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, 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 revenue uncertainty. The company is currently in a provisional agreement with the government for a 20% tariff increase retroactive to September 2008, pending ratification.

Key Financial Metrics (Three Months Ended March 31, 2009)

Liquidity Ratios: Current ratio was 2.47 as of March 31, 2009. Shareholders' equity to total liabilities ratio was 1.35.

Material Changes vs. Prior Period

• Revenue Decline: Net revenues decreased by Ps. 137.7 million (29.7%) primarily due to a Ps. 152.4 million drop in NGL production and commercialization revenues. This was driven by a sharp fall in international prices for propane, butane, and natural gasoline.
• Net Loss: The company reported a net loss of Ps. 11.7 million compared to a net income of Ps. 80.7 million in the prior year. The swing of Ps. 92.4 million was largely due to lower revenues and increased financial expenses.
• Financial Expenses: Net financial expense increased by Ps. 39.3 million to Ps. 82.8 million. This was primarily caused by a Ps. 52.3 million foreign exchange loss resulting from the devaluation of the Argentine peso against the US dollar (approx. 7.2% in Q1 2009).
• Gas Transportation: Revenues from the core gas transportation segment increased slightly by Ps. 6.1 million due to new firm contracts and capacity expansion completed in late 2008.
• Income Tax: Income tax expense dropped significantly from Ps. 55.9 million to Ps. 6.3 million due to lower taxable income.

Outlook, Risks, and Management Commentary

• Tariff Renegotiation: Management is focused on finalizing the integral license renegotiation with the Argentine government. A provisional 20% tariff increase is in place pending a Presidential Decree. The Emergency Law governing these tariffs is set to expire on December 31, 2009.
• Expansion Projects: TGS continues to manage pipeline expansion works under the Gas Trust Program. A 78 MMcf/d expansion was completed in 2008, and a 169 MMcf/d expansion is planned for 2009.
• Regulatory Risks: The "pesification" of tariffs remains a critical risk. The company faces uncertainty regarding the recoverability of non-current assets related to the regulated business if the license renegotiation does not yield favorable terms.
• Legal Contingencies:
  • CIESA Bankruptcy: The controlling shareholder, CIESA, received a US$ 127 million bankruptcy petition in April 2009, which it is contesting.
  • Tax Disputes: Significant provisions exist for turnover tax disputes in the Province of Buenos Aires (Ps. 19.9 million) and other provinces (Ps. 34.1 million).
  • GdE Lawsuit: A remaining provision of Ps. 12.3 million exists regarding a lawsuit with the former state-owned gas company (GdE) over compressor plant costs.
• Dividends: A dividend of Ps. 30 million was approved by shareholders in March 2009 and paid in April 2009.

Investor Verification Checklist

• Tariff Ratification: Verify the status of the Presidential Decree required to make the provisional 20% tariff increase effective.
• Currency Exposure: Assess the impact of continued Argentine peso devaluation on the company's US dollar-denominated debt and financial results.
• CIESA Solvency: Monitor the outcome of the bankruptcy petition filed against the controlling shareholder, CIESA, and its potential impact on TGS governance or operations.
• NGL Price Sensitivity: Evaluate the volatility of international NGL prices and their direct correlation to TGS's non-regulated revenue stream.
• Asset Recoverability: Review the auditor's qualified opinion regarding the uncertainty of the recoverable value of non-current assets tied to the regulated business.