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, 2008
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 largely market-driven. The financial statements are prepared in Argentine pesos under Argentine GAAP.

Key Financial Metrics (Nine Months Ended Sept 30, 2008)

Segment Performance:

• Gas Transportation: Revenues decreased Ps. 4.9 million due to lower interruptible services, offset by new firm contracts.
• NGL Production: Revenues increased Ps. 191.6 million, driven by higher international reference prices and increased volumes.
• Other Services: Revenues increased Ps. 13.4 million, primarily from construction services for pipeline expansion.

Material Changes vs. Prior Period

• Net Income Growth: Net income rose 41% (Ps. 50.3 million) compared to the prior year. This was primarily driven by a Ps. 32.5 million gain from the prepayment of US$ 50 million in notes and a reduction in net financial expenses.
• Cost Increases: Costs of sales and administrative expenses rose by Ps. 177.3 million. Key drivers included a Ps. 84.3 million increase in export taxes (due to variable tax regime implementation), a Ps. 52.1 million rise in NGL costs, and higher labor costs.
• Third Quarter Surge: Q3 2008 net income was Ps. 37.0 million compared to Ps. 3.0 million in Q3 2007. This sharp increase was due to a 78% rise in NGL volumes sold, as supply interruptions were fewer than in the previous year.
• Debt Reduction: Average indebtedness decreased by nearly 20%, contributing to lower interest expenses.

Outlook, Risks, and Management Commentary

Regulatory and Tariff Context:

• Tariff Renegotiation: On October 9, 2008, TGS signed a provisional agreement with UNIREN for a 20% tariff increase retroactive to September 1, 2008. This is contingent on Executive Branch ratification. Funds generated must be invested in the pipeline system via a trust fund.
• License Renegotiation: The company is evaluating a proposal for an integral license renegotiation. The Public Emergency Law, which suspended original tariff adjustment mechanisms, was set to expire on December 31, 2008.

• Focus on creating conditions for business value re-composition and developing alternative expansion mechanisms via client prepayments.
• NGL strategy targets alternatives to natural gas availability and logistics innovation.
• Continued investment in pipeline expansion (247 MMcf/d project) managed via the gas trust fund.

• Tax Disputes: Ongoing litigation regarding turnover tax exemptions for NGL sales in the Province of Buenos Aires. A provision of Ps. 18.7 million is maintained.
• Legal Proceedings: A lawsuit from the former state utility (GdE) regarding compressor plant costs remains, with a net provision of Ps. 13.4 million.
• Asset Valuation: Auditors noted uncertainty regarding the recoverable value of non-current assets related to the regulated business due to the suspension of tariff adjustments and ongoing renegotiations.
• Export Tax: Implementation of a variable export tax regime significantly impacted costs.

Investor Verification Checklist

• Tariff Ratification: Verify if the 20% provisional tariff increase has been ratified by the Argentine Executive Branch and the timing of its implementation.
• License Renegotiation: Monitor the status of the integral license renegotiation agreement with the Argentine government, which is critical for long-term revenue stability.
• Export Tax Impact: Assess the sustainability of the variable export tax regime and its potential impact on future NGL margins.
• Debt Covenants: Review compliance with debt covenants, specifically the consolidated coverage ratio (EBITDA/Interest) and debt ratio, which restrict new debt and dividend payments.
• Legal Provisions: Track the resolution of the turnover tax dispute in Buenos Aires and the GdE lawsuit to determine if current provisions (Ps. 18.7m and Ps. 13.4m) are adequate.