TGS

Business Context and Reporting Period

Company: Transportadora de Gas del Sur S.A. (TGS), also known as Gas Transporter of the South Inc.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2008
Accounting Basis: Argentine GAAP (with US GAAP reconciliations provided)
Primary Operations: TGS is the largest natural gas transporter in Argentina, operating a 5,351-mile pipeline system. It also operates the Cerri Complex for Natural Gas Liquids (NGL) production and commercialization, and provides midstream and telecommunications services.

Key Financial Metrics (Year Ended Dec 31, 2008)

Note: All figures in millions of Argentine Pesos (Ps.) unless otherwise noted. Net income per share was Ps. 0.22 (Argentine GAAP) and Ps. 0.26 (US GAAP).

Material Changes vs. Prior Period (2007)

• Revenue Growth: Net revenues increased by 12.9% (Ps. 161.9 million) to Ps. 1,419.2 million. This was driven primarily by a 21.0% increase in NGL production and commercialization revenues (Ps. 139.9 million) due to higher volumes and international prices, partially offset by a slight decline in gas transportation revenues.
• Profitability: Net income increased by 18.7% to Ps. 175.1 million. Operating income decreased by 12.0% to Ps. 431.4 million, largely due to a 77.3% increase in administrative and selling expenses (Ps. 99.4 million), primarily caused by higher export taxes on NGL.
• Financial Expenses: Net financial expense improved significantly, decreasing by 49.1% to Ps. 98.5 million. This improvement was driven by a Ps. 114.0 million gain from the repurchase of US$ 95 million in debt notes at a discount, partially offset by higher foreign exchange losses due to peso devaluation.
• Debt Reduction: Total financial indebtedness was reduced by US$ 95 million during 2008, bringing the total outstanding debt to approximately US$ 405 million.

Guidance, Outlook, Risks, and Contingencies

Management Commentary and Outlook

• Tariff Renegotiation: TGS signed a provisional agreement with UNIREN in October 2008 for a 20% tariff increase retroactive to September 1, 2008. This requires ratification by Presidential Decree. An integral license renegotiation proposal is under evaluation, with a deadline of December 31, 2009.
• Capital Expenditures: Projected capital expenditures for 2009-2011 total approximately US$ 114.7 million, primarily for pipeline reliability and NGL production improvements.
• Liquidity: Management believes working capital is sufficient for current requirements, though cash generation was impacted by the sharp fall in NGL international prices in Q4 2008.

Key Risks

• Regulatory and Political Risk: The Public Emergency Law allows the Argentine government to renegotiate utility contracts. TGS faces uncertainty regarding the final terms of its license and tariff adjustments. The government has mandated interruptions of firm transportation contracts to prioritize residential and power plant users during supply shortages.
• Currency Risk: Approximately 65% of revenues are peso-denominated, while substantially all debt is USD-denominated. Further devaluation of the peso would increase the relative cost of debt service and reduce USD-equivalent revenues.
• Commodity Price Volatility: NGL revenues are exposed to international price fluctuations. A variable export tax regime caps post-tax prices for LPG and natural gasoline exports, limiting upside potential.
• Controlling Shareholder Litigation: CIESA (controlling shareholder) is involved in litigation with Ashmore Energy International (AEI) regarding debt restructuring, which could affect control of TGS.

Contingencies

• Tax Disputes: TGS faces potential tax liabilities ranging from US$ 6 million to US$ 20 million related to withholding taxes on interest payments for notes issued in 2004. No provision has been recorded as management believes it has sufficient legal grounds to defend its position.
• BCRA Proceedings: The Central Bank of Argentina (BCRA) initiated summary proceedings regarding late foreign currency settlements (approx. US$ 14.7 million). Potential fines are estimated not to exceed US$ 7.3 million; no provision recorded.
• Provincial Turnover Tax: Provisions of Ps. 53.2 million have been recorded for potential turnover tax liabilities in various provinces (Buenos Aires, Santa Cruz, Rio Negro, Tierra del Fuego).

Important Facts for Investor Verification

• Accounting Differences: Verify the significant difference between Argentine GAAP and US GAAP equity (Ps. 3,072.7 million vs. Ps. 2,335.0 million), primarily due to the treatment of deferred taxes on inflation-adjusted assets and capitalized foreign exchange differences.
• Tariff Status: Confirm the status of the 20% tariff increase provisional agreement and the ratification by Presidential Decree, as this is critical for the regulated gas transportation segment's future cash flows.
• Debt Covenants: Review the restrictive covenants in the US$ 500 million New Notes (due 2017), specifically the coverage ratio (2.0:1) and debt ratio (3.75:1) requirements that limit dividend payments and additional borrowing.
• Export Tax Regime: Assess the impact of the variable export tax on NGL revenues, which effectively caps the post-tax price of exports regardless of international market highs.
• Shareholder Structure: Note that ANSES (state social security agency) became a major minority shareholder (approx. 22%) following the nationalization of private pension funds in late 2008.