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: Nine months ended September 30, 2009
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 tariffs, which were "pesified" (fixed at 1:1 USD/ARS) in 2002, creating significant financial pressure. The NGL segment is unregulated and exposed to international commodity prices.

Key Financial Metrics (Nine Months Ended Sept 30, 2009)

Liquidity Ratio (Current Assets/Current Liabilities): 2.71 (2009) vs 2.30 (2008).

Material Changes vs. Prior Period

• Revenue Decline: Total net revenues fell 9.8% primarily due to a 23.1% drop in NGL production and commercialization revenues. This was driven by a sharp decline in international propane, butane, and natural gasoline prices, and a 5.3% reduction in tons sold.
• Gas Transportation Growth: Despite the overall revenue drop, gas transportation revenues increased by Ps. 24.5 million (6.4%) due to new firm contracts and the operation of a 78 MMcf/d pipeline expansion completed in late 2008.
• Financial Expenses: Net financial expenses surged by Ps. 111.4 million. This was largely caused by a Ps. 75.9 million foreign exchange loss due to the 10% devaluation of the Argentine peso, contrasting with a Ps. 4.7 million gain in the prior year.
• Profitability: Net income plummeted 77.6% to Ps. 38.7 million. While operating income decreased, the primary driver of the net income collapse was the deterioration in net financial results.

Outlook, Risks, and Management Commentary

• Tariff Renegotiation: TGS signed a provisional agreement with UNIREN for a 20% tariff increase retroactive to September 1, 2008. This requires ratification by Presidential Decree. The company is currently evaluating a proposal for an integral license renegotiation with the Argentine government.
• Expansion Plans: The company continues to manage expansion works under the Gas Trust Program. A 169 MMcf/d expansion is planned, including a new pipeline in the Magellan Strait.
• Legal Contingencies:
  • Shareholder Bankruptcy: A bankruptcy petition filed by Ashmore Energy International (AEI) against TGS's controlling shareholder, CIESA, was dismissed by the Court of Appeals in October 2009.
  • Tax Disputes: Ongoing disputes regarding turnover tax exemptions on NGL sales in the Province of Buenos Aires and other provinces. Provisions of Ps. 22.4 million and Ps. 40.3 million have been recorded for these contingencies.
  • Central Bank Proceedings: Summary proceedings initiated by the Argentine Central Bank regarding late foreign currency settlements (approx. US$ 14.7 million) remain unresolved; no provision has been recorded.
• Regulatory Risk: The "pesification" of tariffs and the suspension of the original tariff adjustment regime continue to create uncertainty regarding the recoverable value of non-current assets related to the regulated business.

Investor Verification Checklist

• Tariff Ratification: Confirm the status of the Presidential Decree required to activate the 20% tariff increase and the timeline for the integral license renegotiation.
• FX Exposure: Monitor the Argentine peso exchange rate volatility and its impact on the company's significant USD-denominated debt (US$ 500 million notes).
• NGL Price Sensitivity: Assess the correlation between international NGL prices and TGS's revenue stability, given the unregulated nature of this segment.
• Legal Resolution: Track the final resolution of tax disputes in Buenos Aires and other provinces, which could impact future cash flows.
• Shareholder Stability: Verify the long-term stability of the controlling shareholder (CIESA) following the dismissal of the bankruptcy petition.