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: Third Quarter and Nine-Month Period ended September 30, 2010
Business Overview: TGS is Argentina's leading natural gas transporter with a firm contracted capacity of approximately 81.2 MMm³/d. The company also processes natural gas and markets natural gas liquids (propane, butane, natural gasoline). It is listed on the NYSE (TGS) and MERVAL (TGSU2).

Key Financial Metrics

Third Quarter 2010 (vs. Q3 2009)

• Net Income: Ps. 37.6 million (Ps. 0.047 per share), up from Ps. 25.8 million.
• Total Net Revenues: Ps. 352.4 million, up Ps. 15.1 million (4.5%).
• Operating Income: Increased by Ps. 12.6 million, driven by higher gas transportation revenue.
• Costs of Sales & Expenses: Ps. 237.3 million, slightly up from Ps. 234.8 million.
• Net Financial Expense: Ps. 40.0 million, down from Ps. 43.8 million.
• Income Tax Expense: Ps. 31.7 million, up from Ps. 26.1 million.

Nine-Month Period 2010 (vs. YTD 2009)

• Net Income: Ps. 90.1 million (Ps. 0.113 per share), up significantly from Ps. 38.7 million.
• Total Net Revenues: Ps. 1,223.6 million, up Ps. 222.0 million (22.2%).
• Operating Income: Ps. 376.4 million, up Ps. 88.2 million from Ps. 288.1 million.
• Costs of Sales & Expenses: Ps. 847.3 million, up Ps. 133.8 million.
• Net Financial Expense: Ps. 185.4 million, up from Ps. 179.1 million.
• Operating Cash Flow: Ps. 118.9 million, substantially lower than Ps. 380.6 million in the prior period.

Material Changes vs. Prior Period

Revenue Drivers

• Natural Gas Transportation: Q3 revenue rose 16.5% to Ps. 162.8 million due to a 20% tariff increase from a 2008 agreement ratified in late 2009. YTD revenue increased 15.2% to Ps. 470.1 million.
• Liquids Segment: Q3 revenue increased 4.5% to Ps. 168.8 million despite a 10% drop in tons sold, driven by higher international prices for propane, butane, and natural gasoline. YTD revenue surged 37.6% to Ps. 685.7 million.
• Other Services: Q3 revenue fell 42% to Ps. 20.8 million due to lower construction service sales. YTD revenue decreased Ps. 27.2 million.

Expense and Cost Drivers

• Export Taxes: Increased Ps. 7.3 million in Q3 and Ps. 44.0 million YTD due to higher international prices and export volumes.
• Allowance for Doubtful Accounts: A Ps. 27.4 million charge was recorded YTD related to receivables from MetroGAS S.A., which filed for bankruptcy.
• Financial Expenses: YTD expenses rose primarily due to a Ps. 56.0 million adjustment on the value of the tariff increase trade receivable (to be billed in long-term installments without interest).

Outlook, Risks, and Contingencies

• Tariff Implementation: The 20% tariff increase will be billed and collected in long-term monthly installments once the National Gas Regulatory Body (ENARGAS) publishes the new schedule. This impacts cash flow timing.
• Cash Flow Volatility: Operating cash flow for the nine-month period dropped significantly (Ps. 118.9 million vs. Ps. 380.6 million) primarily due to higher income tax payments (Ps. 181.0 million).
• Forward-Looking Statements: Management notes that actual results may differ due to risks including regulatory changes, foreign exchange fluctuations, and market conditions.
• Contingency: The bankruptcy of client MetroGAS S.A. resulted in a specific allowance for doubtful accounts, indicating credit risk exposure in the portfolio.

Investor Verification Checklist

• Tariff Collection Status: Verify the timeline for ENARGAS publishing the new tariff schedule and the actual collection of the Ps. 56.0 million receivable adjustment.
• Liquidity Position: Review the full cash flow statement (Exhibit IV) to understand the impact of the Ps. 181.0 million tax payment on working capital.
• Credit Exposure: Assess the remaining exposure to MetroGAS S.A. and other clients in the "Other Services" segment following the bankruptcy allowance.
• Commodity Price Sensitivity: Monitor international reference prices for propane, butane, and natural gasoline, which heavily influence the Liquids segment revenue.
• Debt and FX Risk: Analyze the composition of net financial expenses, specifically the foreign exchange losses and interest costs, given the Argentine peso's volatility.