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, 2011
Business Overview: TGS operates a natural gas pipeline system in southern and western Argentina and produces/commercializes natural gas liquids (Liquids). The company also provides midstream and telecommunication services. The company is currently engaged in a license renegotiation process with the Argentine National Government under the Public Emergency Law framework.

Key Financial Metrics (Year Ended Dec 31, 2011)

Note: All figures in Argentine Pesos (Ps.) unless otherwise stated. Financial statements are prepared under Argentine GAAP.

Segment Performance

• Gas Transportation: Revenues of Ps. 575.6 million (up Ps. 24.6 million). Growth driven by operation and maintenance of expansion assets under the Gas Trust Fund Program.
• Liquids Production & Commercialization: Revenues of Ps. 1,179.2 million (up Ps. 168.8 million). Driven by higher international prices (15-24% increase) and better contract terms, despite lower production volumes (941,000 short tons vs. ~1 million in prior years) due to maintenance and supply cuts.
• Other Services: Revenues of Ps. 99.1 million (up Ps. 7.5 million). Includes management of pipeline expansion works and LNG injection services.

Material Changes vs. Prior Period

• Net Income Surge: Net income increased by Ps. 97.6 million (73.3%). This is primarily due to the absence of a Ps. 122.1 million "other operating expense" recorded in 2010, which represented the derecognition of a retroactive tariff increase revenue that was not yet authorized for billing by the regulator (ENARGAS).
• Cost Increases: Costs of sales and administrative expenses rose by Ps. 133.9 million, driven by a Ps. 63.7 million increase in export taxes (due to higher international prices) and a Ps. 57.9 million increase in labor costs.
• Financial Expenses: Net financial expenses increased by Ps. 25.6 million, largely due to a Ps. 37.9 million higher foreign exchange loss resulting from the depreciation of the Argentine Peso.
• Liquidity Impact: Cash flow from financing activities decreased significantly (used Ps. 905.9 million vs. Ps. 113.3 million in 2010) due to the distribution of Ps. 976 million in cash dividends.

Guidance, Outlook, and Risks

Management Outlook for 2012

• License Renegotiation: TGS plans to conclude the renegotiation of its operating license and initiate a tariff review process to re-compose profitability in the transportation business.
• Expansion Works: Continued management of pipeline expansion under the Gas Trust Fund Program, expected to generate management fees and future O&M revenues.
• Liquids Business: Focus on mitigating incremental costs from new market regulations, specifically a tariff charge increase for natural gas processing effective December 1, 2011 (from Ps. 0.049 to Ps. 0.405 per cubic meter), which is expected to severely impact 2012 revenues.
• Operational Goals: Implementation of a risk management system, technical audits, and continued focus on safety to reduce accident rates.

Risks and Contingencies

• Regulatory Uncertainty: The Public Emergency Law (expiring Dec 31, 2013) has suspended original tariff adjustment mechanisms. The outcome of the license renegotiation remains uncertain, affecting the recoverability of non-current assets.
• Tax Credits: The company holds significant tax credits (VAT and Income Tax) arising from the reversal of the 20% tariff increase revenue. The timing of the refund of these credits is uncertain.
• Legal Proceedings: Ongoing disputes regarding turnover tax exemptions on liquids sales and potential liabilities related to the GdE lawsuit (partially resolved via offset with expansion works).
• Accounting Standards: Mandatory adoption of IFRS was postponed to fiscal years beginning January 1, 2013, to evaluate the impact of IFRIC 12 on service concession arrangements.

Key Facts for Investor Verification

• Tariff Renegotiation Status: Verify the progress of the license renegotiation with UNIREN and the timeline for the new tariff review, as this is critical for the regulated transportation segment's future profitability.
• Impact of New Processing Tariff: Assess the specific financial impact of the increased tariff charge (Ps. 0.405/cubic meter) on the Liquids segment's margins in 2012.
• Tax Credit Recovery: Monitor the collection status of the Ps. 60+ million in tax credits generated by the reversal of the 2008 tariff increase revenue.
• Debt Covenants: Confirm compliance with debt covenants (Coverage ratio > 2.0:1; Debt ratio < 3.75:1) given the high dividend payout and potential future cash flow pressures.
• IFRS Transition: Review the company's implementation plan for IFRS adoption in 2013, particularly regarding the valuation of Property, Plant, and Equipment (PP&E) and service concession arrangements.