TGS

Business Context and Reporting Period

Company: Transportadora de Gas del Sur S.A. (TGS)
Filing Type: Form 6-K (Annual Report)
Reporting Period: Year ended December 31, 2009
Business Overview: TGS is a major Argentine natural gas transporter and producer of natural gas liquids (NGL). Its operations are divided into three segments: regulated gas transportation, non-regulated NGL production/commercialization, and other services (midstream and telecommunications). The company is controlled by Compañía de Inversiones de Energía S.A. (CIESA), which is majority-owned by Group Petrobras Energía.

Key Financial Metrics

Note: Financial statements are prepared in Argentine Pesos (ARS) in accordance with Argentine GAAP. Inflation accounting was suspended in 2003; the non-recognized inflation effect on net income is stated as not significant.

Material Changes vs. Prior Period

• Revenue Growth: Total net revenues increased by 12.8% (Ps. 181.4 million) driven primarily by a 20% tariff increase in the gas transportation segment (retroactive to Sept 1, 2008), which added Ps. 122.1 million in revenue.
• Segment Performance:
  • Gas Transportation: Revenues rose to Ps. 669.4 million (from Ps. 506.3 million) due to tariff hikes and new firm capacity contracts.
  • NGL Production: Revenues slightly declined to Ps. 800.5 million (from Ps. 807.3 million) due to lower international prices, partially offset by peso devaluation.
  • Other Services: Revenues increased to Ps. 130.7 million (from Ps. 105.6 million) due to asset sales and new midstream contracts.
• Net Income Stability: Net income remained relatively flat (Ps. 178.4 million vs. Ps. 175.1 million). This stability occurred despite a significant drop in financial gains; 2008 included a Ps. 114.0 million gain from debt buybacks, whereas 2009 only generated a Ps. 10.8 million gain from similar transactions.
• Debt Reduction: The company continued its deleveraging strategy, reducing financial indebtedness to a record low of US$ 395 million with no principal maturities for the next four years.

Outlook, Risks, and Management Commentary

• Regulatory Environment: The company is awaiting the finalization of an integral license renegotiation with the Argentine Government (UNIREN). A transitional agreement ratified in Dec 2009 provided a 20% tariff increase, but a comprehensive review is pending. The Public Emergency Law, which suspended dollar-indexed tariffs, remains in effect until Dec 31, 2011.
• Expansion Projects: The "Strait of Magellan Crossing Project" is nearing completion (expected early 2010), which will add 600 MMcf/d capacity. The 2006/2009 Expansion Works are progressing, with 102 MMcf/d already in service.
• Operational Risks:
  • Legal Contingencies: Significant provisions exist for tax disputes (turnover tax on NGL sales and fuel usage) totaling approximately Ps. 67.5 million. A lawsuit regarding compressor plant costs with the former state utility (GdE) remains, with a net provision of Ps. 4.3 million.
  • Shareholder Issues: The controlling shareholder, CIESA, faced bankruptcy petitions in New York in 2009, which were dismissed by the Court of Appeals in October 2009, though legal proceedings regarding the debt restructuring remain active.
• Outlook: Management aims to restore profitability through revenue recomposition, cost reduction, and seizing business opportunities in telecommunications and midstream services. They anticipate continued negotiations for a full tariff review.

Key Facts for Investor Verification

• Tariff Renegotiation Status: Verify the timeline and terms of the pending "integral license renegotiation" with the Argentine Government, as this is critical for long-term revenue stability.
• Debt Covenants: Confirm compliance with debt covenants (coverage ratio ≥ 2.0:1, debt ratio ≤ 3.75:1) which restrict dividend payments and new borrowing.
• Legal Provisions: Review the adequacy of provisions for tax contingencies (Ps. 67.5 million) and the outcome of the CIESA shareholder legal battles in the US.
• Expansion Completion: Monitor the commissioning of the Strait of Magellan pipeline and the associated revenue recognition from the new 600 MMcf/d capacity.
• Currency Exposure: Assess the impact of Argentine Peso volatility on NGL export revenues and foreign currency debt service costs.