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, 2007
Business Overview: TGS operates a natural gas transportation pipeline system connecting southern/western Argentina to the Buenos Aires area and produces/commercializes Natural Gas Liquids (NGL) at the Cerri Complex. The company is regulated by ENARGAS for transportation tariffs, which were "pesified" (fixed at 1:1 USD/ARS) under the 2002 Emergency Law, creating uncertainty regarding tariff renegotiations.

Key Financial Metrics (Nine Months Ended Sept 30, 2007)

Note: All figures are in Argentine Pesos (Ps.).

Material Changes vs. Prior Period

• Net Income Decline: Net income dropped 55% (Ps. 150.0 million) primarily due to a Ps. 100.5 million increase in income tax expense and a Ps. 69.3 million decrease in operating income.
• Revenue Mix Shift:
  • Gas Transportation: Increased Ps. 20.3 million (5.5%) due to new firm contracts signed in March and May 2007.
  • NGL Production: Decreased Ps. 68.1 million (13%) due to a 22% drop in production volumes. This was caused by an unusually cold winter requiring the Cerri Complex to bypass gas to meet residential heating demand.
• Financial Expenses: Net financial expense improved (decreased) by Ps. 32.9 million, driven by a 25% reduction in average indebtedness following debt refinancing and lower foreign exchange losses.
• Tax Impact: The significant rise in tax expense was largely due to the partial reversal of a Ps. 111.9 million tax loss carryforward allowance recorded in 2006.

Outlook, Risks, and Management Commentary

• Regulatory Renegotiation: Management's primary goal is securing a predictable regulatory framework and an overall tariff review to restore profitability in the regulated segment. Negotiations with UNIREN (Unit for Renegotiation and Assessment of Utilities Contracts) remain ongoing with no significant progress reported as of the filing date.
• Debt Restructuring: In May/June 2007, TGS successfully refinanced debt by issuing US$ 500 million in new notes (2007 Global Program) and prepaying prior obligations, improving the debt profile and reducing interest costs.
• Operational Strategy:
  • Regulated: Aiming to become the leading manager of future pipeline expansions.
  • Non-Regulated (NGL): Focusing on securing gas supplies via long-term agreements and enhancing production to protect margins.
• Key Risks:
  • Tariff Uncertainty: Continued suspension of original tariff adjustment mechanisms and the "pesification" of rates.
  • Legal/Tax Contingencies: Ongoing disputes regarding turnover tax exemptions for NGL sales in Buenos Aires and Santa Cruz provinces, and potential withholding tax liabilities on debt interest payments.
  • Asset Recovery: Uncertainty regarding the recoverable value of non-current assets related to the regulated business pending the outcome of license renegotiations.

Investor Verification Checklist

• Tariff Renegotiation Status: Verify the current status of negotiations with UNIREN and the likelihood of a tariff adjustment that restores historical profitability.
• NGL Production Volatility: Assess the sensitivity of NGL revenues to weather patterns and residential gas demand spikes that force production bypasses.
• Tax Provision Adequacy: Review the outcome of the Tax Court rulings regarding turnover tax exemptions for propane and butane sales, as this impacts future tax liabilities.
• Debt Covenants: Confirm compliance with debt covenants (coverage ratio ≥ 2.0:1, debt ratio ≤ 3.75:1) given the recent refinancing and current EBITDA levels.
• Regulatory Asset Valuation: Evaluate the auditor's qualification regarding the recoverable value of non-current assets in the regulated segment.