly attributable to non-conventional exploitation (shale + tight) in the Neuquina basin and, to a lesser extent, other developments in the Austral basin. In particular, non-conventional gas showed a significant increase mainly due to the continued positive performance of Tecpetrol S.A. and its development of the Fortín de Piedra fields.
 
In 2019, YPF continued to be the main producer in Argentina with a 30% market share, followed by Total Austral S.A. with a 25% market share. The graph below shows the market share of the main natural gas operators in Argentina in terms of production for 2019.
 
 
Source: Secretary of Energy
 
In 2018, total natural gas production increased by 5.3% with respect to the previous year from 1,577 Bcf to 1,661 Bcf. This increase primarily resulted from the non-conventional exploitation of the Neuquina basin and the offshore production carried out in the Austral basin. In particular, non-conventional gas showed a significant increase mainly due to the positive performance of Tecpetrol S.A. and its development of the Fortín de Piedra field.
 
In 2017, total natural gas production decreased by 0.8% with respect to the previous year from 1,589 Bcf to 1,577 Bcf. During 2017, the average gross production of natural gas was reduced in all the basins except the Austral and Neuquina, which mainly resulted from the non-conventional exploitation of the Neuquina basin and the offshore production carried out in the Austral basin.
 
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 Corporation 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. Many natural gas producers have announced alliances and agreements with international oil and natural gas companies, such as Petronas E&P Argentina S.A. and China Petroleum & Chemical Corporation, in order to eventually collaborate 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 U.S.$.500 million in 2016 for shale gas exploration in Argentina. Both companies, which have already invested U.S.$ 350 million in a joint shale gas venture, said in a statement that total investment could reach U.S.$2.5 billion in coming years. For additional information regarding the development of Vaca Muerta formation, see “-Neuquina Basin” below.
 
The graph below shows the evolution of gross natural gas production from 2009 to 2019 in MMcf/d:
 
Natural gas production (in MMcf/d)
 
 
Supply from Bolivia –under the framework of the agreement entered by both governments – hit an average of 494.4 MMcf/d, representing a 14.6% drop compared to the volume recorded in 2018. Liquefied natural gas imports (“LNG”) by sea— which is regasified and injected into the natural gas transportation system at the Escobar port located in the Province of Buenos Aires— recorded an average contribution of 183.6 MMcf/d in 2019. This volume was much lower than the 346.1 MMcf/d LNG’s contribution that had been recorded in 2018 from the Escobar and Bahía Blanca terminal. The latter terminal had been closed in late 2018 by the Government in light of expected shale-gas increases in the Neuquina Basin.
 
It was not necessary to import regasified LNG from the Chile terminals during the 2019 winter. Daily average imports of LNG from Chile in 2018 were 74.2 MMcf/d, which were injected to TGN’s transportation system.
 
Two relevant developments positively affected the Argentine energy trade balance in 2019. First, commencing in September 2018, Argentine producers made exports to Chile under permanent permits granted by the Government, after said market had been closed for 11 years. Second, the Government entered into a fourth addendum to the Bolivia imports agreement following the recovery of the natural gas production in Argentina and higher volumes entering into the system from the Province of Neuquén. This addendum adjusted the volumes and prices and is effective until to December 31, 2020. Under the new scheme, during the “summer” months (January to April and October to December), YPF would deliver 388.6 MMcf/d, in May and September such volume would increase to 565.0 MMcf/d and in the peak winter months—between June and August— such volume would be 635.7 MMcf/d.
 
Due to the worsening of the macroeconomic conditions in Argentina, on August 15, 2019, the Government issued Decree No. 566/2019, amended by Decree No. 601/2019, which froze fuel prices on the local market for a period of 90 days. As of the date of this Annual Report, we cannot predict the impact that such measures may have over producers and over their completion of projects to develop the exploration and exploitation of nonconventional fields.
 
Additionally, since April 2019, the Government has been developing a regulatory framework to replace the current LNG and liquid fuels imports with nonconventional natural gas from the Vaca Muerta area, which requires to be transported to urban areas. Under Resolution 82, after several delays, an open bidding to grant a 35-year period license including the construction and operation of a new natural gas pipeline system was launched. For additional information see “Item 4. Our Information. B. Business Overview. Expansions of the system.” As of the issuance of this Annual Report the open bidding has been postponed until December 30, 2020.
 
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.
 
Since then, the development of non-conventional gas in the Province of Neuquén has played a leading role in the increase in production of natural gas in 2019 by 8.2% and 17.4% compared to 2018 and 2017, respectively. Tecpetrol S.A. has had a leading role in the Fortín de Piedra area, becoming the main producing field in the country increasing its natural gas production from an average 1.4 MMcf/d in the beginning of 2018 to an average 14.4 MMcf/d during 2019.
 
Until 2019, Argentina and international producers have been actively seeking opportunities to develop the Neuquina basin, however, given the macroeconomic uncertainty in Argentina and the recent measures adopted by the Government towards the end of 2019 and the beginning of 2020 (including the Solidarity Law), the number of perforations in the area and production significantly decreased. For example, there were no perforations registered in February and March 2020 and production in the Fortin de Piedra area was reduced by 30% between January and December 2019. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Argentina—The impact of reforms and measures taken or to be taken as a result of the change of administration are uncertain.”
 
If brought online, this 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 51.8% was transported by us and approximately 48.2% by TGN for the year ended December 31, 2019.
 
The natural gas production of this basin represented approximately 62.3% of the total production of natural gas in Argentina during 2019. The chart below shows the evolution of the MMcf/d of natural gas produced in the basin for the period indicated.
 
 
Austral and San Jorge Basins. Natural gas provided by these basins, located in the southern region of Argentina, was transported mainly by us (Camuzzi Gas del Sur S.A. 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 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 Energía S.A., Total Austral S.A. and Pan American Energy Sucursal Argentina for the investment of U.S.$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 had a production of 73.6 MMcf/d during 2019.
 
The governments of the provinces on which these basins are located, together with the Government, have taken several measures to develop nonconventional gas and off-shore sites. During May 2019, the Government granted exploration rights to 13 companies over three off-shore basins. Compañía General de Combustibles S.A. is the most relevant player in the Austral basin, with an investment plan of approximately U.S.$1,453 million.
 
In addition, ENAP Sipetrol Argentina S.A., YPF and ENARSA signed an agreement to explore and develop offshore fields in the continental shelf of Argentina, and on September 5, 2019, SHR issued Resolutions No. 524 and 525, which granted an eight-year exploration permit on off-shore areas to Shell Argentina S.A. and QP Oil and Gas S.A.U.
 
The map below illustrates the distribution of the gas basins in Argentina:
 

Regulatory Framework
 
Industry Structure. The legal framework for the transportation and distribution of natural gas in Argentina is comprised by the Natural Gas Law, Decree No. 1,738/92, other regulatory decrees (primarily Decree No. 2255/92 which includes the Basic Rules for Transportation Licenses and Regulations of the Transportation Services), the Pliego, the transfer agreements and the licenses of the newly privatized companies. The Hydrocarbons Law of Argentina regulates the midstream natural gas industry, under a competitive and partially deregulated system. The Public Emergency Law and related laws and regulations, which are no longer in effect, significantly altered the regulatory regime under which we operated since 2002. Notwithstanding this, in December 2019 the national congress passed the Solidarity Law that introduced certain modifications to the RTI concluded in March 2018 with the issuance of Decree 250. 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 of Argentina is available to holders of exploitation concessions to transport their own natural gas production.
 
The Natural Gas Law prohibits natural gas transportation companies (TGN and us) from also being merchants in natural gas. In addition, (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.
 
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 Argentine Congress. However, from 2004 to 2007, ENARGAS was governed by three directors who were not confirmed by the Argentine 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 subinspector. Finally, on January 31, 2018, through Decree No. 84/2018, the Executive Branch appointed Mauricio Ezequiel Roitman as ENARGAS President for a period of five years, thus terminating the intervention period. However, the Solidarity Law established a new intervention of ENARGAS. Thus, on March 16, 2020, by means of Executive Order No. 278/2020, Federico Bernal was appointed as intervention inspector for a period of one year.
 
ENARGAS has broad authority to regulate the operations of the transportation and distribution companies and has its own budget, which must be included in the Argentine national budget and submitted to the Argentine Congress for approval. ENARGAS is funded primarily 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 (currently, the SHR) 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, in case ENARGAS does not submit such instruction in the way required by 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 as of the date of this Annual Report our compliance has not resulted in legal action by any of our firm transportation clients, that 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, which at the date of this Annual Report are in the evidentiary stage. 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.
 
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 also establishes 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.” Pursuant 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 determines 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 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.
 
As of the date of this Annual Report, our compliance has not resulted in legal action initiated by any of our firm transportation clients which could have a significant adverse economic and financial effect on us. 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 operated under a license containing substantially similar terms to those described below and elsewhere herein.
 
Our License has been granted by the Executive Branch by Decree No. 2451/92 for an original period of 35 years, beginning on December 28, 1992. However, the Natural Gas Law provides that we may request ENARGAS to renew its License for an additional period of ten years. ENARGAS must then evaluate 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 years, as the case may be, the Natural Gas Law requires that a new tender be called for the granting of the license. As long as we have substantially complied with our obligations under the License, we have the option to match any offer made by a third party to the Executive Branch.
 
Our License also places certain other rights and obligations on us relating to the services we provide, including:
 

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. Through Resolution No. 22/2018, ENARGAS adjusted the amounts of fines applicable in the event of a breach of obligations, which amount shall be updated on April of every year. On May 7, 2019, through Resolution No. 251/2019, ENARGAS updated the amounts of the fines up to Ps. 21.1 million.
 
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.
 
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.
 
In addition, as licensee for the provision of gas transportation services, we are subject to Law No. 27,437 (Ley de Compre Argentino y Desarrollo de Proveedores), which is regulated by Decree No. 800/2018 and Resolution 91/2018 of Argentine Secretary of Industry. This law provides a regime for purchases from the Government and other concessionaires of public services in Argentina. Pursuant to Article 1 of this law, all public officers, including those in private companies providing public services under licenses and concessions are required to give preference to the acquisition, lease or lease of goods of national origin.
 
Decree No. 465/19. On July 5, 2019, the Executive Branch issued Decree No. 465/2019 which instructed SHR to start a national and international bidding process, to grant a new license for the natural gas transportation system, which includes the construction of a pipeline between Tratayén and Salliqueló (in the Buenos Aires Province) and between Salliqueló and San Nicolás. Through Resolution No. 437 issued on July 30, 2019, SHR called for the bidding process. On April 2, 2020, the Secretary of Energy extended the deadline to submit the bids until December 30, 2020.
 
The terms and conditions of the license granted under this bidding process will be those of the Natural Gas Law, except for the creation during the first 17 years of license of a Special Temporary Regimen (Régimen Especial Temporario), which will regulate the tariffs in a different way from that provided in the Natural Gas Law.
 
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 cubic meter 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 table below shows our local natural gas firm and interruptible rates by pipeline and zones, in effect from April 1, 2016 (applicable for all kind of users except for residential), and October 7, 2016 (applicable for all of our customers), to March 31, 2017, after the issuance of Resolution No. 3724 and No. 4054/2016 (“Resolution 4054”):
 
Between April 1, 2016 and March 31,2017 
  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  0.396058   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 that 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 and 4054.

The table below shows our local natural gas firm and interruptible rates by pipeline and zones, in effect from April 1, 2017, until November 30, 2017, following the issuance of Resolution 4362:

Between April 1, 2017 and November 30, 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 that 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.

The table below shows our local natural gas firm and interruptible rates by pipeline and zones, in effect from December 1, 2017, until March 31, 2018, following the issuance by ENARGAS of Resolution No. 120/2017 (“Resolution 120”):
 
Between December 1, 2017 and March 31, 2018 
  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  1.178272   39.275298   0.49 

 Santa Cruz Sur  2.376029   79.201776   0.98 

 Chubut Sur  6.060905   202.030320   3.38 

 Buenos Aires Sur  7.140583   238.019383   5.60 

 Bahía Blanca  10.937683   364.589386   8.40 

 La Pampa Norte  10.898901   363.296426   8.60 

 Buenos Aires  12.797205   426.573433   10.35 

 Greater Buenos Aires  14.358459   478.615432   11.27 
From Santa Cruz Sur to: Santa Cruz Sur  1.194161   39.805045   0.49 

 Chubut Sur  4.873723   162.457367   2.89 

 Buenos Aires Sur  5.955710   198.523493   5.11 

 Bahía Blanca  9.772503   325.749975   7.91 

 La Pampa Norte  9.770749   325.691329   8.11 

 Buenos Aires  11.638111   387.936804   9.86 

 Greater Buenos Aires  13.204167   440.139326   10.78 
From Chubut to: Chubut Sur  1.184339   39.477749   0.49 

 Buenos Aires Sur  2.220658   74.020757   2.71 

 Bahía Blanca  5.921694   197.388697   5.51 

 La Pampa Norte  6.217779   207.258114   5.71 

 Buenos Aires  7.698187   256.605281   7.46 

 Greater Buenos Aires  9.178595   305.952447   8.38 
From Neuquén to: Neuquén  1.052366   36.080973   0.49 

 Bahía Blanca  5.111469   170.332165   2.80 

 La Pampa Norte  5.505614   183.471269   3.15 

 Buenos Aires  6.922412   230.697053   3.91 

 Greater Buenos Aires  8.478965   283.137219   4.86 
From Bahía Blanca to: Bahía Blanca  1.184334   39.477755   0.49 

 La Pampa Norte  0.296083   9.869416   0.20 

 Buenos Aires  1.776485   59.216586   1.95 

 Greater Buenos Aires  3.256902   108.563756   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 that 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 120.

The table below shows our local natural gas firm and interruptible rates by pipeline and zones, in effect from April 1, 2018 to September 30, 2018 following the issuance of Resolution No. 310/2018 (the “Resolution 310”):
 
Between April 1, 2018 and September 30, 2018 
  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  1.767514   58.916471   0.49 

 Santa Cruz Sur  3.564256   118.809770   0.98 

 Chubut Sur  9.091901   303.063605   3.38 

 Buenos Aires Sur  10.711516   357.050429   5.60 

 Bahía Blanca  16.407506   546.916789   8.40 

 La Pampa Norte  16.349329   544.977233   8.60 

 Buenos Aires  19.196955   639.898420   10.35 

 Greater Buenos Aires  21.538977   717.966088   11.27 
From Santa Cruz Sur to: Santa Cruz Sur  1.791349   59.711139   0.49 

 Chubut Sur  7.311021   243.700626   2.89 

 Buenos Aires Sur  8.934100   297.803051   5.11 

 Bahía Blanca  14.659632   488.654189   7.91 

 La Pampa Norte  14.657000   488.566215   8.11 

 Buenos Aires  17.458211   581.940011   9.86 

 Greater Buenos Aires  19.807436   660.248478   10.78 
From Chubut to: Chubut Sur  1.776614   59.220165   0.49 

 Buenos Aires Sur  3.331187   111.037777   2.71 

 Bahía Blanca  8.883072   296.100754   5.51 

 La Pampa Norte  9.327226   310.905767   5.71 

 Buenos Aires  11.547971   384.930944   7.46 

 Greater Buenos Aires  13.768715   458.956121   8.38 
From Neuquén to: Neuquén  1.578643   54.124697   0.49 

 Bahía Blanca  7.667662   255.513529   2.80 

 La Pampa Norte  8.258915   275.223364   3.15 

 Buenos Aires  10.384239   346.066277   3.91 

 Greater Buenos Aires  12.719209   424.731232   4.86 
From Bahía Blanca to: Bahía Blanca  1.776607   59.220174   0.49 

 La Pampa Norte  0.444152   14.805009   0.20 

 Buenos Aires  2.664887   88.830192   1.95 

 Greater Buenos Aires  4.885645   162.855375   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 310.

The table below shows our local natural gas firm and interruptible rates by pipeline and zones, in effect from October 1, 2018 to March 31, 2019 following the issuance of Resolution No. 265/2018 (the “Resolution 265”):

Between October 1, 2018 and March 31, 2019

 

 

 

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

 

 

2.115187

 

 

 

70.505443

 

 

 

0.49

 


 

Santa Cruz Sur

 

 

4.265351

 

 

 

142.179858

 

 

 

0.98

 


 

Chubut Sur

 

 

10.880293

 

 

 

362.676743

 

 

 

3.38

 


 

Buenos Aires Sur

 

 

12.818489

 

 

 

427.282869

 

 

 

5.60

 


 

Bahía Blanca

 

 

19.634891

 

 

 

654.496272

 

 

 

8.40

 


 

La Pampa Norte

 

 

19.565270

 

 

 

652.175202

 

 

 

8.60

 


 

Buenos Aires

 

 

22.973029

 

 

 

765.767552

 

 

 

10.35

 


 

Greater Buenos Aires

 

 

25.775731

 

 

 

859.191266

 

 

 

11.27

 

From Santa Cruz Sur to:

 

Santa Cruz Sur

 

 

2.143710

 

 

 

71.456424

 

 

 

0.49

 


 

Chubut Sur

 

 

8.749112

 

 

 

291.636962

 

 

 

2.89

 


 

Buenos Aires Sur

 

 

10.691453

 

 

 

356.381429

 

 

 

5.11

 


 

Bahía Blanca

 

 

17.543207

 

 

 

584.773317

 

 

 

7.91

 


 

La Pampa Norte

 

 

17.540057

 

 

 

584.668038

 

 

 

8.11

 


 

Buenos Aires

 

 

20.892272

 

 

 

696.408622

 

 

 

9.86

 


 

Greater Buenos Aires

 

 

23.703593

 

 

 

790.120501

 

 

 

10.78

 

From Chubut to:

 

Chubut Sur

 

 

2.126078

 

 

 

70.868874

 

 

 

0.49

 


 

Buenos Aires Sur

 

 

3.986437

 

 

 

132.879101

 

 

 

2.71

 


 

Bahía Blanca

 

 

10.630388

 

 

 

354.344287

 

 

 

5.51

 


 

La Pampa Norte

 

 

11.161907

 

 

 

372.061471

 

 

 

5.71

 


 

Buenos Aires

 

 

13.819476

 

 

 

460.647529

 

 

 

7.46

 


 

Greater Buenos Aires

 

 

16.477046

 

 

 

549.233587

 

 

 

8.38

 

From Neuquén to:

 

Neuquén

 

 

1.889165

 

 

 

64.771119

 

 

 

0.49

 


 

Bahía Blanca

 

 

9.175905

 

 

 

305.773484

 

 

 

2.80

 


 

La Pampa Norte

 

 

9.883458

 

 

 

329.360278

 

 

 

3.15

 


 

Buenos Aires

 

 

12.426836

 

 

 

414.138116

 

 

 

3.91

 


 

Greater Buenos Aires

 

 

15.221099

 

 

 

508.276603

 

 

 

4.86

 

From Bahía Blanca to:

 

Bahía Blanca

 

 

2.126068

 

 

 

70.868885

 

 

 

0.49

 


 

La Pampa Norte

 

 

0.531517

 

 

 

17.717180

 

 

 

0.20

 


 

Buenos Aires

 

 

3.189075

 

 

 

106.303245

 

 

 

1.95

 


 

Greater Buenos Aires

 

 

5.846660

 

 

 

194.889310

 

 

 

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 that 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 265.
 
The table below shows our local natural gas firm and interruptible rates by pipeline and zones, in effect from April 1, 2019 to March 31, 2020, following the issuance of Resolution No. 192/2019 (the “Resolution 192”) and the enactment of the Solidarity Law, which provides that natural gas transportation and distribution rates will remain unadjusted for a maximum period of 180 days from December 23, 2019:
 
Between April 1, 2019 and March 31, 2020 
  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  2.665144   88.837143   0.49 
  Santa Cruz Sur  5.374436   179.147196   0.98 
  Chubut Sur  13.709213   456.974163   3.38 
  Buenos Aires Sur  16.151349   538.378143   5.60 
  Bahía Blanca  24.740042   824.667950   8.40 
  La Pampa Norte  24.652320   821.743392   8.60 
  Buenos Aires  28.946110   964.870213   10.35 
  Greater Buenos Aires  32.477525   1,082.584470   11.27 
From Santa Cruz Sur to: Santa Cruz Sur  2.701084   90.035383   0.49 
  Chubut Sur  11.023917   367.463752   2.89 
  Buenos Aires Sur  13.471273   449.042042   5.11 
  Bahía Blanca  22.104511   736.816745   7.91 
  La Pampa Norte  22.100543   736.684093   8.11 
  Buenos Aires  26.324347   877.477681   9.86 
  Greater Buenos Aires  29.866623   995.555027   10.78 
From Chubut to: Chubut Sur  2.678866   89.295068   0.49 
  Buenos Aires Sur  5.022927   167.428204   2.71 
  Bahía Blanca  13.394433   446.475235   5.51 
  La Pampa Norte  14.064048   468.798959   5.71 
  Buenos Aires  17.412596   580.417750   7.46 
  Greater Buenos Aires  20.761144   692.036541   8.38 
From Neuquén to: Neuquén  2.380356   81.611872   0.49 
  Bahía Blanca  11.561677   385.275827   2.80 
  La Pampa Norte  12.453197   414.995282   3.15 
  Buenos Aires  15.657864   521.815701   3.91 
  Greater Buenos Aires  19.178646   640.430576   4.86 
From Bahía Blanca to: Bahía Blanca  2.678855   89.295082   0.49 
  La Pampa Norte  0.669714   22.323718   0.20 
  Buenos Aires  4.018247   133.942519   1.95 
  Greater Buenos Aires  7.366815   245.561319   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 that 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 192.

In addition to the tariffs above, we are entitled to a CAU. Since its inception in 2005, the CAU was increased, by 73.2% on May 1, 2015, and by 200.1% on April 1, 2016, by ENARGAS. We received an additional 50% and 19.7 % increase in the CAU on April 1, 2018, and October 1, 2018, respectively. In 2019, we recognized revenues of Ps. 835.7 million 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 might exceed the amount of the CAU, we filed a claim against the Government to obtain the adjustment of the values and ensure a fair compensation for the service it renders. See “Item 4. Our Information—B. Business Overview—Natural Gas Transportation—Pipeline Operations—Pipeline Expansions.”
 
On June 26, 2018, as a result of the conclusion of our renegotiations of our License, we, CIESA and its former and current shareholders, withdrew all of the legal claims filed against the Government related to our business resulting from the Public Emergency Law.
 
Tariff situation.
 
Background and Renegotiation Process
 
On January 6, 2002, the Argentine Congress enacted the Public Emergency Law which introduced dramatic changes to Argentina’s economic model, empowering the Government to implement, among other things, additional monetary, financial and foreign exchange measures to overcome the economic crisis in the short-term and bringing to an end the regime established pursuant to the Argentine Convertibility Act, including the fixed parity of the U.S. dollar and the peso. Among others, the Public Emergency Law granted the Executive Branch the power to conduct a renegotiation of public utility contracts and the tariffs set therein.  The Public Emergency Law expired on December 31, 2017.
 
In July 2003, UNIREN was created in order to reach total or partial agreements with the licensees and/or concessionaires of public services and submit proposals regulating the transitory adjustment of tariffs and prices, among other things.  Under this framework, we signed with UNIREN (i) the agreement dated October 9, 2008, between TGS and former UNIREN (the “2008 Transitional Agreement”) that contemplated a tariff increase of 20% and (ii) the agreement dated October 2015 between us and the former UNIREN, which incorporated ENARGAS Resolution No. 3347, including, as of May 1, 2015, a transitional increase of 44.3% in the price of the natural gas transportation service and a 73.2% increase in the CAU. Following UNIREN’s failure to comply with certain of its obligations under different renegotiation agreements, we took legal actions against UNIREN.
 
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 contracts. Decree No. 367/2016 also conditioned the finalization of the new tariff scheme provided in the respective integral renegotiation agreement approved by the Executive Branch to completion of the RTI and provided that transitional adjustment of prices and tariffs are necessary to ensure the continuity of the normal provision of services.
 
Under the framework of the agreement signed in February 2016 (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. Additionally, among other things, Resolution 3724 required us to not distribute dividends without the prior authorization of ENARGAS after reviewing our compliance with the transitional mandatory investment plan included in the 2016 Transitional Agreement (the “2016 Investment Plan”). As of the date of this Annual Report, the 2016 Investment Plan is fully executed and has been approved by ENARGAS.
 
As several legal proceedings were initiated against Resolution 3724 in order to obtain the annulment of the increase of the PIST and the tariff increases for the natural gas transportation and distribution licensees approved by ENARGAS, we were not able to bill the 200.1% increase in full. On August 18, 2016, the Supreme Court order issued its final decision mandating the Government to: (i) implement compulsory public hearings prior to the establishment of natural gas transportation and distribution tariffs, (ii) implement compulsory public hearings prior to the establishment of the point-of-injection gas price and (iii) declare the invalidity of Resolutions 28 and 31 with respect to residential users, for whom tariffs had to be returned to tariff rates effective as of March 31, 2016.
 
On August 19, 2016, ENARGAS issued Resolution No. 3953/2016, which implemented the decisions arising out of a public hearing before the Supreme Court. For additional information regarding the public hearing’s agenda, see “—Natural Gas Transportation—The Argentine Natural Gas Industry.”
 
As a result of this public hearing, since October 7, 2016, we were able to collect the revised tariffs at the levels provided for in Resolution 3724, allowing us to complete in full our 2016 Investment Plan.
 
ICSID Claim
 
In 2003, Enron, a former indirect shareholder of 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 redenomination of tariffs in pesos (pesificación) and other unilateral changes to our regulatory structure effected by the Public Emergency Law and related laws and decrees violated 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 U.S.$106.2 million to the Claimants. In July 2010, an ICSID committee annulled the 2007 ICSID resolution. This annulment did 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 created.
 
In January 2011, Pampa Energía acquired, among other assets (i) 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, the financial debt of CIESA 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 Energía 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 U.S.$26 million to Pampa Energía to enable it to purchase the rights to monitor, suspend and withdraw the ICSID Claim. In 2015, we acquired Pampa Energía’s rights over the ICSID Claim (the “Rights of the Arbitration Proceeding”) from Pampa Energía 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 Energía, 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.
 
On March 27, 2018, the Executive Branch issued the Decree No. 250 which ratified the 2017 Integral Agreement (as defined below). This decree represents the conclusion of the RTI process and the finalization of the agreement signed on March 30, 2017, between TGS and the Government (the “2017 Transitional Agreement”), and thus, the final renegotiation of our License. Therefore, we and our former and present shareholders abandoned any claim, including the ICSID Claim, on June 26, 2018.
 
Resolution 74 Tariff Increases
 
On March 30, 2017, we entered into the Integral Renegotiation Agreement (the “2017 Integral Agreement”) and the related 2017 Transitional Agreement. On the same day and consistent with the 2017 Transitional Agreement, ENARGAS issued Resolution No. 4362 by which a new transitional tariff schedule applicable to us determined a total tariff increase of 214.2% and 37%, on the tariff of the natural gas transportation service and the CAU, respectively.
 
However, Resolution 74 provided for a limitation on the full effectiveness of the tariff increase arising from the RTI process until the approvals of the 2017 Integral Agreement were completed. This meant that the tariff increase was granted in three stages on April 1, 2017, December 1, 2017 and April 1, 2018. This staged increase is structured to provide the same economic benefits to us as if the increases had been fully effective since April 1, 2017.
 
As required by Resolution 74, the first of the tariff increases was granted by Resolution 4362 since April 1, 2017, amounting to 64.2% of our natural gas transportation service tariff. In this opportunity, the CAU was not increased.
 
In addition, Resolution 4362 requires us to comply with the Five-Year Plan and approved a non-automatic six-month adjustment mechanism for the natural gas transportation tariff and the CAU.
 
On October 20, 2017, ENARGAS issued Resolution No. 62/2017 by means of which a public hearing was called for November 14, 2017, to address a transitory tariff adjustment on account of the increase foreseen in the tariff review. The public hearing resulted in a transitory tariff adjustment authorized through Resolution 120, which determined an 80.8% increase for the natural gas transportation tariff and 29.7% for the CAU. These new tariff schemes came into effect beginning on December 1, 2017.
 
A further public hearing in connection with the integral renegotiation was conducted on February 20, 2018 to address: (i) a tariff adjustment and, (ii) an incremental tariff resulting from the pipeline system expansion project presented by us to ENARGAS on December 19, 2017, involving the building of 47 miles of pipeline extending from the towns of Mercedes and Los Cardales in the Province of Buenos Aires and the installation of a compressor plant at the wellhead. This project would require an initial investment of U.S.$150 million and would allow the incremental transportation of 388MMcf/d of natural gas, with financing through an investment factor (“k” factor).
 
As a consequence of the public hearing mentioned above, on March 27, 2018, ENARGAS issued Resolution 310 which stated a tariff increase of 50% for the natural gas transportation tariff and the CAU effective as of April 1, 2018.
 
On March 27, 2018, through Decree 250, the Executive Branch ratified the 2017 Integral Agreement, following the approval of several governmental authorities, including the Argentine Congress. Decree 250 concludes the RTI process and terminates the 2017 Transitional Agreement, representing the final renegotiation of our License with the Government after 17 years of negotiations. As a result of the foregoing (i) we are entitled to the final tariff increase contemplated in Resolution 4362 (finally granted by Resolution 310 mentioned above), and (ii) we and our current and former shareholders withdrew any claim against the Government related to our business resulting from the Public Emergency Law, including the ICSID Claim, on June 26, 2018.
 
On June 21, 2019, SHR issued Resolution 336, through which the payment of 22% of the bills issued from July 1, 2019 to October 31, 2019 to residential customers of natural gas was deferred. Such deferral will be recovered through the bills issued from December 1, 2019 in five consecutive monthly installments. It is expected that the Government will compensate licensors for such deferral. On August 22, 2019, SHR issued Resolution No. 488/2019 (“Resolution 488”) which established the procedure to calculate the deferral provided by Resolution 336. Furthermore, Resolution 488 instructs the implementation of a procedure to calculate and pay the compensation for licensors. As of the date of this Annual Report, the regulation containing the calculations and payment method for such compensation has not been issued.
 
The Solidarity Law provides that natural gas transportation and distribution tariffs will remain unadjusted for a maximum period of 180 days from December 23, 2019 and that the Executive Branch is authorized to renegotiate such rates, either within the framework of the current RTI or through an extraordinary review in accordance with the provisions of the Natural Gas Law. As of the date of issuance of this Annual Report, no action has been taken by the Government to adjust our tariffs in accordance with the RTI or otherwise.
 
Later, as a consequence of the spread of the COVID pandemic and the measures taken by the Government to reduce its impact, the Executive Branch issued Decree 311 which suspends, for certain type of users, the outage of natural gas and electricity public services for 180 days. This situation is currently affecting the collection of credit accounts of our main natural gas transportation customers. Thus, as of the date of issuance of this Annual Report, we have suffered delays in the collections from our gas distribution customers.
 
Semiannual Adjustment of Tariffs. Under our License, we may be permitted to adjust tariffs semiannually 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’s 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 levels of earnings 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 ENARGAS.
 
On September 4, 2018, a new public hearing was held at which we presented a proposed adjustment for our tariffs for the following six months for natural gas transportation service. Finally, on September 28, 2018, ENARGAS issued Resolution 265, which provides an increase of 19.67% over the tariff for the natural gas transport service. This increase came into effect on October 1, 2018.
 
On February 26, 2019, a new public hearing took place with the aim of establishing the semiannual tariff. On March, 29 2019, ENARGAS issued Resolution 192 which provides an increase of 26% over the tariff for the natural gas transport service. This increase came into effect on April 1, 2019 and was calculated considering the WPI for the period August 2018 – February 2019.
 
On September 3, 2019, SHR issued Resolution 521 – later complemented by Resolution N° 751/2019- which defers the semiannual adjustment corresponding to October 1, 2019, to February 1, 2020.
 
Resolution 521 provides that companies will be compensated for their loss of income through the review and adjustment of the investments included in the Five-Year Plan. As of the date of this Annual Report, we have not agreed with ENARGAS on the amount of such compensation.
 
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. If we decide not to participate in a new bidding for a new License term, we will receive 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;
 

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; and
 

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.
 
Environment
 
Environmental matters of the natural gas transportation business are governed by regulation NAG153 (as described below) issued by ENARGAS, which sets the guidelines for the implementation of an environmental management system and for the obligation to evaluate the environmental impact of projects.
 
Our business activities primarily have an impact on the atmosphere (as a result of methane release and combustion gases), the soil and watercourses due to the pipelines (including maintenance, third parties’ actions or failures). Our activities also generate hazardous waste and environmental noise. Further, we may be required to handle universal archeological or paleontological findings during works. All these aspects are monitored and measured under our comprehensive environmental program. We also conduct an annual emergency drill program to test our response capacity under safety and environmental emergencies, the 2019 drill was completed with satisfactory results. Our policy also extends to our contractors, who are required to comply with the same standards and implement environmental protection measures for the execution of each work.
 
Competition
 
Our Natural Gas Transportation business provides an essential public service in Argentina in accordance with Article No. 1 of the Natural Gas Law. 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 natural gas to justify the capital investment. The building and operation of a natural gas pipeline requires important technical know-how and high investment levels
 
Also, the ability of new entrants to successfully penetrate our market would depend on a favorable regulatory environment, an increasing and unsatisfied demand for natural 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. Given the potential of Vaca Muerta’s non-conventional gas formation, other competitors, new market participants or even us in association with third parties, may become interested in participating in the construction of new similar projects that could have an impact on our competitive position and on our financial situation and future results.
 
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 Gas Pampeana S.A., Metrogas S.A. and Naturgy Argentina S.A.). We compete directly with TGN for the transportation of natural gas from the Neuquina 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 2008 and 2010, the Government, through ENARSA, finalized the construction of LNG regasification ports in Bahía Blanca and Escobar, respectively, which are intended to supplement the natural gas supply deficit.
 
Additionally, since April 2019, the Government has been developing a regulatory framework to transport nonconventional natural gas from the Vaca Muerta area to urban areas. For this purpose, on July 30, 2019, the SHR issued Resolution No. 437/2019 (“Resolution 437”), which published the rules for a public tender process to grant a new license, including the design and construction of a pipeline, for the operation of a new natural gas transport system, which will be completed in two stages: (i) first, by connecting the area of Tratayén in the Neuquén province with the area of Salliqueló in the Buenos Aires province, and (ii) second, by connecting the area of Salliqueló with the city of San Nicolás de los Arroyos in the Buenos Aires province. The first stage of the project is expected to be working in part within 18 months from the date the license is granted, and should be fully operational within 24 months from the date of the license. The second phase of the project shall be operative within 60 months from the date the license is granted.
 
The license will be granted for a period of 35 years, renewable for 10 years according to the Natural Gas Law. Additionally, during the first 17 years of license a Special Temporary Registry (Registro Especial Temporario) will be created, which will allow to negotiate the compensation payable to the carriers without restrictions. Such compensation cannot be transferred to the final tariffs of residential clients. The regime of the Natural Gas Law will become effective after such 17-year period.
 
Before granting the license, the awarded bidder should incorporate a company (sociedad anónima) in the terms of the General Companies Act, named “Transportadora de Gas del Centro S.A.”, which shall have a specific and exclusive purpose.
 
As of the date of the issuance of the present report, although the Government has not confirmed its intentions to conduct the project, we are currently analyzing our participation in it. If this project continues and is awarded to another company, then we will compete with Transportadora de Gas del Centro S.A 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 future expansion projects.
 
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.
 
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.
 
We own the Liquids 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. The results of our Liquids Production and Commercialization segment are subject to risks associated with commodity price changes.
 
During 2019, 2018 and 2017, all of our Liquid sales were on our own account. Our sales of Liquids in the domestic market are regulated through the Households with Bottles Program (as defined below) of the Ministry of Energy in order to guarantee the supply at reasonable prices. For more information, see “—Regulation—Domestic market” below.
 
Liquids production in 2019 reached 1,127,558 short tons, a decrease of 44,248 short tons or 3.8%, with respect to Liquids production in 2018. This decrease was mainly due to a 29% decrease in ethane sales in 2019, primarily as a result of an accident in June 2019 at the facilities of PBB (our sole ethane purchaser) that affected its capacity to purchase our ethane production until October 2019. This was partially offset by an increase in volume produced of propane and butane. In during the winter season of 2019 there were no production restrictions given the higher local gas supply derived from non–conventional gas developments.
 
Liquids production in 2018 reached 1,171,806 short tons, an increase of 169,949 short tons or 17%, with respect to Liquids production in 2017. This increase was mainly due to higher ethane took by PBB.
 
In 2019, we were the second ethane producer behind MEGA, and our market share increased to more than 40% of the total ethane produced in Argentina in that year. The graphs below show our share in total propane and butane production in Argentina during 2019:

 
On October 12, 2018, through a joint bidding process with MEGA, we awarded Geogas Trading S.A. an export contract for LPG for the period of October 19, 2018, to March 30, 2019. As in previous contracts, the price was determined at the international reference price (Mont Belvieu) plus a fixed price per ton sold. The performance of the joint adjudication process with MEGA allowed us to obtain an improvement in the fixed price and to optimize the logistics management of cargo of the ships.
 
After the end of the aforementioned contract, between the months of April and December, we export propane and butane at spot prices, which allowed us to capture opportunities associated with different market niches, allowing to considerably increase the individual fixed prizes of each operation.
 
Regarding natural gasoline exports, for the period between February 1, 2019, and January 1, 2020, we entered with Petrobras Global Trading B.V. into a new agreement that improved commercial conditions. The sale price is calculated based on the NWE ARA price minus a fixed discount per ton sold. To guarantee continuity in the supply of this product, we renewed the agreement with Petrobras Global Trading B.V. for the period of February 1, 2020, to January 31, 2021.
 
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 much lower than exports by sea, they allow us to obtain a larger profit margin.
 
Our entire ethane production is sold to PBB through a long-term agreement signed on September 6, 2018. This agreement will expire on December 27, 2027 and includes, among other conditions, TOP and DOP commitments for minimum annual quantities of 308,644 short tons per year, which is 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. Pursuant to the current contract with PBB, in case of a default by PBB with respect to its TOP commitments, PBB will be required to compensate us.
 
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 47.6% in 2019, 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 primarily from exports.
 
Propane, butane and natural gasoline export prices in Argentina decreased 28.5%, 23.3% and 17.0%, respectively, in 2019 compared to the prices of such liquids in 2018. International reference prices fell during the first half of 2019, showing recovery signs as from the month of August. Due to global economic instability and the confrontation between the main oil producers in the world, the reference price of propane, butane and natural gasoline fell approximately 41.6%, 56.2% and 74.2%, respectively.
 
In 2019, our export revenues from the Liquids Production and Commercialization segment were Ps. 9,144.9 million and represented 18.8% of our total net revenues and 39.5% of our liquids production and commercialization revenues. Additionally, the total volume of sales from Liquids was 1,146,825 short tons, and the volume of sales from Liquids exports was 439,650 short tons, representing 38.3% of our total liquids sales volumes.
 
The annual sales of our Cerri Complex for 2019, 2018 and 2017 in short tons were as follows:
 
  2019  2018  2017 
Ethane
  
312,651
   
437,362
   
311,786
 
Propane
  
416,519
   
334,852
   
353,561
 
Butane
  
287,083
   
260,761
   
260,171
 
Natural Gasoline
  
130,572
   
132,311
   
133,802
 
Total  1,146,825   1,165,286   1,059,319 
 
We anticipate 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.
 
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.
 
On March 9, 2005, the Government enacted Law No. 26,020, which set forth the regulatory framework for LPG industry and commercialization. After its issuance, the Ministry of Energy established, through several subsequent resolutions, reference prices applicable to sales of LPG bottles.
 
On March 30, 2015, the Executive Branch issued Decree No. 470/2015, regulated by Resolution No. 49/2015 issued by the former Federal Energy Bureau, both creating the framework for selling LPG bottles (the “Households with Bottles Program”) which replaced the programs in force until that time.
 
The provisions of Law No. 26,020 set the sale prices of LPG for the local market and the SHR is the body that periodically determines the minimum volume of product that each producer must allocate for commercialization in order to ensure domestic supply. The former Federal Energy Bureau established, through several resolutions, reference prices applicable to sales of LPG containers of less than 45 kilograms and to wholesale LPG sales exclusively to LPG retailers (fraccionadores).
 
Under the Households with Bottles Program the Ministry of Energy regulates the price and the quantity of LPG sold in the domestic market by each LPG producer. For the year 2016 and the first quarter of 2017, the price for butane was established by Resolution No. 70/2015 at Ps. 650 per ton. During 2017, the Ministry of Energy issued Resolutions No. 56-E/2017 and No. 287-E/2017, setting the prices at Ps. 2,568 per ton of butane and Ps. 2,410 per ton of propane as of April 2017 and at Ps. 4,302 per ton of butane and Ps. 4,290 per ton of propane as of December 1, 2017. The compensation received from the Ministry of Energy was Ps. 550 per ton of butane from April 2015 through March 2018.
 
Afterwards, on March 27, 2018, the SHR issued Resolution No. 5/2018 increasing the price paid under the Households with Bottles Program to Ps. 5,416 per ton of butane and Ps. 5,502 per ton of propane, effective as of April 1, 2018.
 
During 2019, the Government introduced several amendments to the prices of the products commercialized under the Households with Bottles Program. The prices per ton of butane and propane increased as follows: (i) from February 1, 2019 to May 10, 2019, to Ps. 9,154 and Ps. 9,042 respectively, (ii) from May 10, 2019 to June 30, 2019, to Ps. 9,327 and Ps. 9,213 respectively, and (iii) since July 1, 2019, to Ps. 9,895 and Ps. 9,656 respectively. Furthermore, since February 1, 2019 the compensation received through the Households with Bottles Program was completely eliminated.
 
The Households with Bottles Program requires us to produce, under certain circumstances, and market the LPG volumes required by the Ministry of Energy at prices significantly below the market. This requirement might prevent 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 enjoin the requirement that we sell products with negative operating margins for an extended period. On June 3, 2015, we filed a motion for reconsideration regarding the volumes of LPG that we were required to provide in 2015 under the Households with Bottles Program. In addition, on August 18, 2015, we filed a lawsuit to overturn Resolutions No. 49/15 and 70/15 which implemented the Households with Bottles Program and required us to sell products below their international reference prices. Since the Macri administration took office, prices of products sold under the Households with Bottles Program have been adjusted and we did not continue pursuing legal actions against Resolutions No. 49/15 and 70/15.
 
On March 16, 2015, through Resolution No. 36/2015, which modified Resolution No. 792/05, the Ministry of Energy set the method to calculate the LPG export parity that would be updated monthly by this agency. These modifications generated an increase in the prices at which the LPG is sold in the local market to those customers who do not fall under the Households with Bottles Program and the Propane for Networks Agreement.
 
Since the Propane for Networks Agreement was signed between the Government and producers of LPG, including us, in 2003, we have complied with our commitments under that agreement. Pursuant to the Propane for Networks Agreement, which has been extended several times, 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 LPG export parity price published monthly by the Ministry of Energy. The compensation is calculated on a monthly basis.
 
In May 2018, we signed the sixteenth extension of the Propane for Networks Agreement, which served as a framework for the marketing of the products stipulated therein for the period from April 1, 2018 to December 31, 2019. Additionally, this extension established the price at which propane intended for this program concept will be sold to the customer. As of the date of this Annual Report, a new agreement has not been concluded. Notwithstanding the foregoing, on January 14, 2020 we received an instruction from the Ministry of Energy to deliver propane in accordance with the conditions of the sixteenth extension of the Propane for Networks Agreement, and such authority expressed that it will take actions to uphold the Propane for Networks Agreement until at least June 30, 2020.
 
The Government compensates us for our participation in the Propane for Networks Agreement. Although we have not received this payment in a timely manner, collections improved in 2017, 2018 and 2019. As of December 31, 2019, we had Ps. 143.8 million in receivables against the Government in connection with the Households with Bottles Program and the Propane for Networks Agreement.
 
International market
 
In the international market, we commercialize propane, butane and natural gasoline to international traders and other clients.
 
On September 4, 2018, through Decree No. 793/2018, an additional 12% withholding tax on exports was established for consumption of all merchandise, with the maximum limits of Ps. 4 per U.S. dollar for primary goods and Ps. 3 per U.S. dollar for the processed ones. This measure was set on a transitory basis until December 31, 2020.
 
On September 28, 2018, Decree No. 865/2018 was issued and established modifications to Decree No. 793/2018. In accordance with such decree, the export duty may not exceed Ps. 4 for each U.S. dollar of the taxable value, including the amount that the application of the aliquot, or the official free on board price, as applicable, provides. For merchandise included in the common customs nomenclature of the MERCOSUR tariffs will not exceed Ps. 3 for each U.S. dollar of the taxable value, including the amount that the application of the aliquot or the official free on board price, as appropriate, provides. If these limits are applied, they will remain in Ps. until the cancellation of the obligation.
 
Environment
 
In addition to this sector-specific regulation, we must comply with the environmental legislation set by each of the seven provinces where the high-pressure trunk gas pipeline system runs.
 
Our production and liquid storage facilities are subject to Law No. 11,459 of industrial establishment of Buenos Aires. Additionally, we must comply with all environmental legislation issued by the province, which includes laws and regulations of gas emissions, waste emissions, use of public waters and return of effluents, among others. Both facilities in the Cerri Complex and Puerto Galván have valid environmental certificates.
 
Competition
 
The construction and operation of natural gas processing plants located in the Province of Neuquén have represented important competition for our Liquids sector, since our customers could satisfy their product demand with alternative suppliers. This competition was finally mitigated by entering into agreements with natural gas producers that limited their ability to make investments in natural gas processing plants.
 
For example, 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’s activity. 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.
 
Formerly, 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 of taking 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 and the contracts in effect do not limit the ability of gas producers to build natural gas processing plants upstream of the Cerri Complex during the term of the agreement. 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 business 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, as well as services related to pipeline and compression plant construction, operation and maintenance of pipelines and compressor plants services, and steam generation for electricity production. 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.
 
This business segment includes the transportation and all related services provided in Vaca Muerta after the important project carried out during 2019 which allow us to comply with the agreements signed with the main natural gas producers in the area.
 
In addition, we provide operation and maintenance of pipelines services to our affiliate Gas Link S.A. (“Link”).
 
In September 2017, the UT Río Neuquén was created by YPF, Pampa Energía and Petrobras Brasil, to expand for the next ten years, the services provided at the Río Neuquén Plant. A natural gas dehydration unit with capacity of 71 MMcf/d has been installed and several minor modifications in the plant have been performed.
 
As for the construction services, the connection of the natural gas supply of the General Rojo thermal power plant to the DVS Construcciones S.A. firm was completed in May 2017 and the gas supply work of the Spegazzini thermal power plant, belonging to Generación Mediterránea S.A., was completed in August 2017.
 
We have entered into an UT with SACDE for the purpose of participating jointly in the National Public Bid No. 452-0004-LPU17: Assembly of Pipes for the Construction of the Project “Expansion of the Natural Gas Transportation and Distribution System”. As a result of this bid, the Ministry of Mines and Energy awarded to the aforementioned UT the construction of the Regional II-Recreo/Rafaela/Sunchales Regional Gas Pipeline. As of the date of issuance of this Annual report, construction works are still in progress.
 
Furthermore, we aim to have a leading role in the development of the energy sector of Argentina. In this sense, we developed the projects of the Southern Section and Northern Section in the Vaca Muerta fields. To make these investments viable, we executed agreements with various natural gas producers and hired treatment of natural gas services for a period of 10 years.
 
The total investment in both the Northern Section and the Southern Section was U.S.$260 million, and may amount to up to U.S.$800 million with the expansion of the natural gas reserve plant serving Vaca Muerta and other areas of the Neuquina basin. The plant will capture and transport the natural gas production of eight hydrocarbon areas adjacent to Vaca Muerta. The Northern Section and Southern Section will provide the infrastructure to transport and condition the production of natural gas for its entry into the transportation systems through 91 miles. The natural gas pipelines have a transportation capacity of 2.2 Bcf/d and the modular conditioning plant has a capacity of 176.6 MMcf/d in its initial stage.
 
Additionally, in February 2020, we approved a project to expand the plant located in Tratayén. The execution term of this project is for one year—works are expected to commence in the fourth quarter of 2020— and will require a U.S.$15 million investment. This project will consist of a 42.4 MMcf/d increase in the plant’s treatment capacity, the installation of a butane extraction unit and the building of facilities for liquids storage and dispatch. This project is expected to improve the profitability of our investment and we believe will generate business alternatives required for the sustainable development of the area by natural gas producers.
 
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 line with our mid- and long-term business consolidation strategy, Telcosur signed agreements with new clients and extended or renewed current agreements. With the technological update of the main Cerri-Río Grande telecommunications system in 2019, we have completed the update of the whole telecommunications system, as in 2018 we had finished the section Buenos Aires – Bahía Blanca – Neuquén.
 
We have also expanded the video surveillance system, digital signage at the office, plants and bases and Wi-Fi at the Cerri Complex. These achievements will improve our connectivity and will enable us to render services to oil and gas producers and service companies in Vaca Muerta.
 
C. Organizational Structure
 
The following is a summary diagram of our subsidiaries and affiliates as of March 31, 2020, including information about ownership and location:
 


(1)
Incorporated in Argentina.
(2)
Incorporated in Uruguay.

As of the date of this Annual Report, we are performing the formal steps to liquidate Emprendimientos de Gas del Sur S.A. (“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 operated under the License on an exclusive basis. 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/square inch. 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. Such performance also maintains and verifies 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.
 
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, 2019, 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   24/30   853/995   59   17   512,800 
Neuba I/Loop Sur  1,217   24/30   853   18   6   65,800 
Neuba II  1,307   30/36   975/995   21   7   194,000 
Other (1)
  273  Various  Various   6   3   7,500 
Total  5,736           104   33   780,100 


(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.

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 the northern Santa Cruz and southern Chubut Provinces. The natural gas pipeline primarily 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. As part of the works scheduled to be completed in the Five-Year Plan, we are executing the construction of a compressor plant in the town of Confluencia, Neuquén Province, which will allow the Neuba I gas pipeline to be interconnected with the Neuba II pipeline and thus grant a greater degree of flexibility to the operation of the natural gas transport system.
 
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.
 
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 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 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 direct current 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.
 
Measurement and Control of the Transport System
 
To guarantee the reliability of the facilities and optimize the operation of the transport system, it is necessary to have real-time information from the various measurement and control devices installed throughout our more than 5,705 miles of gas pipelines and 32 compressor plants.
 
To that effect, we have fiscal measurement stations associated with gas receptions from producer facilities and gas deliveries to our distributors or customers, in addition to the mediation equipment installed in the compressor plants to determine the volumes of pumped gas, fuel and other variables of operational interest.
 
All the information generated by the field devices is collected by our SCADA/EFM system, transmitted through our communications infrastructure and centralized at our headquarters. The fiscal mediation information contains volumes and quality of gas, which is collected by the SCADA/EFM system and saved in a database for further processing by other corporate systems.
 
In addition, the information is shared in real time with producers, distributors and ENARGAS in order to ensure the required auditability and transparency.
 
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 Measurement (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 (“Liquids Production and Commercialization”). 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 68,882 short tons of liquids. See “—Item 4. Our information —B. Business Overview—Liquids Production and Commercialization” above.
 
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 206.6 MMcf/d and a total compression capacity of 34,790 HP, respectively.
 
Throughout the year 2019, we successfully concluded assembly and pressurization works of an important Vaca Muerta project that involved an aggregate investment of U.S.$ 260 million and will be pivotal in the development of Vaca Muerta natural gas reserves. The execution of these works demanded great commitment from our team and compliance with all the terms agreed with our customers. The Vaca Muerta project was executed in three stages:
 
•          Milestone 1: on April 30, 2019, we finished the construction of the southern section of the Vaca Muerta pipeline, its connection to the northern Vaca Muerta pipeline and the segment that extends from connection to the project’s conditioning plant (the construction of which is still ongoing) located in the city of Tratayén, Province of Neuquén. In addition, both an early conditioning plant (integrated to the definite conditioning plant) and the plant connection to the Neuba I pipeline began operations.
 
•          Milestone 2: on November 3, 2019, the northern section of the Vaca Muerta pipeline began operations, connecting the Rincón la Ceniza field with the southern section of the Vaca Muerta pipeline.
 
•          Milestone 3: on December 12, 2019, the northern section of the Vaca Muerta pipeline began operations, extending from the Los Toldos I South field to Rincón la Ceniza, connected with the section previously started. The completion of this section, represented the completion of the northern section of the Vaca Muerta pipeline.
 
This pipeline system goes through several hydrocarbon fields, including Bajada de Añelo, La Calera, Rincón la Ceniza, Los Toldos I Sur and Pampa de las Yeguas I and II. The following map shows the location of the Vaca Muerta pipeline.


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 Buenos Aires–Bahía Blanca–Neuquén routes to the West and the Buenos Aires–Bahía Blanca–Comodoro Rivadavia–Río Grande routes to the South, and (ii) a dark fiber optic network of approximately 1,056 miles, which covers the La Plata–Buenos Aires–Rosario–Córdoba–San Luis–Mendoza routes. There is also a network in the Patagonia region, which consists of a “lit” fiber optic network of approximately 374 miles, which covers the Puerto Madryn–Pico Truncado route.
 
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 Bahía Blanca–Puerto Madryn route; 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.
 
Environmental and Sustainability Policy
 
Our safety and environment policy establishes a commitment of compliance with the applicable legislation in environmental matters, the prevention of pollution and the continuous improvement of its Sistema de Gestión Integrado (“SGI”). This commitment extends not only to our personnel, but also to contractors who work for, or provide services to, us.
 
Aligned with our safety and environment policy, we implemented an environmental management system, which is integrated with quality, safety and occupational health management. The SGI is certified according to ISO 9001, ISO 14001 and OHSAS 18001. Described in this framework are the processes that make up environmental management and the responsibilities and procedures associated with each of them.
 
A requirement of fundamental importance for us is to guarantee compliance with applicable environmental legislation, both in regulatory matters and at the level of the different jurisdictions in which we operate. To put it into practice, we have specific procedures that establish the obligations related to specific areas and a strategy to monitor the requirements of the authorities that allow for the maintenance of the environmental permits necessary to operate. In the case of projects, the environmental impact assessment is carried out following the requirements of Argentine natural gas rule 153 (“NAG153”), and any other applicable requirement requested by each local authority. The projects are carried out following the guidelines of the environmental protection plans that arise from the evaluation process.
 
In the framework of strengthening sustainability management, progress was made in the first stage of our environmental improvement program (the “Environmental Improvement Program”), with the aim of managing projects that reduce the environmental impact of our operations. A series of projects focused on optimizing the measurements of environmental variables was carried out in order to have a baseline on which to set objectives associated with improvement projects, such as the calculation of the Company’s carbon footprint, and the balance of energy efficiency in the Cerri Complex, Galván Plant and headquarters. We continue to evaluate technical alternatives with the goal of achieving “zero effluent” in the Cerri Complex.
 
Environmental performance is monitored through indicators that show trends in the main variables and serve as a basis to evidence the process of continuous improvement. In turn, the adequacy of the SGI in relation to the certified standards is verified through an annual program of internal audits.
 
We recognize that caring for the environment in the communities, where we carry out our activities, is essential to the strength of our business. We understand that business success is based on the ability to be recognized for operational efficiency, social responsibility and a commitment as a local company.
 
The Environmental Improvement Program aims to implement projects through interdisciplinary teams that allow us to know/validate the current situation of some of our environmental impacts. These validations will establish the baseline on which future improvements and investments will be calculated. The impacts considered are gaseous emissions, liquid effluents and energy consumption.
 
The work methodology consists of collecting information and having reliable data that allows us to obtain gas emission inventories, liquid effluent reduction plans and measures for the most efficient use of energy.
 
The Environmental Improvement Program seeks to reduce negative environmental impacts and avoid lawsuits for environmental issues and non-compliance with legislation. In order to meet its objectives, the following projects have been developed:
 

inventory of gaseous emissions;
 

monitoring of gaseous emissions from the Cerri Complex;
 

zero effluent in the Cerri Complex;
 

diagnosis of energy efficiency in the Cerri Complex, Puerto Galván and our headquarters;
 

measurement of the vents generated by the use of seals; and
 

sewage effluent treatment plant in Plaza Huincul.
 
Prevention and Control of Impacts on the Environment
 
We have a database that evaluates all activities that may have a significant impact on the environment or risks to the health and safety of our staff and contractors.
 
The main environmental factors affecting our operations are related to emissions to the atmosphere (including methane and combustion gases), generation of waste, environmental noise, and archaeological or paleontological findings. To assess the respective risk, all of these factors are evaluated based on the probability of occurrence and the magnitude of the damage that such factor could cause. Those environmental factors have one or more control procedures to guarantee our adequate operation.
 
In order to produce a planned response and an operational method in the event of an incident, emergency or crisis, we issued a crisis plan and particular emergency plans for each site. These plans take into account the possible impact on the community, the environment and the availability of external support services. In particular, in the Cerri Complex of Bahía Blanca, we participate in the Awareness and Preparedness for Emergencies at Local Level Plan (APPEL Plan), a process of awareness and preparation for emergencies designed by the United Nations, which seeks to provide organized responses in the event of major technological accidents. The objective is to protect the community from human and material losses, as well as to avoid damage to the environment, by preparing a coordinated emergency plan. This program is distinguished from other community experiences of self-protection given it requires the active participation of the community, local government authorities and the industry. In the case of the Galván Plant, the National Contingency Plan (PLANACON) is applied, aimed at responding to environmental emergencies in port areas and with jurisdiction of Prefectura Naval Argentina. It focuses on the mitigation of possible spills of dangerous substances, for which simulations are carried out and a company qualified for a response to spills is hired.
 
Insurance
 
We maintain insurance, subject to deductibles, against third-party liability for damage to all of our facilities used in the Liquids and Other Services business segments and 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 to 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.
 
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 2019, 2018 and 2017 relate to the fiscal years ended December 31, 2019, 2018 and 2017, respectively.
 
We maintain our accounting books and records in pesos. Our Financial Statements as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017 have been prepared in accordance with the accounting policies based on IFRS as issued by the IASB.
 
Our management considers that there is sufficient evidence to conclude that Argentina is a hyperinflationary economy in terms of IAS 29, effective as of July 1, 2018. As a result, (i) our audited consolidated statements of financial position as of December 31, 2019, and our audited consolidated statements of comprehensive income, changes in equity and cash flows, and the related explanatory notes for the year ended December 31, 2019, included elsewhere in this Annual Report have been prepared using hyperinflation accounting in accordance with IAS 29, and (ii) our audited consolidated statements of financial position as of December 31, 2018, and our audited consolidated statements of comprehensive income, changes in equity and cash flows, and the related explanatory notes for the years ended December 31, 2018 and 2017, included elsewhere in this Annual Report have been restated to Constant Currency in accordance with IAS 29 for comparative purposes. Thus, the Financial Statements and the financial information included in this Annual Report for all the periods reported are presented on the basis of constant pesos as of December 31, 2019.
 
For information relating to the presentation of financial information, see “Presentation of Financial and Other Information.
 
Critical Accounting Policies and Estimates
 
Critical accounting policies are those that are most important to the portrayal of our 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. 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 at the end of each reporting period, 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. Subsequent to the reporting period, there have been changes in the global and Argentinean economy as a consequence of COVID. Thus, it is reasonable that our estimates made at December 31, 2019 could change as the negative consequences over our results of operations and financial condition.
 
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:
 

impairment of property, plant and equipment (“PPE”);
 

provisions for legal claims and others; and
 

income tax – deferred tax assets and tax credits.
 
Impairment of property, plant and equipment
 
We consider each of our business segments to be a single cash generating unit (“CGU”). Accordingly, we evaluate the carrying value of our PPE 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.
 
When assessing whether an impairment indicator may exist, we evaluate both internal and external sources of information, such as the following:
 

whether significant decreases in the market values of PPE elements took place;
 

whether prices of the main products and services that are marketed decreased;
 

whether significant changes in the regulatory framework were introduced;
 

whether operating costs suffered a material increase;
 

whether evidence of obsolescence or physical damage has occurred; and
 

whether the macroeconomic situation in which we carry out our activities, including significant variations in the sale prices of products, raw materials, interest rates, etc., has worsened.

Since August 2019, the main macroeconomic and business variables of Argentina suffered a significant deterioration which led the Government to take measures affecting the regulatory framework of the Natural Gas Transportation segment (see “Item 3. Key Information. D. Risk Factors. Risk Related to Argentina”). We consider the macroeconomic situation of Argentina and the measures taken by the Government in response thereof as indicators of impairment to determine the carrying value of our PPE for impairment.
 
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 the cost of natural gas used to produce such liquids; (ii) for assets associated with the Natural Gas Transportation segment, estimates of future tariff adjustments and the recognition of cost adjustments; and (iii) for all of our assets, (x) projections of the future costs to be incurred, and (y) forecasts of macroeconomic variables such as interest rates, inflation, and foreign exchange rates; and (iii) for assets associated with Other Services segment, which mainly includes the pipeline and conditioning plant built in the Vaca Muerta area, future expectation of the need of Vaca Muerta gas producers to evacuate untreated natural gas. The discount rate is based on our weighted average cost of capital (“WACC”).
 
Due to the uncertainties surrounding the tariff renegotiation process as described in “Item 4. Our Information - B. Business Overview – Natural Gas Transportation – Tariff Situation”, 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. For this reason, we performed probability-weighted analysis as to the cash flow assumptions considered in performing an impairment test of our natural gas transportation business. We considered three different scenarios. Two of them considered that the RTI process includes different tariff increases: an optimistic scenario and a base scenario. The remaining scenario assumes there is not any RTI Process but we received a limited tariff increase, the pessimistic scenario, considering an inflation index as from the last quarter of 2020.
 
As of December 31, 2019, we assigned a probability of occurrence to the optimistic, base and pessimistic scenarios of 20%, 50% and 30%, respectively.
 
In performing the analysis of our natural gas transportation segment, we based on: (i) the status of negotiations with the Government, (ii) the contractual rights derived from the License, (iii) management´s expectations regarding the procedures and actions initiated, (iv) our expectations regarding new RTI process required by the Argentine Government and (v) the impact of a cost monitoring scheme that allows the realization of semiannual adjustments to current tariffs. The resulting probability-weighted scenario was compared with the book value of the assets used in our Natural Gas Transportation segment.
 
In addition, we have performed a sensitivity analysis of the probability of occurrence of each scenario and we concluded that an increase of up to 70 percentage points in the weighted probability of the pessimistic case (from 30% to 100%) and a reduction in the probability of occurrence of the optimistic scenario and in the probability of occurrence of the base scenario (reducing each to zero) would not generate a value that would require an adjustment in carrying amount for impairment.
 
In performing the analysis for the Production and Commercialization of Liquids segment, we based it on, among others, future evolution of international liquid prices based on available public information, and projections of the future costs to be incurred to acquire natural gas for gas processing.
 
In performing the analysis for the Other Services segment, we based it on, among others, future expectation of the need of Vaca Muerta gas producers to evacuate untreated natural gas to extend the current firm shipping contracts, and projections of the contractual tariffs based on international inflation index.
 
Based on the foregoing, we did not identify the need for any impairment of the PPE amounts as of December 31, 2019.
 
The estimated recoverable values are sensitive to variation of the assumptions used in our impairment analysis, including the determination of future tariffs to be negotiated with the Government for our Natural Gas Transportation business segment and the expectation of the development of Vaca Muerta gas fields on our Other Services business segment. Therefore, significant differences could arise in relation to the estimated values in use.
 
Regarding the effects on the recoverable values of PPE given the subsequent events occurred after year-end, the Company is in process of adapting its business projections as new information arises in relation to the negative impact of the decline in the Argentine macroeconomic conditions subsequent to December 31, 2019 and the known effects of the COVID on our business.
 
During the first quarter of 2020, the natural gas liquid prices has fallen sharply in large part due to the impact of the international spread of COVID and geopolitical factors. Also, in light of the international macroeconomic uncertainties and the measures took by the Government, the main Argentine macroeconomics suffered a deterioration. For additional information see “Item 3. Key Information. – D. Risk factors – Risk Related to Argentina.” Thus, we have considered these events provided evidence of a deterioration of our PPE assets subsequent to year-end.
 
In the Natural Gas Transportation segment, a less favorable scenario is being considered taking into account the current regulatory framework and the measures taken by the Argentine Government subsequent to year-end, which implied that the current tariffs would not be adjusted in line with the estimated future inflation during 2020.
 
In the Production and Commercialization of Liquids segment, we are considering the current drop of future international liquid prices based on available public information.
 
In any case, we cannot assure with certainty that actual cash flows will be in line with the assumptions applied. Therefore, significant differences could arise in the future in relation to the estimated values in use.
 
No impairment indicators were identified during the years ended December 31, 2018 and 2017.
 
Provisions for Legal Claims and Others
 
We have certain contingent liabilities with respect to legal and regulatory proceedings. We accrue liabilities at the expected cancellation value when it is more likely than not that future expenses will be incurred and such expenses can be reasonably estimated. Such provisions are based on developments as of the time the provisions 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 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; and
 

the impact that recognizing or reversing 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 asset
 
Deferred income tax assets are measured at an undiscounted nominal value at the tax rates that are expected to apply in the year when the asset is realized, based on tax rates and tax laws that have been enacted or substantively enacted at the reporting period rate.
 
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 booked 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 macroeconomic variables affecting the business.
 
On December 29, 2017, the Executive Branch promulgated and put into effect the Tax Reform. Among other things, this reform establishes a gradual reduction of the applicable rate for the calculation of income tax, being 35%, 30% and 25% for fiscal periods 2017, 2018 through 2019 and 2020 onwards, respectively.
 
The Solidarity Law suspended until fiscal years beginning on January 1, 2021 inclusive, the 25% reduction of the applicable rate and the withholding of 13% on dividends. For additional information see “Item 10. Additional Information. E. Taxation.”
 
Since these regulations were in full force, for the calculation of deferred assets and liabilities, we estimate the reversal of the deferred items and the tax rates applicable in the period in which the asset is expected to be realized or the liability is expected to be canceled.
 
As of December 31, 2019 and 2018, we do not maintain any income tax loss carry-forward.
 
Factors Affecting Our Consolidated Results of Operations
 
As we are an Argentine corporation (sociedad anónima) and all of our operations and 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. Moreover, as a provider of a regulated service and producer of hydrocarbons, the prices of our services and products are subject to significant intervention by the Government. In particular, these factors affect our operating costs and revenues.
 
For the year ended December 31, 2019, 47.6% and 46.6% 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 macroeconomic indicators in Argentina during the years specified below, as reported by official sources.

  2019  2018  2017  2016  2015 
WPI (in %) (1)
  58.5   73.5   18.8   34.6   10.6 
CPI (in %)(2)
  53.8   47.6   24.8   36.1   23.6 
Devaluation of pesos vs. dollar (in %)  58.9   102.2   17.4   9.3   52.5 
Real GDP (pesos of 2004) (% change)  (2.2)  (2.5)  2.7   (2.1)  2.7 
Industrial production (% change)  1.3   (14.8)  1.8   (4.6)  0.1 
Transportation services tariffs increase  26.0   79.5   182.0   200.1   44.3 


(1)
For the year 2015, the latest information published by the INDEC refers to October 2015. This rate (which contains ten months accumulated), was complemented with CPI average rates as of November and December 2015 published by the Province of San Luis and the City of Buenos Aires (7.8%).
(2)
Since June 2016, the INDEC began to gradually publish CPI information for the period commencing in May 2016 and concluding in December 2016. As of the date of issuance of this Annual Report the CPI for the first four months of 2016 has not been published. As a consequence of the lack of information, we completed the missing information with CPI average rates for these four months published by the Province of San Luis and the City of Buenos Aires (16.6%).
Source: INDEC, Banco Nación Argentina, Statistical Agencies for the Province of San Luis and the City of Buenos Aires.
 
Before 2016, 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 our Natural Gas Transportation segment.
 
2019 was impacted by the national, provincial and municipal elections after which the candidate of the “Frente para Todos” political party, Alberto Fernández, was elected president and began his four-year term on December 10, 2019. The presidential elections have generated high levels of political and economic volatility. Combined with external factors, the main variables of the economy were negatively impacted during the year 2019, which have worsened in 2020 as a result of the impact of COVID.
 
The exchange rate continued its upward trend closing at Ps. 59.89 for each U.S. dollar as of December 31, 2019 from Ps. 37.70 at the end of 2018 (representing a 58.9% devaluation). In particular, the peso depreciated 33.4% against the U.S. dollar in a single day immediately after the primary elections held in August 9, 2019.
 
From that moment, the Government was unable to renew the maturities of its short-term debt causing a significant fall in the price of Argentine financial assets and dollar deposits.
 
Encouraged by global uncertainty the risk premium paid by the Argentine debt, measured by the Emerging Markets Bond Index and prepared by J.P. Morgan, increased significantly as from September 2019, reaching the highest levels since the financial crisis of 2008.
 
The reserve stock of the BCRA decreased to U.S.$45,190 million in December 2019 from U.S.$65,806 million in December 2018. On August 29, 2019, the Executive Branch issued Decree No. 596/2019 by which the maturities of certain short-term debt securities (“Letes”, “Lecaps”, “Lecer” and “Lelink”) were postponed, through an extension of their maturities, without affecting capital or interest rates.
 
Additionally, as of the issuance of Communication “A” 6770 by the BCRA, restrictions were established in the foreign exchange market effective as of September 1, 2019, providing deadlines for entering and liquidating exports and requiring authorizations from the BCRA for payment of debts to related companies abroad.
 
Thus, several macroeconomic indicators showed a significant deterioration in the economy such as the acceleration of inflation, and a fall in the industrial production and consumption.
 
In this context and after the beginning of President Alberto Fernández’s term, on December 23, 2019, the National Congress passed the Solidarity Law. Said law, on the basis of the public emergency, grants the Executive Branch broad legislative powers to create the necessary conditions for economic recovery and achieve fiscal sustainability.
 
Among the measures adopted by this law are, among others:
 
1. Provisions regarding sovereign debt through which the Executive Branch is empowered to carry out the negotiations and make the necessary decisions to achieve the renegotiation of the Argentine public debt.
 
2. Freezing and tariff review of transportation and distribution services of natural gas and electric power (for more information, see “Item 4. Our Information. B. Business overview. Natural Gas Transportation. Regulatory Framework.”).
 
3. Establishment of a cap on the export rights of hydrocarbons.
 
4. Establishment of a regime of regularization of tax, social security and customs obligations.
 
5. Tax modifications in relation to personal property tax, financial income, earnings, on bank and internal credits and debits.
 
6. Creation of the tax for an inclusive and solidarity Argentina that taxes foreign currency acquisition operations for treasury, acquisition of goods and services and tourism.
 
7. Modifications to customs taxes.
 
Year to year fluctuations in our net income are a result of a combination of factors, including primarily:
 

the volume of Liquids;
 

changes in international prices of LPG and natural gasoline (in 2020 their outlook remains precarious principally as a consequence of the uncertainty regarding the effect of the COVID outbreak);
 

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 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 pesos; and
 

other changes in laws or regulations affecting our operations, including tax matters.
 
Consideration of the Effects of Inflation and Restatement of Financial Statements
 
Argentina has faced and continues to face inflationary pressures. During periods of high inflation, effective wages and salaries tend to fall and consumers adjust their consumption patterns to eliminate unnecessary expenses. The increase in inflationary risk may erode macroeconomic growth and further limit the availability of financing, causing a negative impact on our operations. Inflation increases also have a negative impact on our cost of sales, selling expenses and administrative expenses. We cannot give any assurance that increased costs as a result of inflation will be offset in whole or in part with increases in prices of our products and services.
 
In January 2007, the INDEC modified its methodology for calculating the CPI in order to reflect the CPI for the greater 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 Government to decide to discontinue the publication of the IPCNu.
 
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. 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 recalculate CPI for those months.
 
IAS 29 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 measurement 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 three years’ approaches or exceeds 100%.
 
In order to evaluate the aforementioned quantitative condition, and also to restate the financial statements, the CNV has established that the series of indexes to be used for the application of IAS 29 is determined by the FACPCE. This series of indexes combines the CPI as of January 2017 (base month: December 2016) with the WPI, both published by the INDEC until that date, computing for the months of November and December 2015, for which there is no information from the INDEC on the evolution of the WPI, the variation in the CPI of the Autonomous City of Buenos Aires.
 
Considering the aforementioned index, inflation was 53.8%, 47.6% and 24.8% in the years ended December 31, 2019, 2018 and 2017, respectively.
 
The restatement method of IAS 29 provides that monetary assets and liabilities (those with a fixed nominal value in local currency) must not be restated since they are already expressed in the current unit of measurement at the end of the reporting period. In an inflationary period, maintaining monetary assets generates loss of purchasing power and maintaining monetary liabilities generates a gain in purchasing power, provided that such items are not subject to an adjustment mechanism that compensates to some extent for these effects. The monetary loss or gain is included in the result of the period reported, revealing this information in a separate line item.
 
Assets and liabilities subject to adjustments based on specific inflation agreements must be adjusted in accordance with such agreements. The non-monetary items measured at their current values at the end of the reporting period, such as the net realization value or others, do not need to be restated. The remaining non-monetary assets and liabilities must be (i) restated by applying a general price index and (ii) expressed in the measuring unit (the hyperinflationary currency) current at the end of the reporting period. Any restated non-monetary asset amount does not exceed its recoverable amount.
 
As of the IAS 29 transition date (January 1, 2016), we applied the following rules to express the shareholders’ equity accounts in the currency unit at December 31, 2019:
 

The components of the capital stock were restated from the dates they were contributed;
 

Reserved earnings were maintained at the date of transition at their nominal value (legal amount without restatement);
 

The restated unallocated results were determined by the difference between the net assets restated at the transition date and the rest of the initial equity components expressed as indicated in the preceding paragraphs; and
 

After the restatement at the transition date, all the components of the equity were restated by applying the general price index from the beginning of the period, and each variation of those components was restated from the date of contribution or from the moment in which the variation is added by any other means.
 
Revenues and expenses (including interest and foreign exchange differences) are restated from the date of their booking, except for those income statement items that reflect or include in their determination the consumption of assets measured in purchasing power of a date before the consumption booked, which are restated based on the date of origin of the asset to which the item is related (for example, depreciation and other consumption of assets valued at historical cost); and also those results that arise from comparing two measurements expressed in purchasing power currency of different dates, for which it is necessary to identify the amounts compared, restate them separately, and make the comparison, but with the amounts already restated.
 
Because Natural Gas Transportation business segment sales represented 46.6% of our total revenues during the years 2019, and are denominated in pesos, any further increase in the rate of inflation not accompanied by a parallel increase in our tariffs would decrease our revenues in real terms and adversely affect our results of operations. Further, as a consequence of the application of IAS 29, maintaining our net monetary liability position would generate a gain of purchasing power. This gain is booked in the statement of comprehensive income.
 
For additional information regarding the impact of the application of IAS 29, see Note 4.d to our Financial Statements included elsewhere in this Annual Report.
 
In addition, inflation may negatively affect income tax payable. For example, under hyperinflationary contexts, the existence of higher monetary liabilities over monetary assets will mean an increase in income tax payable. Act 27,468 substituted the WPI for the CPI for the calculation of the indexation adjustments for tax purposes, and it modified the standards for triggering the tax indexation procedure. During the three periods commencing on January 1, 2018, the tax indexation will apply if the variation of the CPI exceeds 55% in 2018, 30% in 2019 and 15% in 2020.
 
In order to calculate income tax payable, since the amendment of Law No. 27,541, one-sixth of the income tax inflation adjustment shall be computed in each fiscal year, and the remaining five-sixths shall be computed in equal parts, in the five immediately following fiscal years.
 
 During 2018, we did not reach the 55% threshold. Therefore, the inflation adjustment regime in such fiscal period did not apply. However, as of December 31, 2019, the accumulated variation of the CPI exceeds the threshold set for the application of the income tax inflation adjustment. For the year 2019, we recorded a loss of Ps. 1,998,487 in our Income Tax line item of our Statement of Comprehensive Income regarding the application of the above-mentioned tax inflation adjustment.
 
Outlook for 2020
 
Since the Macri administration took office on December 10, 2015, such administration had been taking different measures to enable Argentina to begin a path of sustainable growth, lower inflation, a reduction of the fiscal deficit, regaining access to credit markets, production of reliable statistics and correcting imbalances in the relative prices of certain goods and services in the economy. These measures included: (i) the issuance of Decree No. 55/2016, which declared a national statistic emergency and granted INDEC the necessary tools to restore international credibility regarding the indexes that it publishes; (ii) the relaxation of foreign exchange controls; (iii) the settlement of claims by holdout bondholders; (iv) the Tax Reform which reduced taxes for commercial companies and encourage private investment in Argentine economy; (v) the elimination or reduction of taxes on exports in order to improve the situation of regional economies; and (vi) the process of adjustment of public services rates, including those collected by the Natural Gas Transportation business segment.
 
In addition, on December 28, 2017, the Argentine Congress passed the Pension Reform Act, with the goal of improving the sustainability and predictability of Argentina’s pension program, while still protecting the most vulnerable persons. To that effect, the Pension Reform Act modified the basic formula for the periodic adjustment of retirements, pensions and the universal child allowance (Asignación Universal por Hijo).
 
The Pension Reform Act also modified Section 252 of Labor Act No. 20,744 by establishing that employers may request employees who have reached 70 years of age to initiate retirement proceedings (compared to age 65 under the prior regimen). Public sector employees are excluded from the foregoing provision.
 
The years 2018 and 2019 were marked by high macroeconomic volatility as a result of the impact of both external and internal factors on the main economy variables. The combination of international geopolitical tensions, the drought at the beginning of the year, uncertainty related to the monetary policy evolution, higher fiscal pressure and the Argentinean economy’s external vulnerability bred the conditions that led to the exchange crisis of April 2018. This occurred to such an extent that in 2018 the peso depreciated by 102%, reaching $37.70 per United States dollar as of December 31, 2018. The crisis exacerbated following the primary elections of August 2019, as the international markets casted doubt on Argentina’s debt sustainability. In view of this, the country risk indicator raised to 2,200 basis points topping off a depreciation of bond prices. Also, on August 29, 2019, by Decree No. 596/2019, the Government announced a debt profiling consisting of (i) an extension on the payment term for short-term local bonds, only for institutional investors that will receive the full payment in a term of three and six months (15% on the original maturity date, 25% and 60% at the third and sixth month of the original maturity date, respectively), but not for natural persons who acquired the bonds before July 31, 2019, who will receive full payment on the maturity date; (ii) a proposal to the Argentine Congress of a bill to extend the maturity dates of other local bonds, without reduction on the capital or interest; (iii) a proposal for an extension of the maturity dates of foreign bonds; and (iv) after achieving fiscal goals, the start of talks with the IMF in order to reprofile the deadlines to dispel the default risk in 2020 and 2023.
 
As a result of the foregoing, Argentina’s credit rating was downgraded in August 2019 and further downgraded in December 2019 to near-default status by both Fitch and S&P Global after the Government publicly stated that it would delay payments on its short-term dollar-denominated local debt.
 
Fitch cut Argentina’s long-term issuer rating two notches to “restricted default” from CC, after President Alberto Fernandez’s government announced by decree that it would extend payments on U.S.$ 9.1 billion in dollar-denominated Treasury bills until August 31, 2020. According to Fitch’s criteria, Argentina has defaulted on its sovereign obligations, and this development constitutes a ‘distressed debt exchange. S&P also downgraded Argentina’s credit rating to “selective default” from CCC-, while Moody’s foreign issuer rating for Argentina is Caa2.
 
The government’s decision to extend payments on its short-term notes constitutes the second such delay of payments in five months. In February 2020, the IMF has also publicly stated its concerns about the sustainability of Argentina’s public debt and suggested that a definitive debt operation—yielding a meaningful contribution from private creditors—is required to help restore debt sustainability with high probability. As of the date of this Annual Report, Argentina’s public debt load stands at U.S.$ 332 billion, including loans from the IMF. Outstanding debt with private bondholders is approximately U.S.$ 148 billion.
 
These factors contributed to a rapid retraction of economic activity since the second quarter of 2018. In general terms, most economic sectors were affected by this general macroeconomic retraction.
 
In this context, the national government announced a new fiscal adjustment program that would seek to restore public accounts and eliminate the primary fiscal deficit in 2020. As of October 1, 2018, the BCRA implemented a new monetary policy scheme with the aim of reducing inflation. Specifically, the BCRA commits to not increasing the monetary base level. The monetary goal is implemented through daily operations of liquidity notes with banks, the current rate of which is at around 65%.
 
In addition, beginning on 2020 there has been an outbreak of COVID which caused a global collapse in the demand of products and services as a consequence of the measures taken by countries in order to stop the spread of the disease. These measures also affected the supply of products, slowing the economy of European countries, China, and the United States, among others. Furthermore, in March 2020, there have been developments in the oil market that brought a huge degree of uncertainty, collapsing its price and the stock markets.
 
This fall in the international prices of oil and its derivatives, added to the fragile macroeconomic situation in Argentina, generate uncertainty regarding the productivity and development of natural gas in the country, especially in the Vaca Muerta area. Additionally, the global recession scenario due to the effect of COVID, caused a rapid drop in the price of the main commodities exported by Argentina, which considerably affects the country’s tax collection and its economic activity, generating a high degree of uncertainty regarding its economic development and the possibility of renegotiating its financial indebtedness.
 
As a response, to slow down the spread of COVID, the Government took a series of measures which, among others, included: (i) a country lockdown, (ii) adoption of public health policies to mitigate the impact of COVID in the population, (iii) the issuance of several economic measures to assist to different sectors affected by the virtual paralysis of the economic activity and (iv) the issuance of measures to reduce the impact on certain type of natural gas consumers. Thus, the energy sector has suffered a sharp decrease in its activity, leading by a significant decrease in its profitability and a deterioration in its chain of payment. Thus, natural gas distribution companies’ collections have been materially affected, which has affected our collections from them and creating important delays affecting our operating cash flow.
 
At the date of this Annual Report there is uncertainty regarding impact that these and other measures that the Government could take will have on key macroeconomic variables and particularly on the energy sector.
 
Further, we have seen macro-economic uncertainty with regards to prices and demand for oil, natural gas and LNG products. In this context, prices of propane, butane and natural gasoline decline 41.2%, 56.2% and 71.2%, respectively during the first quarter of 2020, negatively affecting our revenues and results of operations. It has negatively impacted on the net revenues of our Production and Commercialization of Liquids business segment.
 
In view of these circumstances, we have adopted a series of measures aimed at mitigating its negative effect on our results, financial position and balance sheet and guaranteeing the continuity of our operations. Among them:
 
• We have adopted all the measures provided by the Government in order to guarantee the health of our employees and the communities where we carry out our activities,
 
• We have reduced capital expenditures and operating and administration expenses, without affecting security tasks that allow us to operate the gas pipeline system in accordance with current regulations,
 
• We have implemented all those public health measures imposed by the authorities in order to make the operation in the Cerri Complex viable.
 
• We have suspended the execution of those works that do not affect the integrity of the gas pipeline system,
 
• Given the delays in collections and increasing of past due receivable amounts both in the Natural Gas Transportation segment and the decrease in our revenues, we have implemented a daily cash evolution control in order to make decisions depending on how it evolves.
 
As of the date of the issuance this Annual Report, our capital and financial resources, and overall liquidity position, have been somehow affected by the delay in the collections of some of our natural gas transportation customers and principally by the decrease in our Liquids sales due to the abrupt fall of the reference international prices in March 2020. Considering our current financial position and the measures taken above-mentioned we believe that we have sufficient resources to satisfy our current working capital needs and service our debt.
 
Notwithstanding the above-mentioned measures taken by us, the scale and duration of these developments remain uncertain but could impact our earnings, cash flow and financial condition which will depend on the severity of the health emergency and the success of the governmental measures taken and those that will be taken in the future.
 
While our business continued growing in 2019, our operating results, financial condition and cash flows remain vulnerable to fluctuations in the Argentine economy. See “Item 3—Key Information—Risk Factors—Risks Relating to Argentina.”
 
New accounting pronouncements adopted as of December 31, 2019
 
We have adopted IFRS 16 following the modified retrospective approach and have not restated comparative figures for previous reporting periods, as permitted under the specific transitional provisions in the standard. After the analysis performed by Management, no significant adjustments were made to the accumulated results or significant reclassifications were made at January 1, 2019. For additional information regarding the impact of the application of IFRS 16, see Note 4.a to our Financial Statements included elsewhere in this Annual Report.
 
New accounting pronouncements not adopted as of December 31, 2019
 
Amendments to IAS 1 and IAS 8 Regarding the Definition of Materiality
 
In October 2018 the IASB included certain amendments to IAS 1 “Presentation of financial statements” and IAS 8 “Accounting policies, changes in accounting estimates and errors” with the objective of clarifying the concept of materiality and aligning that definition with the amendments introduced in the Conceptual Framework.
 
Additionally, these amendments incorporate new concepts that help both financial statement preparers and their users to prepare and interpret the financial information included in them.
 
These amendments are applied on a prospective basis and are effective for annual periods beginning on or after January 1, 2020. Modifications to the concept of materiality are not expected to have a significant impact on the Company’s financial statements.
 
Discussion of Results of Operations for the Years Ended December 31, 2019 and 2018
 
The following table presents a summary of our consolidated results of operations for the years ended December 31, 2019 and 2018, stated in millions of pesos, and the increase or decrease and percentage of change between the periods presented:
 
  Year ended December 31,    
  2019  2018  Variation  
Percentage
of change
 
  (in millions of pesos) 
Revenues
  
48,561.5
   
52,399.4
   
(3,837.9
)
  
(7.3
)
Operating costs
  
(20,835.4
)
  
(21,894.5
)
  
1,149.1
   
(5.2
)
Depreciation
  
(3,540.1
)
  
(3,008.3
)
  
(531.8
)
  
17.7
 
Costs of sales
  
(24,375.5
)
  
(24,902.9
)
  
527.4
   
(2.1
)
Gross profit  24,186.0   27,496.5   (3,310.6)  (12.0)
Administrative and selling expenses
  
(4,299.9
)
  
(4,194.3
)
  
(105.6
)
  
2.5
 
Other operating loss
  
(127.5
)
  
(1,370.3
)
  
1,242.8
   
(90.7
)
Operating profit  19,758.6   21,932.0   (2,173.4)  (9.9)
Net financial results
  
(2,897.4
)
  
(4,378.5
)
  
1,481.0
   
(33.8
)
Share of (loss) / profit from associates
  
(31.9
)
  
28.0
   
(59.9
)
  
n/a
 
Income tax (expense)
  
(4,024.2
)
  
(20.3
)
  
(4,003.9
)
  
n/a
 
Total net income and total comprehensive income  
12,805.1
   
17,561.2
   (4,756.1)  (27.1)
 
Year 2019 Compared to Year 2018
 
Total comprehensive income
 
For the year ended December 31, 2019, we reported a total net income and a total comprehensive income of Ps. 12,805.1 million, which represents a Ps. 4,756.1 million decrease compared to the total net income and total comprehensive income of Ps. 17,561.2 million reported in 2018.
 
The material factors affecting total comprehensive income were as follows:
 

Net revenues to third parties reached Ps. 48,561.5 million, a decrease of Ps. 3,837.9 million compared to the 2018 fiscal year. This decrease was mainly due to lower net revenues from the Natural Gas Transportation and Liquids Production and Commercialization segments, which suffer a reduction 4.9% or Ps. 1,165.3 million and 9.5% or Ps. 2,440.2 million, respectively.
 

Cost of sales, including depreciation of fixed assets, decreased by Ps. 527.4 million, or 2.1% over 2018 fiscal year, primarily as a result of the decrease in the price and volumes of natural gas used as RTP totaling Ps. 1,059.5 million and lower technical assistance fee accrued of Ps. 881.5 million. These effects were partially offset by higher charges for the preservation of fixed assets, including depreciation of Ps. 1,140.8 million and labor costs of Ps. 260.7 million.
 

Administrative and selling expenses rose by Ps. 105.6 million, or 2.5% over 2018 fiscal year, as a result of the increase in the turnover tax and tax on exports of Ps. 392.2 million and labor costs of Ps. 92.2 million. These effects were partially offset by lower doubtful accounts charges by Ps. 201.5 million and lower depreciations of Ps. 255.9 million.

Cost of sales, administrative and selling expenses
 
Cost of sales for the years ended on December 31, 2019 and 2018, represented 50.2% and 47.5%, respectively, of net revenues reported in the corresponding year.
 
Administrative and selling expenses for the years ended on December 31, 2019 and 2018, represented 8.9% and 8.0%, respectively, of net revenues reported in the corresponding year.
 
See. “—Analysis of Operating Profit by Business Segment for the years ended December 31, 2019 and 2018.
 
Share of profit from associates
 
For the year ended December 31, 2019, we recorded a loss from our investment in associates of Ps. 31.9 million, compared to the profit of Ps. 28.0 million recorded in 2018.
 
Net Financial Results
 
In accordance with IAS 29 we presented the financial results in gross terms considering the effects of the change in the currency purchasing power in a single separate line (“Gain on monetary position”). Gains and losses from monetary positions represent the effects of inflation on our monetary liabilities and assets, respectively.
 
Net financial results for the years ended December 31, 2019 and 2018, are as follows:
 
  Year ended December 31, 
  2019  2018 
  (in millions of pesos) 
Financial income      
Interest income  
719.6
   
2,069.5
 
Foreign exchange gain  
7,815.6
   
12,559.2
 
Subtotal  8,535.1   14,628.7 
Financial expenses        
Interest expense  
(2,509.8
)
  
(2,577.4
)
Foreign exchange loss  
(15,636.5
)
  
(20,185.9
)
Capitalized financial expenses  
446.2
   
-
 
Subtotal  (17,700.1)  (22,763.3)
Other financial results        
Fair value gains on financial instruments through profit and loss  
542.2
   
2,112.0
 
Derivative financial instruments results  
(19.2
)
  
163.2
 
Other financial charges  
(409.7
)
  
(374.6
)
Subtotal  113.4   1,900.6 
Gain on monetary position  6,154.2   1,855.5 
Total  (2,897.4)  (4,378.5)
 
In accordance with the provisions of IAS 29, we opted to present the gain on the monetary position in a single line included in the financial results. This presentation implies that the nominal magnitudes of the financial results have been adjusted for inflation. The real magnitudes of financial results are different from the components of financial results presented above.
 
For fiscal year 2019, the financial results decreased by Ps. 1,481.0 million compared to previous year. This variation is mainly explained by the higher gain on monetary position of Ps. 4,298.7 million given an increase in net liability monetary position and the annual inflation rate (47.6% in 2018 compared to 53.8% in 2019). This effect was partially offset by lower interests generated by financial assets of Ps. 2,919.7 million and the negative foreign exchange rate variation of Ps. 194.3 million booked during fiscal year 2019 compared to 2018.
 
Income tax
 
Income tax for fiscal year 2019 was negative at Ps. 4,024.2 million, compared to a loss of Ps. 20.3 million in fiscal year 2018.
 
The higher charge for income tax for the year 2018 was due to the fact that we recognized, in that period, a reduction in the deferred tax liability generated by the future recognition benefit derived from higher property, plant and equipment depreciations as a consequence of the tax revaluation, partially offset by the one-time tax that we paid for adopting the above mentioned tax revaluation option. The income tax charge for fiscal year 2019 was increased by the effect of applying the inflation adjustment for tax purposes in accordance with the provisions of Law No. 27,468, as discussed above.
 
Analysis of Operating Profit by Business Segment for the Years Ended December 31, 2019 and 2018
 
The following table sets forth revenues and operating income for each of our business segments for the years ended December 31, 2019 and 2018:
 
  Year ended December 31,  
Year ended December 31,
2019, compared to year
ended December 31, 2018
 
  2019  2018  Variation  
Percentage
Change
 
Natural Gas Transportation            
Revenues from sales (1)
  23,236.4   24,706.2   (1,469.8)  (6.0%)
Cost of sales  (8,667.6)  (7,944.3)  (723.3)  9.1%
Gross profit  14,568.8   16,761.9   (2,193.1)  (13.1%)
Administrative and selling expenses  (2,387.1)  (2,751.9)  364.8   (13.3%)
Other operating expense  (136.9)  (240.4)  103.5   (43.1%)
Operating profit  12,044.8   13,769.6   (1,724.8)  (12.5%)
                 
Liquids Production and Commercialization                
Revenues from sales  23,138.2   25,578.4   (2,440.2)  (9,5%)
Cost of sales  (14,661.5)  (16,130.9)  1,469.3   (9.1%)
Gross profit  8,476.6   9,447.5   (970.9)  (10.3%)
Administrative and selling expenses  (1,534.5)  (1,114.1)  (420.4)  37.7%
Other operating expense  3.2   (1,117.9)  1,121.1   n/a 
Operating profit  6,945.3   7,215.5   (270.1)  (3.7%)
                 
Other services                
Revenues from sales  2,526.6   2,784.5   (257.9)  (9,3%)
Cost of sales  (1,524.4)  (1,621.8)  97.3   (6.0%)
Gross profit  1,002.2   1,162.8   (160.6)  (13.8%)
Administrative and selling expenses  (325.4)  (276.0)  (49.4)  17.9%
Other operating (expense) / income  3.6   (8.4)  12.0   n/a 
Operating profit  680.4   878.4   (198.0)  (22.5%)
                 
Telecommunications                
Revenues from sales  276.2   250.9   25.4   10.1%
Cost of sales  (137.9)  (126.5)  (11.4)  9.0%
Gross profit  138.4   124.4   14.0   11.3%
Administrative and selling expenses  (52.8)  (52.3)  (0.6)  1.2%
Other operating expense  2.6   (3.6)  6.2   n/a 
Operating profit  88.2   68.5   19.6   28.6%
 
(1)Includes of intersegment revenues of Ps. 616.0 million and 920.6 million for the fiscal years 2019 and 2018, respectively.

Regulated Natural Gas Transportation Segment
 
The Natural Gas Transportation business segment represented 46.6% and 45.4% of our total revenues during the years 2019 and 2018, 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.
 
For additional information regarding the history of our discussions with various 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.
 
During 2019, the Natural Gas Transportation business segment recorded an operating profit of Ps. 12,044.8 million, compared to Ps. 13,769.6 million recorded in 2018. The main factors that affected the results of operations of this segment compared to 2018 are the following:
 

Revenues from the Natural Gas Transportation business segment decreased by Ps. 1,469.8 million for the year 2019 compared to 2018;
 

During 2019, we received nominal tariff increases totaling 26.0% while annual inflation was 53.8%;
 

Revenues related to natural gas firm transportation contracts for the years ended December 31, 2019, decreased by Ps. 313.6 million. The decrease is mainly due to a single rate increase granted by ENARGAS since April 2019 (26%, although according to the RTI process, a second increase as of October 2019 should have been granted), which was lower than the 2019 annual inflation rate (53.8%). See “Item 4. Our Information—B. Business Overview—Natural Gas Transportation—Regulatory Framework—Regulation of Transportation Rates-Actual Rates” for additional information;


Revenues related to interruptible natural gas transportation service decreased by Ps. 885.5 million. The decrease mainly resulted from the tariff decrease in Current Currency discussed above and lower volumes dispatched;
 

Revenues relating to the CAU decreased by Ps. 34.7 million by the same tariff effect. The value of the CAU is much lower 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;
 

Intersegment sales decreased by Ps. 304.6 million given the lower volumes of natural gas transported to Cerri Complex and the tariff decreases in Current Currency discussed above;
 

Costs of sales and administrative and selling expenses for the year ended December 31, 2019 increased by Ps. 358.5 million, from Ps. 10,696.2 million to Ps. 11,054.7 million, as compared to the year ended December 31, 2018. This increase was mainly attributable to higher: (i) ordinary maintenance expenses for the pipelines and other fixed assets by Ps. 532.9 million, (ii) labor costs by Ps. 213.2 million and (iii) depreciations amounting to Ps. 105.7 million. These effects were partially offset by a lower technical assistance fee accrued of Ps. 513.0 million and charges in doubtful accounts by Ps. 203.9 million; and
 

The positive variation in other operating expenses of Ps. 103.5 million derives mainly from the US$ 21.3 million one-time payment made in June 2018, as part of the resolution of the arbitration initiated by Pan American Energy LLC Argentine Branch and Pan American Sur S.A. before the International Court of Arbitration on May 8, 2015, against the Company for US$ 306.3 million.
 
As of the date of issuance of this Annual Report, the Government has not issued the necessary resolutions to carry out the RTI process according to the Solidarity Law.
 
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 Ministry of Energy. 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.
 
The Liquids Production and Commercialization segment represented 47.6% and 48.8% of our total net revenues during the years ended December 31, 2019 and 2018, respectively. Liquids Production and Commercialization 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.
 
For the fiscal years 2019 and 2018, all of our sales were made for our account.
 
All ethane produced by our Liquids segment in the years ended December 31, 2019 and 2018 was sold locally to PBB. In June 2019, PBB suffered technical problems in its facilities that prevented the normal supply of ethane. These inconveniences were gradually resolved until October 2019 when we were able to restore the normal ethane supply.
 
Our ethane sales for the years 2019 and 2018 represented 27.4% and 36.2% of our Liquids Production and Commercialization net revenues. For this reason, the decrease in the volumes of ethane sold to PBB during 2019 had a negative impact on our net revenues.
 
In 2019, we sold 56.1% of our production of LPG in the local market to LPG marketers, compared to 57.9% in 2018, with the remainder exported to LPG traders. In addition, all natural gasoline produced during 2019 and 2018 was exported. 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 2019 and 2018 in short tons were as follows:
 
  Years ended December 31,  
Year ended December
31, 2019 compared to
year ended December 31, 2018
 
  (volumes in short tons)  (volumes in short tons) 
  2019  2018  
Increase/
(Decrease)
  
Percentage
Change
 
Local Market            
Ethane  312,651   437,362   (124,711)  (28.5)
Propane  234,125   172,834   61,291   35.5 
Butane  160,399   171,889   (11,490)  (6.7)
Subtotal  707,175   782,085   (74,910)  (9.6)
                 
Exports                
Propane  182,394   162,018   20,376   12.6 
Butane  126,684   88,872   37,812   42.5 
Natural Gasoline  130,572   132,311   (1,738)  (1.3)
Subtotal  439,650   383,201   56,450   14.7 
Total Liquids  1,146,825   1,165,286   (18,460)  (1.6)

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 regulation of domestic prices See “Item 8. Financial Information— A. Consolidated Statements and Other Financial Information—Exports.
 
On September 4, 2018, by means of Decree No. 793/2018 (later amended by National Executive Branch Decree No. 865/2018, the effectiveness of which was ratified by Law No. 27,467), the National Executive Branch stipulated a 12% withholding on exports for all the goods comprised in the common customs MERCOSUR nomenclature, with a maximum of Ps. 4 per United States dollar for the products that our Company exports. This measure was stipulated provisionally until December 31, 2020.
 
Through Law No. 27,541, the Executive Branch (until December 31, 2021) is empowered to set export duties the rate of which may in any case no exceed 33% of the taxable value price. Beyond the general limit mentioned above, with respect to hydrocarbons, it is established that withholding tax may not exceed 8% of the taxable value price. As of the issuance of this Annual Report this reduction in the withholding tax has not been regulated.
 
For the years ended December 31, 2019 and 2018, the total accrued exports withholding amounted to Ps. 843.4 million and Ps. 382.9 million, respectively.
 
In the domestic market, the Secretary of Energy continued issuing a series of measures with the aim of reducing the impact of the subsidies in public accounts to reduce the negative impact that the participation in the Households with Bottles Program and Propane for Networks Agreement have in the results of operations of natural gas liquids producers. These measures include an increase in the sale price from selling LPG bottles the above-mentioned agreements.
 
Butane and propane price commercialized under the Households with Bottles Program is determined by the SHR, the Hydrocarbon Resources Secretariat, which in 2018 issued Resolution No. 5/2018 increasing, from April 1, 2018, the price paid under the Households with Bottles Program to Ps. 5,416 per ton of butane and Ps. 5,502 per ton of propane. The compensation paid to us remained without modification at Ps. 550 per ton of butane.
 
Afterwards, on January 28, 2019, the Secretariat of Energy issued Resolution No. 15/2019, which modifies the price at which products supplied to the Household with Bottles Program are commercialized. As from February 1, 2019 prices went up to Ps. 9,154 and Ps. 9,042 per ton of butane and propane, respectively, whereas the compensation received from the Government was eliminated.
 
Subsequently, on May 10, 2019, the Undersecretary of Hydrocarbons and Fuels issued Provision No. 34/2019 that modifies the price for which the products contributed to the Households with Bottles Program are marketed to Ps. 9,327 and Ps. 9,213 for propane and butane, respectively. On July 1, 2019, Provision No. 104/2019 was issued, modifies prices as of July 1, 2019, with the new amounts of Ps 9,895 and Ps. 9,656 for propane and butane, respectively.
 
Under this agreement, we collect compensation from the Government, which is calculated taking into consideration the export parity price published monthly by the Federal Energy Bureau.
 
Regarding the Propane for Networks Agreement, on May 30, 2018, we signed the sixteenth extension by which the methodology for determining the price and volumes for the period April 1, 2018 to December 31, 2019 was established. As of the date of this Annual Report this program has not been extended.
 
See “Item 4. Our Information—B. Business Overview—Liquids Production and Commercialization—Regulation—International Market.” for additional information.
 
During 2019 the Liquids Production and Commercialization business segment recorded operating income of Ps. 6,945.3 million, compared to Ps. 7,215.5 million in 2018. The main factors that affected the results of operations for this segment compared to 2018 were the following:
 

Segment revenue decreased by Ps. 2,440.2 million in 2019, compared with the previous year. This decrease is mainly due to lower international reference prices by Ps. 4,154.2 million and ethane volumes and price by Ps. 4,225.9 million. These effects were partially offset by the depreciation of the peso against the U.S. dollar by Ps. 3,335.7 million, higher propane and butane volumes sold by Ps. 1,967.2 million and the increase in the price of the propane and butane sold under the supply programs sponsored by the Government;
 

In 2019 propane, butane and natural gasoline average export prices recorded decreases of 28.5%, 23.3% and 17.0%, respectively. The fall in international reference prices occurred mainly during the first half of the year showing signs of recovery as from August 2019;
 

During 2019, the production of Liquids reached 1,127,558 short tons (44,248 tons or 3.8% less than in 2018). This was mainly due to the lower ethane sold during 2019 as a result of the operational problems that occurred at the PBB facilities, an effect that was partially offset by the higher volumes of propane and butane obtained. It should be noted that there were no production restrictions during the winter period, as a result of a greater supply of local gas due to non-conventional gas developments;
 

Notwithstanding the changes made to the Households with Bottles 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, 2019, decreased by Ps. 1,048.9 million, from Ps. 17,245.0 million to Ps. 16,196.0 million, as compared to the year ended December 31, 2018. This decrease was mainly due to the reduction in the price and volumes of natural gas that we are required to purchase as RTP as part of the Liquids processing business of Ps. 1,059.5 million and the lower technical assistance fee of Ps. 333.4 million. These effects were partially offset by higher taxes, mainly due to tax on exports, of Ps. 401.0 million, and labor costs of Ps. 92.6 million;
 

Other operating expenses decreased by Ps. 1,121.1 million mainly resulting from the Ps. 1,054.4 million (US$ 21.3 million) payment made, on June 14, 2018, as part of the resolution of the arbitration initiated by Pan American Energy LLC Argentine Branch and Pan American Sur S.A. before the International Court of Arbitration on May 8, 2015, against the Company for US$ 306.3 million.
 
In 2019, export revenues from the Liquids Production and Commercialization segment were Ps. 9,144.9 million and accounted for 18.8% (17.7% in 2018) of total net sales and 39.5% (36.2% in 2018) of total Liquids Production and Commercialization revenues.
 
Between January and March 2019, deliveries of propane and butane to the export market were made to Geogas Trading S.A. under an agreement signed on October 12, 2018, which stipulated minimum quantities of products to be delivered at international reference prices (Mont Belvieu) plus a fixed price per ton sold.
 
After the end of the aforementioned contract, between the months of April and December, we export propane and butane at spot prices, which allowed us to capture opportunities associated with different market niches, allowing us to considerably increase the individual fixed prices of each operation.
 
For the period from October 1, 2017 to April 30, 2018, we sold our LPG exports to Petredec (Europe) Limited. This agreement stipulated monthly sales by us of approximately 16,534 short tons of propane and 16,534 short tons of butane at the international reference price plus a fixed charge per ton sold. Since the termination of the agreement with Petredec (Europe) Limited, we have performed spot sales and to the date of this Annual Report, we are under negotiations for a new agreement.
 
As in prior years, in the period ranging from May to September 2019, the sales of these products were conducted mainly in the domestic market, due to the restrictions in natural gas consumption for the production of Liquids and governmental requirements to supply the domestic market within the framework of the programs outlined by the Government for the supply of LPG.
 
Regarding natural gasoline exports, for the period ranging from February 1, 2018 to January 31, 2019, we entered a new agreement with Petrobras Global Trading S.V. To guarantee continuity in the supply of this product, we renewed this agreement for the period from February 1 2019 to January 31 2020, and negotiated improvements to the former terms and conditions.
 
Subsequently, and effective between February 1, 2020 and January 31, 2021, we achieved the renewal of said agreement.
 
Additionally, we export to Chile, Paraguay and Brazil by land. Volumes exported under this modality are lower than volumes exported by sea, which increased over the last several years, allowing us to capitalize a higher operative margin.
 
Regarding the price of natural gas, measured in U.S. dollars, acquired for RTP for processing at the Cerri Complex, it has suffered a decreased of 23.9% with respect to 2018 principally as a consequence of the increase in the supply of available natural gas.
 
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 2019, the other services business segment recorded an operating profit of Ps. 680.4 million, compared to Ps. 878.4 million in 2018. The main factors that affected the results of operations of this segment during 2019 are the following:
 

Net revenues decreased by Ps. 257.9 million primarily due to the lower sales associated with lower construction of Ps. 499.6 million and operation and maintenance services of Ps. 172.5 million rendered in fiscal year 2019. These effects were partially offset by the impact of the exchange rate increase on the revenues denominated in United States dollars of Ps. 270.9 million and revenues related to natural gas transportation and conditioning in Vaca Muerta of Ps. 165.8 million.


Costs of sales, administrative and selling expenses decreased by Ps. 47.9 million, mainly due to decreases in costs of services rendered to third parties (Ps. 236.5 million). These effects were partially offset by higher (i) depreciations (Ps. 98.4 million), (ii) professional fees (Ps. 51.5 million) and (iii) labor costs (Ps. 39.4 million).
 
During 2019, we concluded the construction of the Vaca Muerta pipeline and the conditioning plant which became operative in August 2019. To carry out this project, it was essential to enter into long-term service agreements with several producers (including Total Austral S.A., Shell Argentina S.A., Pampa Energía, Pluspetrol S.A., ExxonMobil Argentina S.A.). Through these agreements we outlined the terms and conditions for the rendering of natural gas transportation and conditioning services so the gas received from producers satisfies ENARGAS regulatory requirements for its entrance into the regulated transportation system.
 
Telecommunications
 
Telecommunication services are rendered by our subsidiary, Telcosur. During 2019, the Telecommunications business segment recorded an operating profit of Ps. 88.2 million, compared to Ps. 68.5 million in 2018. The main factors that affected the results of operations of this segment during 2019 are the following:
 

Net revenues increased by Ps. 25.4 million in the year ended December 31, 2019, when compared to 2018. The positive variation was mainly due to the increase in the foreign exchange rate of the peso compared to the U.S. dollar.
 

Costs of sales, administrative and selling expenses increased by Ps. 12.0 million.
 
Discussion of Results of Operations for the Years Ended December 31, 2018 and 2017
 
The following table presents a summary of our consolidated results of operations for the years ended December 31, 2018 and 2017, stated in millions of pesos, and the increase or decrease and percentage of change between the periods presented:
 
   Year ended December 31, 
  2018  2017  Variation  
Percentage
of change
 
  (in millions of pesos) 
Revenues  
52,399.4
   30,694.6   21,704.8   70.7%
Operating costs  
(21,894.5
)
  (15,445.8)  (6,448.7)  41.8%
Depreciation  
(3,008.3
)
  (2,915.0)  (93.3)  3.2%
Costs of sales  
(24,902.9
)
  (18,361.0)  (6,542.0)  35.6%
Gross profit  27,496.5   12,333.6   15,162.8   122.9%
Administrative and selling expenses  
(4,194.3
)
  (2,370.8)  (1,823.5)  76.9%
Other operating loss  
(1,370.3
)
  (417.7)  (952.6)  228.1%
Operating profit  21,932.0   9,545.1   12,386.7   129.8%
Net financial results  
(4,378.5
)
  (812.7)  (3,565.8)  438.8%
Share of profit from associates  
28.0
   33.2   (5.2)  (15.7%)
Income tax (expense)  
(20.3
)
  81.7   (102.0)  n/a 
Total net income and total comprehensive income  
17,561.2
   
8,847.3
   8,713.7   98.5 
 
Year 2018 Compared to Year 2017
 
Total comprehensive income
 
For the year ended December 31, 2018, we reported a total net income and a total comprehensive income of Ps. 17,561.2 million, which represents a Ps. 8,713.7 million increase compared to the total net income and total comprehensive income of Ps. 8,847.3 million reported in 2017.
 
The positive variation in the comprehensive net results for fiscal year ended December 31, 2018, was mainly attributed to the increase of the operating profit of Ps. 12,386.7 million partially offset by the increase of Ps. 3,565.8 million in net financial expense.
 
The material factors affecting total comprehensive income were as follows:
 

Net revenues reached Ps. 52,399.4 million, an increase of Ps. 21,704.8 million compared to the 2017 fiscal year. This increase was mainly due to higher net revenues from the Natural Gas Transportation and Liquids Production and Commercialization segments, which grew by 108.6% or Ps. 12,859.3 million and 48.8% or Ps. 8,389.2 million, respectively.
 

Operating costs, including depreciation of fixed assets, increased by Ps. 6,541.9 million, or 35.6% over 2017 fiscal year, primarily as a result of: (i) the increase in the price and volumes of natural gas used as RTP totaling Ps. 4,018.9 million, (ii) more third parties’ services and higher fees at Ps. 1,412.9 million, (iii) higher charges for the preservation of fixed assets, including depreciation of Ps. 484.7 million and (iv) labor costs of Ps. 213.8 million.
 

Administrative and selling expenses rose by Ps. 1,823.4 million, or 76.9% over 2017 fiscal year, as a result of: (i) the increase in the turnover tax and tax on exports of Ps 1,150.4 million, (ii) higher doubtful accounts charges by Ps. 186.0 million and (iii) higher depreciations of Ps. 218.4 million.
 
Cost of sales, administrative and selling expenses
 
Cost of sales for the years ended on December 31, 2018 and 2017 represented 47.5% and 59.8%, respectively, of net revenues reported in the corresponding year.
 
Administrative and selling expenses for the years ended on December 31, 2018 and 2017 represented 8.0% and 7.7%, respectively, of net revenues reported in the corresponding year.
 
See. “—Analysis of Operating Profit by Business Segment for the years ended December 31, 2018 and 2017.
 
Share of profit from associates
 
For the year ended December 31, 2018, we recorded a profit from our investment in associates of Ps. 28.0 million, compared to the profit of Ps. 33.2 million recorded in 2017.
 
Net Financial Results
 
In accordance with IAS 29 we presented the financial results in gross terms considering the effects of the change in the currency purchasing power in a single separate line (“Gain on monetary position”). Gains and losses from monetary positions represent the effects of inflation on our monetary liabilities and assets, respectively.
 
Net financial results for the years ended December 31, 2018 and 2017 are as follows:
 
  Year ended December 31, 
  2018  2017 
  (in millions of pesos) 
Financial income      
Interest income  
2,069.5
   
204.8
 
Foreign exchange gain  
12,559.2
   
863.9
 
Subtotal  14,628.7   1,068.7 
Financial expenses        
Interest expense  
(2,577.4
)
  
(1,302.0
)
Foreign exchange loss  
(20,185.9
)
  
(1,718.6
)
Capitalized financial expenses  
-
   
-
 
Subtotal  (22,763.3)  (3,020.6)
Other financial results        
Fair value gains on financial instruments through profit and loss  
2,112.0
   
680.7
 
Derivative financial instruments results  
163.2
   
-
 
Other financial charges  
(374.6
)
  
(258.4
)
Subtotal  1,900.6   422.4 
Gain on monetary position  1,855.5   716.8 
Total  (4,378.5)  (812.7)
 
In accordance with the provisions of IAS 29, the Company opted to present the gain on the monetary position in a single line included in the financial results. This presentation implies that the nominal magnitudes of the financial results have been adjusted for inflation. The real magnitudes of financial results are different from the components of financial results presented above.
 
For fiscal year 2018, the financial results decreased by Ps. 3,565.8 million compared to previous year. This variation is mainly explained by: (i) the negative foreign exchange rate variation of Ps. 6,772.0 million booked during fiscal year 2018 compared to 2017, (ii) higher interests accrued by the 2018 Notes maturing on May 2, 2025, amounting to US$ 500 million, (iii) a Ps. 299.0 million charge related to the premium paid to cancel the notes issued in February 2014, and (iv) the impact of a higher average foreign exchange rate on total interests in US dollars. These negative effects were partially offset by higher interests generated by financial assets of Ps. 3,296.0 million as well as an increase in the gain on monetary position of Ps. 1,138.7 million given an increase in the annual inflation rate (24.8% in 2017 compared to 47.6% in 2018).
 
Income tax
 
Income tax for fiscal year 2018 was negative at Ps. 20.3 million, compared to a gain of Ps. 81.7 million in fiscal year 2017. The negative variation of Ps. 102.0 million is explained by higher current income tax of Ps. 1,162.5 million as a consequence of higher taxable profits in fiscal year 2018 and the one-time tax the Company must pay for adopting the tax revaluation option of Ps. 1,612,2 million. These effects were partially offset by a reduction in the deferred tax liability generated by the future recognition benefit derived from higher property, plant and equipment depreciations as a consequence of the tax revaluation of Ps. 2,672.8 million.
 
Analysis of Operating Profit by Business Segment for the Years Ended December 31, 2018 and 2017
 
The following table sets forth revenues and operating income for each of our business segments for the years ended December 31, 2018 and 2017:
 
  Year ended December 31,  
Year ended December
31, 2018 compared to
year ended December 31, 2017
 
  2018  2017  Variation  
Percentage
Change
 
Natural Gas Transportation            
Revenues (1)  24,706.2   11,846.9   12,859.3   108.6%
Cost of sales  (7,944.3)  (6,428.5)  (1,515.8)  23.6%
Gross profit  16,761.9   418.4   11,343.5   209.4%
Administrative and selling expenses  (2,751.9)  (1,564.0)  (1,187.9)  76.0%
Other operating expense  (240.4)  (503.3)  262.9   (52.3%)
Operating profit  13,769.6   3,351.1   10,418.5   310.9%
                 
Liquids Production and Commercialization                
Revenues  25,578.4   17,189.2   8,389.2   48.8%
Cost of sales  (16,130.9)  (11,186.1)  (4,944.8)  44.2%
Gross profit  9,447.5   6,003.1   3,444.4   57.4%
Administrative and selling expenses  (1,114.1)  (552.4)  (561.7)  101.7%
Other operating (expense) / income  (1,117.9)  99.5   (1,217.4)  n/a 
Operating profit  7,215.5   5,550.2   1,665.3   30.0%
                 
Other services                
Revenues  2,784.5   1,844.8   1,844.8   50.9%
Cost of sales  (1,621.8)  (1,008.8)  (1,008.8)  60.8%
Gross profit  1,162.8   836.0   836.0   39.1%
Administrative and selling expenses  (276.0)  (220.6)  (220.6)  25.1%
Other operating expense  (8,4)  (14.2)  (14.2)  (41.3%)
Operating profit  878.4   601.2   601.2   46.1%
                 
Telecommunications                
Revenues  250,9   190.9   60.0   31.4%
Cost of sales  (126,5)  (114.8)  (11.7)  10.5%
Gross profit  124.4   76.1   48.3   62.9%
Administrative and selling expenses  (52.3)  (33.8)  (18.5)  54.6%
Other operating (expense) / income  (3.6)  0.3   (3.9)  -n/a
Operating profit  68.5   42.6   25.9   60.4%


(1)
Includes of intersegment revenues of Ps. 920.6 million and 377.2 million for the fiscal years 2018 and 2017, respectively.

Regulated Natural Gas Transportation Segment
 
The Natural Gas Transportation business segment represented 45.4% and 37.4% of our total revenues during the years 2018 and 2017, respectively.
 
For additional information regarding the history of our discussions with various 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.
 
During 2018, the Natural Gas Transportation business segment recorded an operating profit of Ps. 13,769.6 million, compared to the Ps. 3,351.1 million recorded in 2017. The main factors that affected the results of operations of this segment compared to 2017 are the following:
 

Revenues from the Natural Gas Transportation business segment increased by Ps. 12,859.3 million for the year 2018 compared to 2017;
 

Revenues related to natural gas firm transportation contracts for the years ended December 31, 2018, increased by Ps. 9,863.4 million. The increase is mainly due to the combined effect of: (i) the full application during fiscal year 2018 of the tariff increases granted by Resolutions 4362 and 120 of 58% and 78%, respectively, (ii) the application starting April 1, 2018 of Resolution 310 including a tariff increase equivalent to 50%; and, (iii) the application starting October 1, 2018 of Resolution 265 including a tariff increase equivalent to 19.7%. See “Item 4. Our Information—B. Business Overview—Natural Gas Transportation—Regulatory Framework—Regulation of Transportation Rates-Actual Rates” for additional information;
 

Revenues related to interruptible natural gas transportation service increased by Ps. 2,249.0 million. The increase mainly resulted from the tariff increase discussed above,
 

Revenues relating to the CAU increased by Ps. 203.4 million. 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,


Intersegment sales increased by Ps. 543.3 million given larger volumes of natural gas transported to Cerri Complex and tariff increases,
 

During 2018, we received nominal tariff increases totaling 79.5%;
 

Costs of sales and administrative and selling expenses for the year ended December 31, 2018 increased by Ps. 2,703.7 million, from Ps. 7,992.5 million to Ps. 10,696.2 million, as compared to the year ended December 31, 2017. This increase was mainly attributable to: (i) a higher technical assistance fee accrued of Ps. 889.1 million, (ii) an increase of Ps. 380.9 million in ordinary maintenance expenses for the pipelines and other fixed assets and (iii) higher tax on sale of Ps. 626.4 million, (iv) higher depreciations amounting to Ps. 285.0 million and (v) a higher charge in doubtful accounts by Ps. 239.8 million; and
 

The positive variation in other operating expenses mainly resulted from a Ps. 167.7 million decrease in certain non-financial assets.
 
Liquids Production and Commercialization Segment
 
The Liquids production and commercialization segment represented 48.8% and 56.0% of our total net revenues during the years ended December 31, 2018 and 2017, respectively.
 
Our ethane sales for the years 2018 and 2017 represented 36.2% and 31.1% 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 2018, we sold 57.9% of our production of LPG in the local market to LPG marketers, compared to 57.3% in 2017, with the remainder exported to LPG traders. In addition, all natural gasoline produced during 2018 and 2017 was exported. 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 2018 and 2017 in short tons were as follows:
 
  Years ended December 31,  
Year ended December
31, 2018 compared to
year ended December 31, 2017
 
  (volumes in short tons)  (volumes in short tons) 
  2018  2017  
Increase/
(Decrease)
  
Percentage
Change
 
Local Market            
Ethane  437,362   311,786   125,576.0   40.3%
Propane  172,834   194,665   (21,830.9)  (11.2%)
Butane  171,889   156,912   14,976.9   9.5%
Subtotal  782,085   663,363   118,722.1   17.9%
                 
Exports                
Propane  162,018   158,895   3,122.8   2.0%
Butane  88,872   103,259   (14,386.7)  (13.9%)
Natural Gasoline  132,311   133,802   (1,490.0)  (1.1%)
Subtotal  383,201   395,956   (12,753.9)  (3.2%)
Total Liquids  1,165,286   1,059,319   105,968.2   14.7%
 
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.
 
Between January 7, 2017 and September 4, 2018, natural gasoline, LPG exports were not subject to hydrocarbons withholding. This is because the hydrocarbon export rights scheme created by Law 26,732 and its amendments was not renewed upon its expiration date. For the year ended December 31, 2017, when the average applicable withholding rates were of 1%, the total accrued exports withholding amounted to Ps. 2.0 million.
 
For the year ended December 31, 2018, the total accrued exports withholding amounted to Ps. 382.9 million.
 
See “Item 4. Our Information—B. Business Overview—Liquids Production and Commercialization—Regulation—International Market.” for additional information.
 
During 2018 the Liquids Production and Commercialization business segment recorded operating profit of Ps. 7,215.5 million, compared to Ps. 5,550.2 million in 2017. The main factors that affected the results of operations for this segment compared to 2017 were the following:
 

Segment revenue increased by Ps. 8,389.2 million in 2018, compared with the previous year. This increase is mainly due to increases of: (i) Ps. 4,036.7 million as a result of depreciation of the Argentine peso against the U.S. dollar, (ii) Ps. 2,208.1 million resulting from higher international reference prices and the increase in the price of the butane received under the Households with Bottles Program and (iii) Ps. 2,124.4 million resulting from higher volumes sold;
 

In 2018 propane, butane and natural gasoline export prices recorded increases of 8.1%, 1.0% and 26.3%, respectively, although with some volatility. In spite of that, in line with the developments in the oil prices, significant drops were recorded as from October and therefore prices as of December 2018 were 30% lower than in October;
 

Notwithstanding the changes made to the Households with Bottles 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, 2018 increased by Ps. 5,506.5 million, from Ps. 11,738.5 million to Ps. 17,245.0 million, as compared to the year ended December 31, 2018. This increase was mainly due to: (i) the rise in the price of natural gas that we are required to purchase in as RTP as part of the Liquids processing business of Ps. 4,018.9 million, (ii) higher taxes, mainly due to tax on exports, of Ps. 380.9 million and (iii) higher technical assistance fee of Ps. 229.7 million; and
 

Other operating expenses increased by Ps. 1,217.4 million mainly resulting from the Ps. 1,054.4 million (US$ 21.3 million) payment made, on June 14, 2018, as part of the resolution of the arbitration initiated by Pan American Energy LLC Argentine Branch and Pan American Sur S.A. before the International Court of Arbitration on May 8, 2015, against the Company for US$ 306.3 million.

For the period from October 1, 2017 to April 30, 2018, we sold our LPG exports to Petredec (Europe) Limited. This agreement stipulated monthly sales by us of approximately 16,534 short tons of propane and 16,534 short tons of butane at the international reference price plus a fixed charge per ton sold. Since the termination of the agreement with Petredec (Europe) Limited, we have performed spot sales and to the date of this Annual Report, we are under negotiations for a new agreement.
 
As in prior years, in the period ranging from May to September 2018, the sales of these products were conducted mainly in the domestic market, due to the restrictions in natural gas consumption for the production of Liquids and governmental requirements to su