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: Three months ended March 31, 2010
Business Overview: TGS operates a natural gas pipeline system in Argentina and produces/commercializes natural gas liquids (NGL). The company is regulated by ENARGAS for transportation services, while NGL activities are market-driven. The controlling shareholder is Compañía de Inversiones de Energía S.A. (CIESA), owned largely by Group Petrobras Energía.

Key Financial Metrics

Note: Financial statements are prepared in Argentine pesos. The filing does not provide a clear value for total debt in USD, though it notes financial indebtedness of approximately US$384.8 million as of March 31, 2010.

Material Changes vs. Prior Period

• Profitability Turnaround: The company reported a net income of Ps. 75.4 million, reversing a Ps. 11.7 million loss in Q1 2009. This was driven by a Ps. 101.0 million increase in operating income.
• Revenue Growth: Net revenues increased by Ps. 160.0 million (49%).
  • NGL Segment: Revenues surged Ps. 130.3 million due to a >70% rise in international prices for propane, butane, and natural gasoline.
  • Gas Transportation: Revenues increased Ps. 27.7 million, primarily due to a 20% tariff increase ratified by the Argentine Government (Presidential Decree No. 1,918/09).
• Financial Expenses: Net financial expenses decreased by Ps. 37.5 million, largely due to reduced foreign exchange losses resulting from lower peso devaluation against the US dollar in Q1 2010 compared to Q1 2009.
• Tax Expense: Income tax expense increased significantly by Ps. 46.5 million due to higher taxable income.

Outlook, Risks, and Management Commentary

• Regulatory Negotiations: TGS is negotiating an overall tariff review with UNIREN. A transitional agreement ratified in late 2009 provides a 20% tariff increase, with funds temporarily held in a trust fund for pipeline investments. The company aims to finalize an integral license renegotiation before the Public Emergency Law expires on December 31, 2011.
• Expansion Projects: The company is managing the second expansion of the gas pipeline system (247 MMcf/d capacity). As of March 31, 2010, 166 MMcf/d was operational, with the Magellan Strait pipeline completed in March 2010.
• Accounting Standards: TGS is implementing a plan to adopt International Financial Reporting Standards (IFRS) effective for fiscal years beginning January 1, 2012.
• Legal Contingencies:
  • Tax Disputes: Significant provisions exist for turnover tax disputes with provincial tax bureaus (Buenos Aires, Santa Cruz, Río Negro, Tierra del Fuego). Total provisions for these contingencies were approximately Ps. 73.4 million (Ps. 25.3m + Ps. 48.1m).
  • GdE Lawsuit: A remaining provision of Ps. 4.5 million relates to a Supreme Court judgment regarding compressor plant costs, partially offset by expansion work costs.
  • Central Bank Proceedings: No provision recorded for a summary proceeding by the Central Bank regarding foreign currency settlements from 2002-2003.
• Dividends: A dividend of Ps. 30.3 million was approved and paid in April 2010.

Investor Verification Checklist

• Tariff Renegotiation Status: Verify the progress of the integral license renegotiation with UNIREN and the timeline for the expiration of the Public Emergency Law (Dec 31, 2011).
• Commodity Price Exposure: Assess the sustainability of NGL revenue growth given the heavy reliance on international propane and butane prices.
• Regulatory Risk: Monitor the outcome of tax disputes with provincial authorities, which could impact future cash flows if provisions are insufficient.
• Debt Covenants: Review compliance with debt covenants (coverage ratio > 2.0:1, debt ratio < 3.75:1) which restrict new debt and dividend payments.
• IFRS Transition: Evaluate the potential impact of adopting IFRS in 2012 on reported equity and earnings.