TGS

Business Context and Reporting Period

Company: Transportadora de Gas del Sur S.A. (TGS), also known as Gas Transporter of the South Inc.
Reporting Period: Fiscal year ended December 31, 2013.
Accounting Standards: First-time adoption of International Financial Reporting Standards (IFRS) for the year ended December 31, 2013. Prior periods were prepared under Argentine GAAP.
Operations: TGS is the largest natural gas transporter in Argentina, operating the southern pipeline system. Its business segments include Natural Gas Transportation (regulated), Liquids Production and Commercialization (non-regulated), and Other Services (midstream and telecommunications).

Key Financial Metrics (Year Ended Dec 31, 2013)

Debt and Liquidity:

• Total Indebtedness: As of December 31, 2013, financial debt denominated in U.S. dollars was approximately US$377.7 million (Ps. 2,463.0 million). Total indebtedness including trade payables was higher.
• Net Liability Position: The company had a net monetary liability position of US$287.0 million as of December 31, 2013.
• Liquidity: The company reported sufficient working capital to meet operating costs and capital expenditures, with cash flows from operations increasing significantly in 2013.

Material Changes vs. Prior Period

• Net Income Decline: Total comprehensive income decreased by 53.8% (Ps. 125.2 million) compared to 2012. This was primarily driven by a Ps. 190.3 million increase in net financial expenses, largely due to foreign exchange losses on U.S. dollar-denominated debt resulting from peso devaluation.
• Revenue Growth: Revenues increased by 11.3% (Ps. 290.0 million). The Liquids Production and Commercialization segment drove this growth (up 12.5%), while the Natural Gas Transportation segment saw a 9.6% increase despite no tariff adjustments for 14 years.
• Operating Profit Stability: Operating profit remained relatively flat, increasing only 0.7% (Ps. 4.9 million), as revenue gains were offset by rising operating costs (labor, taxes) and inflationary pressures in the regulated segment.
• Accounting Transition: The 2013 figures are not directly comparable to 2012 due to the transition from Argentine GAAP to IFRS, which involved changes in accounting policies and presentation.

Guidance, Outlook, and Risks

Management Commentary and Outlook:

• Tariff Renegotiation: A critical issue is the ongoing renegotiation of the gas transportation license with the Argentine government (UNIREN). While a 20% transitional tariff increase was partially implemented starting April 1, 2014 (fully effective August 1, 2014), the company continues to seek retroactive application from 2008.
• Debt Management: In January 2014, the company launched an exchange offer to refinance 2007 Notes with new 2014 Notes to improve the maturity profile. Approximately 67% of the 2007 Notes were exchanged.
• Capital Expenditures: Projected capital expenditures for 2014-2016 total approximately US$117.3 million, primarily funded by cash from operations and customer advances.

Key Risks and Contingencies:

• Regulatory Risk: The Public Emergency Law has frozen tariffs for over a decade. Failure to reach a comprehensive agreement on license renegotiation could materially adversely affect profitability.
• Foreign Exchange Risk: The company has a significant net liability position in U.S. dollars. Further devaluation of the Argentine peso would increase financial expenses and reduce net income.
• Legal Proceedings: Ongoing disputes include tax claims regarding turnover tax on liquids sales and a challenge to increased gas processing tariff charges (Gas Tariff Resolutions). A preliminary injunction obtained in 2012 exempts the company from the increased charge, but the outcome remains uncertain.
• Customer Credit Risk: Major customer MetroGAS faced financial difficulties but repaid its outstanding debt in full in December 2013.

Important Facts for Investor Verification

• IFRS Transition Impact: Verify the specific adjustments made during the transition from Argentine GAAP to IFRS to understand the true year-over-year performance trends.
• Tariff Implementation Status: Confirm the actual collection of the retroactive tariff increases granted in April 2014 and the status of the full license renegotiation with UNIREN.
• Foreign Exchange Sensitivity: Assess the impact of the peso's devaluation (approx. 20% in early 2014) on the company's ability to service its US$385.6 million debt obligation due in May 2014.
• Legal Injunction Validity: Monitor the status of the court injunction regarding the Gas Tariff Resolutions, which, if overturned, could result in a net loss of Ps. 123.9 million for 2013.
• Debt Covenants: Review compliance with debt covenants (Consolidated Coverage Ratio ≥ 2.0:1 and Consolidated Debt Ratio ≤ 3.75:1) which restrict dividend payments and additional borrowing.