TGS

Business Context and Reporting Period

Company: Transportadora de Gas del Sur S.A. (TGS), also known as Gas Transporter of the South Inc.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2011
Accounting Basis: Argentine GAAP (with US GAAP reconciliations provided)
Primary Operations: TGS is the largest natural gas transporter in Argentina, operating the southern gas transportation system. It also engages in the production and commercialization of natural gas liquids (ethane, LPG, natural gasoline) and provides midstream and telecommunications services.

Key Financial Metrics (Year Ended Dec 31, 2011)

Note: All figures in millions of Argentine Pesos (Ps.) unless otherwise noted. US GAAP figures are reconciled in Note 12 of the filing.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 12.2% to Ps. 1,853.9 million, driven primarily by a 16.7% increase in the Liquids Production and Commercialization segment (Ps. 1,179.2 million) due to higher international prices for LPG and natural gasoline. Gas Transportation revenues grew modestly by 4.5%.
• Profitability Surge: Net income increased 73.3% to Ps. 230.7 million. This was largely due to a one-time reversal of Ps. 122.1 million in "Other operating expenses" recorded in 2010 related to the derecognition of a tariff increase that was not collected. Operating income rose 52.0%.
• Dividend Distribution: The company paid a significant dividend of Ps. 976.0 million in 2011, compared to Ps. 30.3 million in 2010. Consequently, cash and cash equivalents decreased significantly from Ps. 1,089.5 million to Ps. 346.6 million.
• Debt Reduction: The company continued to reduce its financial indebtedness by purchasing and canceling notes on the open market. Total US dollar-denominated debt was approximately US$ 374 million as of the filing date.

Guidance, Outlook, Risks, and Contingencies

Regulatory and Tariff Risks

• Tariff Renegotiation: TGS is engaged in a prolonged renegotiation process with UNIREN regarding its gas transportation license. A transitional agreement signed in 2008 provided for a 20% tariff increase retroactive to 2008, but as of the filing date, the regulator (ENARGAS) had not authorized the billing schedule. The company has suspended recognition of this revenue under US GAAP and reversed it under Argentine GAAP in 2010.
• Export Taxes: The company is subject to a variable export tax regime on LPG and natural gasoline. If international prices exceed certain thresholds, the marginal tax rate on the excess is 100%, effectively capping post-tax revenues.
• Processing Tariff Increase: In November 2011, ENARGAS increased the tariff charge for natural gas processing from Ps. 0.049 to Ps. 0.405 per cubic meter. Management estimates this will reduce net income by approximately Ps. 69.1 million (29.9% of 2011 net income) starting in 2012.

Operational and Market Risks

• Gas Supply Shortages: Government-mandated interruptions of firm transportation contracts to prioritize residential and power plant consumption have occurred. In winter 2011, processing at the Cerri Complex was interrupted for 68 days, reducing liquids production volumes.
• Exchange Rate Exposure: The company has a significant net liability position in U.S. dollars (approximately US$ 275.2 million). A 10% devaluation of the peso would result in a Ps. 118.4 million variation in the consolidated net position.
• Legal Proceedings:
  • CNV Withholding Tax: A contingency exists regarding withholding tax on interest payments for 2004 notes, estimated between US$ 8 million and US$ 24 million. No provision has been recorded.
  • BCRA Proceedings: Summary proceedings initiated by the Central Bank regarding late foreign currency settlement could result in fines up to US$ 7.3 million. No provision has been recorded.
  • Turnover Tax: Provisions of Ps. 34.0 million and Ps. 75.5 million have been recorded for potential turnover tax liabilities in Buenos Aires and other provinces.

Outlook

Management anticipates that future pipeline expansions will provide opportunities for the liquids business. However, the company faces uncertainty regarding the finalization of the license renegotiation, the impact of the new processing tariff charge, and potential future government interventions in the energy sector.

Investor Verification Checklist

• Tariff Renegotiation Status: Verify the current status of the 20% tariff increase agreement with UNIREN and whether ENARGAS has authorized the billing schedule.
• Processing Tariff Impact: Confirm the actual financial impact of the increased natural gas processing tariff (Ps. 0.405/m3) on 2012 and subsequent earnings.
• Gas Supply Constraints: Monitor government directives regarding gas allocation and potential interruptions to the Cerri Complex, which directly impacts the high-margin liquids segment.
• Exchange Rate Sensitivity: Assess the company's ability to service its US$ 374 million debt in the event of further peso devaluation, given the mismatch between peso-denominated regulated revenues and dollar-denominated debt.
• Legal Contingencies: Review updates on the CNV withholding tax dispute and BCRA proceedings to determine if provisions need to be established.
• Dividend Policy: Note that the 2011 dividend was exceptionally high; verify if future dividends will be sustainable given the reduced cash balance and upcoming capital expenditure requirements.