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: Full fiscal year and fourth quarter ended December 31, 2010
Business Overview: Argentina's leading natural gas transporter with approximately 2.8 Bcf/d firm contracted capacity. The company also operates as a leading processor and marketer of natural gas liquids (Liquids) via the Cerri Complex. The company is listed on the NYSE (TGS) and MERVAL (TGSU2).

Key Financial Metrics

Segment Revenue Breakdown (2010):

• Liquids Production and Commercialization: Ps. 1,010.4 million (61% of total)
• Natural Gas Transportation: Ps. 551.0 million (33% of total)
• Other Services: Ps. 91.6 million (6% of total)

Material Changes vs. Prior Period

Net Income Decline: Full-year net income decreased by Ps. 76.2 million (43%) to Ps. 102.2 million. Q4 net income dropped significantly to Ps. 12.1 million from Ps. 139.7 million in the prior year.

Primary Driver of Variance: The decline is primarily attributed to the derecognition in 2010 of Ps. 122.1 million in revenue related to a 20% natural gas transportation tariff increase granted retroactively to September 2008. This amount was recognized in 2009 but removed in 2010 due to regulatory appeals by ENARGAS and the Ministry of Federal Planning.

Revenue Growth Drivers: Despite the tariff adjustment, total revenues increased by Ps. 52.4 million. The Liquids segment grew 26.2% to Ps. 1,010.4 million, driven by a 30% increase in average international prices and higher export sales.

Expense Variations:

• Costs of Sales: Increased by Ps. 128.4 million due to higher export taxes (Ps. 48.3 million), higher Liquids costs (Ps. 32.5 million), and a Ps. 27.2 million allowance for doubtful accounts related to MetroGAS S.A. bankruptcy.
• Financial Expenses: Decreased by Ps. 48.9 million, largely due to lower foreign exchange losses (Ps. 49.5 million reduction) compared to 2009.

Outlook, Risks, and Management Commentary

Dividend Declaration: TGS declared an annual cash dividend of Ps. 40.0 million (approx. Ps. 0.050 per share) for 2010, pending shareholder approval.

Liquidity Position: Cash and cash equivalents decreased significantly from Ps. 420.4 million to Ps. 64.4 million. This reduction was caused by a Ps. 191.1 million outflow from operating activities (primarily higher income tax payments) and Ps. 113.3 million used in financing activities.

Regulatory Risks: The company faces ongoing uncertainty regarding the 20% tariff increase. ENARGAS and the Ministry of Federal Planning have appealed the court verdict upholding TGS's right to the increase, leading to the discontinuation of revenue recognition for this item in 2010.

Forward-Looking Statements: Management notes that actual results may differ materially from projections due to known and unknown risks, including regulatory changes and market conditions.

Investor Verification Checklist

• Tariff Resolution: Verify the current status of the regulatory appeal regarding the 20% tariff increase and the potential for future revenue recognition.
• Liquidity Trends: Monitor the significant drop in cash reserves (from Ps. 420.4m to Ps. 64.4m) and the company's ability to fund operations and dividends without new financing.
• Credit Exposure: Assess the impact of the Ps. 27.2 million allowance for doubtful accounts related to MetroGAS S.A. and potential further credit risks in the sector.
• Commodity Prices: Evaluate the sustainability of the Liquids segment's growth, which is heavily dependent on international natural gas liquid prices.
• Dividend Approval: Confirm the approval of the declared Ps. 40.0 million dividend at the Annual Shareholders' Meeting.