TGS

Business Context and Reporting Period

Company: Transportadora de Gas del Sur S.A. (TGS)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Year ended December 31, 2013
Accounting Standards: First-time adoption of International Financial Reporting Standards (IFRS) for the fiscal year 2013.
Core Business: TGS operates in three segments: Natural Gas Transportation (regulated), Production and Commercialization of Natural Gas Liquids (non-regulated), and Other Services (midstream and telecommunications). The company is celebrating its 21st anniversary of operations.

Key Financial Metrics

Segment Performance (2013):

• Natural Gas Transportation: Revenues of Ps. 661.0 million (up Ps. 57.6 million); Operating Income of Ps. 29.5 million. Tariffs remain frozen since 1999.
• Liquids Production & Commercialization: Revenues of Ps. 2,065.3 million (up Ps. 229.6 million); Operating Income of Ps. 646.9 million. Accounts for 72% of total revenue.
• Other Services: Revenues of Ps. 138.6 million; Operating Income of Ps. 30.3 million.

Material Changes vs. Prior Period

• Net Income Decline: Net income dropped 54% to Ps. 107.5 million from Ps. 232.7 million in 2012. This was primarily driven by a Ps. 190.3 million increase in net financial expenses due to foreign exchange losses on U.S. dollar-denominated debt.
• Revenue Growth: Total revenues increased by approximately 11% year-over-year, driven by the Liquids segment and higher volumes in interruptible transportation services.
• Cost Increases: Cost of sales and administrative expenses rose by Ps. 301.1 million, attributed to fixed cost increases in the transportation segment (including Ps. 75.8 million in salary increases) and higher variable costs for natural gas in the Liquids segment.
• Exchange Rate Impact: The devaluation of the Argentine peso significantly impacted financial results. A 10% appreciation of the USD against the peso would decrease pre-tax income by approximately Ps. 187.6 million.

Outlook, Risks, and Management Commentary

Outlook and Strategy

• Tariff Renegotiation: Management is actively working with the National Government to implement a 20% tariff increase stipulated in a 2009 Transitory Agreement (Decree No. 1,918/09) and to finalize a comprehensive license renegotiation. This is critical as current revenues cannot support growing costs in the transportation segment.
• Expansion Works: TGS continues to manage pipeline expansion under the Gas Trust Fund Program, with 307.2 MMcf/d of incremental capacity already in service.
• Financial Hedging: To mitigate exchange rate risk, the company entered into currency forward agreements and invested in dollar-linked financial instruments. In 2014, they plan to continue these mitigation actions.

Risks and Contingencies

• Regulatory Risk: The primary risk is the delay in tariff adjustments. The company has reversed the recognition of the 20% tariff increase revenue pending regulatory approval, though legal injunctions support their claim.
• Foreign Exchange Risk: Approximately 90% of financial indebtedness is denominated in U.S. dollars, while a significant portion of transportation revenues is in Argentine pesos. As of February 10, 2014, the peso had depreciated ~20% against the dollar, increasing financial expenses.
• Legal Claims: The company faces ongoing tax disputes regarding Turnover Tax exemptions on liquids sales and fuel usage, with provisions recorded totaling Ps. 129.2 million (Ps. 43.3 million for liquids sales and Ps. 85.9 million for fuel tax).
• Customer Credit Risk: MetroGAS, a major customer, faced financial difficulties but reached a repayment agreement in December 2013, collecting all outstanding receivables as of year-end.

Investor Verification Checklist

• Tariff Implementation Status: Verify the current status of the 20% tariff increase (Decree No. 1,918/09) and the comprehensive license renegotiation with UNIREN.
• Exchange Rate Exposure: Monitor the Argentine peso/USD exchange rate and the effectiveness of TGS's hedging strategies (forward contracts) in 2014.
• Debt Maturity Profile: Review the terms of the 2007 Global Program notes (US$ 374 million outstanding) and the recent exchange offer launched in January 2014.
• Legal Provisions: Track the resolution of tax disputes regarding Turnover Tax, which could impact future cash flows if provisions are insufficient.
• Liquids Segment Margins: Assess the impact of international LPG price fluctuations and government-mandated local supply requirements on the profitability of the Liquids segment.