Fitch Affirms Transportadora de Gas del Sur S.A.'s Foreign Currency IDR at 'B'; Outlook Stable

BUENOS AIRES, Argentina--(BUSINESS WIRE)--Fitch Ratings has affirmed Transportadora de Gas del Sur S.A.'s (TGS) international ratings as follows:

--Long-term Foreign Currency Issuer Default Rating (FC IDR) at 'B'

--Long-term Local Currency IDR at 'B+'

--USD 500 million, 2017 notes, at 'B/RR4'

The Rating Outlook is Stable. Approximately USD 381 million of local and international bonds are affected.

TGS's senior unsecured notes due 2017 were assigned a Recovery Rating of 'RR4', which indicates recovery prospects in the range of 31%-50% of current principal and related interest in the event of default. The 'RR4' reflects Argentina's Recovery Rating cap.

Credit concerns include the effect of volatile commodity prices for the natural gas processing business unit, the prevalence of flat tariffs for its transportation business unit (representing 34% of sales and 45% of EBITDA) and a broad domestic economic downturn. Tariff adjustments remain a critical factor in the regulated gas transportation business profitability and margins, particularly within a context of rising inflation and cost increases. In December 2009, a presidential decree approving a 20% tariff increase retroactive through September 2008 was signed. However, at present the new tariff scheme has not yet been applied. Fitch estimates that such a tariff increase would result in a USD20 million-USD25 million increase in EBITDA (subject to the exchange rate). Fitch's credit analysis and metrics do not include this impact.

In 2009, TGS grew its firm contracted capacity to 78.3 million cubic meters per day (MMm3/d) following the advances made under the 2006/2009 national expansion plan which up to date has added 3.9 MMm3/d. However, natural gas continued to be redirected to satisfy residential demand which resulted in a decrease in TGS's annual load factor to 79% from 86% in 2008. The injection of approximately 5.9 MMm3/d of natural gas from the regasification vessel during the winter reduced the restrictions on natural gas availability and resulted in a load factor during the winter season of 85%, similar to that of 2008,

The company's gas processing unit (representing 57% of sales and 47% of EBITDA) was affected in 2009 by a decline in liquid natural gas (LGN) international prices. In 2010, however, the negative trend in LGN prices has reverted, and prices have improved. Despite lower export sales, TGS's right to maintain up to 70% of its exports proceeds abroad continues to provide some degree of flexibility under a potential scenario of exchange controls. In 2009 export proceeds were USD90 million.

TGS's ratings reflect the weak regulatory framework, lack of tariff adjustments, and government interference in the sector, which are tempered by TGS's solid credit metrics. Despite frozen tariffs for its pipeline business and rising inflation, TGS continued to reduce debt levels and build up cash through during the first quarter of 2010. TGS's liquidity is strong, with USD284 million in cash and equivalents, no debt maturities until May 2014, and annual interest payments of approximately USD30 million for 2010. Fitch expects an EBITDA of approximately USD160 million, absent tariff adjustments, which will result in interest coverage of approximately 4.7 times (x) and debt/EBITDA of approximately 2.6x. For the 12 months ended May 31, 2010, operating EBITDA was USD187 million, interest coverage was 4.8x and debt/EBITDA was 2.1x. Near-term capex plans are expected to remain at a minimum level of approximately US$40 million, allowing TGS to continue generating positive free cash flow and to maintain considerable financial flexibility.

TGS is primarily controlled by Compania de Inversiones de Energia (CIESA), which holds 55.3% of the company's common stock, and its major shareholder is Petrobras Energia S.A. (PESA). PESA is materially involved in the operations of TGS, as it has a three-year contract to provide technical support until 2011. The remaining 50% of CIESA's equity is distributed between Enron Corp. subsidiaries (10%) and a trust administered by ABN Ambro Bank N.V. (40%).

Applicable criteria available on Fitch's web site at www.fitchratings.com:

--'Fitch Corporate Rating Methodology', Nov. 24, 2009.

Additional information is available at www.fitchratings.com.

Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489018

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