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: Three months ended March 31, 2006
Business Overview: TGS operates a natural gas transportation pipeline system in Argentina and produces and commercializes Natural Gas Liquids (NGL). The company is regulated by the National Gas Regulatory Agency (ENARGAS) for transportation services, while NGL and other services are unregulated. The financial statements are prepared in constant Argentine pesos in accordance with Argentine GAAP.

Key Financial Metrics

Debt Profile: Total loans amounted to Ps. 2,579.7 million as of March 31, 2006. The debt structure includes Euro Medium-Term Notes (EMTN) and loans from the Inter-American Development Bank (IDB), with significant portions denominated in US dollars.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased by Ps. 108.2 million (46.7%) year-over-year. This was driven primarily by the NGL segment, which saw a Ps. 91.9 million increase due to higher international prices and a 36% volume increase. Gas transportation revenues rose by Ps. 12.4 million, aided by the San Martín pipeline expansion.
• Operating Income: Operating income surged by Ps. 67.8 million (67.9%) to Ps. 167.7 million, reflecting strong performance in the unregulated NGL segment.
• Net Income Decline: Despite higher operating income, Net Income decreased by Ps. 2.8 million (3.0%) to Ps. 90.4 million. This was caused by a significant increase in Net Financial Expenses of Ps. 69.9 million, primarily due to a Ps. 30.6 million foreign exchange loss resulting from the devaluation of the Argentine Peso in Q1 2006.
• Cash Flow: Operating cash flow improved significantly by Ps. 72.1 million to Ps. 194.8 million, resulting in a net increase in cash and cash equivalents of Ps. 154.8 million.

Guidance, Outlook, and Risks

Management Commentary and Outlook

Management's primary goal is the re-composition of economic value through a predictable regulatory framework and a tariff review to restore profitability in the regulated gas transportation business. In the non-regulated NGL segment, the strategy focuses on margin improvement and volume increases via long-term agreements. The company anticipates seizing new growth opportunities once regulatory agreements are finalized.

Regulatory Risks and Contingencies

• Tariff Renegotiation: The company is in ongoing negotiations with UNIREN regarding the renegotiation of its License. The Public Emergency Law, which suspended tariff adjustments based on the US dollar, remains in effect until December 31, 2006. TGS has rejected previous proposals offering only a 10% tariff increase, seeking a comprehensive agreement.
• Legal Proceedings:
  • GdE Lawsuit: TGS is liable for approximately Ps. 25.6 million (net of pipeline expansion costs) regarding the fair value of compressor plants acquired during privatization. Payment is being offset against future pipeline expansion costs.
  • Tax Disputes: A provision of Ps. 22.1 million has been recorded regarding a potential denial of turnover tax exemptions for NGL sales in the Province of Buenos Aires.
  • Debt Tax Exemption: The CNV questioned the tax-exempt status of certain 2004 notes, potentially exposing the company to withholding income tax on interest payments.
• Debt Covenants: The company is subject to restrictive covenants limiting new debt, capital expenditures, and dividend payments based on debt ratios and coverage ratios. Dividends are capped at US$ 15 million for fiscal years 2005 and 2006.

Investor Verification Checklist

• Regulatory Resolution: Verify the status of the License renegotiation with UNIREN and the likelihood of achieving a tariff adjustment that restores regulated business profitability.
• Currency Exposure: Assess the impact of Argentine Peso volatility on the company's dollar-denominated debt and net financial expenses.
• Legal Provisions: Confirm the final settlement amounts for the GdE compressor plant lawsuit and the outcome of the Buenos Aires Province tax exemption dispute.
• Debt Compliance: Monitor compliance with debt covenants, specifically the consolidated debt ratio and coverage ratio requirements, which restrict capital expenditures and dividends.
• NGL Market Dynamics: Evaluate the sustainability of the NGL segment's revenue growth, which is dependent on international commodity prices and export volumes.