TGS

Business Context and Reporting Period

Company: Transportadora de Gas del Sur S.A. (TGS)
Reporting Period: Full fiscal year and fourth quarter ended December 31, 2005.
Business Overview: TGS is Argentina's leading natural gas transporter and processor, with operations in gas transportation, NGL production/commercialization, and other midstream/telecommunication services. The company is listed on the NYSE (TGS) and MERVAL (TGSU2).

Key Financial Metrics

Q4 2005 Specifics: Net income was Ps. 8.5 million (Ps. 0.011 per share), a significant decline from Ps. 78.7 million in Q4 2004. Total Q4 revenue was Ps. 328.4 million.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 7.1% year-over-year.
  • Natural Gas Transportation: Up 5.9% to Ps. 460.0 million, driven by the San Martín pipeline expansion (operational July/August 2005).
  • NGL Production: Up 7.9% to Ps. 546.3 million, primarily due to higher international reference prices, partially offset by lower volumes.
  • Other Services: Up 9.2% to Ps. 58.4 million, driven by telecommunication sales.
• Profitability Drivers: Full-year net income increased 47.1%, largely due to a non-recurring deferred income tax gain of Ps. 101.4 million.
  • Q4 Decline: Q4 net income dropped 89.2% compared to Q4 2004. This was primarily caused by a Ps. 76.9 million exchange loss due to a 4% devaluation of the Argentine Peso against the US Dollar.
• Cost Structure: Costs of sales and administrative expenses rose by Ps. 81.3 million, attributed to higher NGL production costs (natural gas price increases), increased export taxes (rate hike from 5% to 20%), and higher labor costs.
• Financial Expenses: Net financial expenses decreased by Ps. 51.8 million year-over-year, driven by the absence of 2004 debt restructuring expenses and lower interest accruals from principal amortizations, despite higher average interest rates.

Outlook, Risks, and Management Commentary

• Regulatory Environment: The Economic Emergency Law (2002) ended the convertibility regime and "pesified" regulated tariffs at USD 1 = Ps. 1. Tariff renegotiation has been delayed with no significant progress reported.
• Currency Risk: The company faces significant exposure to Argentine Peso devaluation, as evidenced by the Ps. 76.9 million exchange loss in Q4 2005 impacting dollar-denominated monetary positions.
• Liquidity: TGS relies on cash generated from operations as its primary source of financing. Operating cash flow for 2005 was Ps. 584.7 million, funding investments (Ps. 166.1 million) and financing activities (Ps. 241.5 million).
• Legal Contingencies: The company has faced litigation regarding asset transfers from Gas del Estado S.E. and tax claims from the Argentine Tax Authority (AFIP) and Buenos Aires Province, though some provisions were reversed in 2005 due to favorable rulings.
• Forward-Looking Statements: Management notes that actual results may differ materially from projections due to known and unknown risks, including regulatory changes and economic conditions.

Investor Verification Checklist

• Verify the sustainability of the Ps. 101.4 million non-recurring deferred tax gain included in 2005 net income.
• Assess the impact of the 4% Peso devaluation on future earnings and the company's hedging strategies for dollar-denominated debt.
• Monitor the status of tariff renegotiations with ENARGAS, given the long-standing delay since the 2002 Emergency Law.
• Review the details of the San Martín pipeline expansion financing and the specific revenue contribution from the Gas Trust.
• Confirm the current status of outstanding litigation with Gas del Estado S.E. and tax authorities to evaluate potential future provisions.