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, 2009
Business Overview: TGS is Argentina's leading natural gas transporter with approximately 2.8 Bcf/d of firm contracted capacity. It is also a leading processor of natural gas and a major marketer of natural gas liquids (NGL). The company operates in three primary segments: Gas Transportation, NGL Production and Commercialization, and Other Services.

Key Financial Metrics

Third Quarter 2009 (vs. Q3 2008)

• Net Income: Ps. 25.8 million (Ps. 0.032 per share) vs. Ps. 37.0 million (Ps. 0.047 per share) in Q3 2008.
• Total Net Revenues: Ps. 337.3 million vs. Ps. 374.7 million in Q3 2008.
• Segment Revenues:
  • Gas Transportation: Ps. 139.8 million (up from Ps. 127.3 million).
  • NGL Production: Ps. 161.6 million (down 25% from Ps. 216.5 million).
  • Other Services: Ps. 35.9 million (up 16.2% from Ps. 30.9 million).
• Costs of Sales & Expenses: Ps. 234.8 million (down from Ps. 261.7 million).
• Net Financial Expense: Ps. 43.8 million (up from Ps. 33.8 million).
• Income Tax Expense: Ps. 26.1 million (down from Ps. 32.3 million).

Nine-Month Period 2009 (vs. Nine-Month 2008)

• Net Income: Ps. 38.7 million (Ps. 0.049 per share) vs. Ps. 173.1 million (Ps. 0.218 per share) in 2008.
• Total Net Revenues: Ps. 1,001.6 million vs. Ps. 1,110.0 million in 2008.
• Segment Revenues:
  • Gas Transportation: Ps. 408.1 million (up 6.4% from Ps. 383.6 million).
  • NGL Production: Ps. 498.5 million (down 23% from Ps. 648.4 million).
  • Other Services: Ps. 95.0 million (up from Ps. 78.0 million).
• Costs of Sales & Expenses: Ps. 713.5 million (down from Ps. 725.6 million).
• Net Financial Expense: Ps. 179.1 million (up significantly from Ps. 67.7 million).
• Income Tax Expense: Ps. 55.8 million (down from Ps. 129.8 million).
• Operating Cash Flow: Ps. 380.6 million for the nine-month period.

Material Changes vs. Prior Period

• Decline in NGL Revenues: The primary driver of reduced profitability was a sharp decline in NGL export volumes (down 60% in Q3) and international prices for propane, butane, and natural gasoline. Production was impacted by labor union conflicts affecting natural gas availability and a scheduled 15-day maintenance shutdown at the Cerri Complex.
• Foreign Exchange Impact: The Argentine peso depreciated against the US dollar, resulting in a foreign exchange loss of Ps. 75.9 million for the nine-month period, compared to a gain of Ps. 4.7 million in the prior year. This significantly increased net financial expenses.
• Gas Transportation Growth: Revenues in this segment increased due to new firm transportation contracts and the operation of a 78-million-cubic-feet-per-day pipeline capacity expansion completed in late 2008.
• Cost Reductions: Costs of sales decreased primarily due to lower NGL export taxes resulting from reduced export volumes, partially offset by higher labor costs and new government tariff charges on NGL variable costs.

Outlook, Risks, and Management Commentary

• Forward-Looking Statements: The filing contains forward-looking statements based on management's current views. Actual results may differ due to known and unknown risks.
• Key Risks:
  • Commodity Prices: Volatility in international NGL prices directly impacts revenue.
  • Operational Disruptions: Labor union conflicts and maintenance schedules can reduce production volumes.
  • Currency Fluctuation: Depreciation of the Argentine peso creates foreign exchange losses on dollar-denominated liabilities.
  • Regulatory Environment: The Gas Transportation segment is regulated by ENARGAS, and government tariffs affect NGL costs.
• Liquidity: Operating cash flow was positive and used to increase the company's cash position. The filing does not provide specific debt maturity schedules or liquidity ratios beyond the cash flow figure.

Investor Verification Checklist

• Verify the current status of labor union conflicts and their potential impact on future natural gas availability and NGL production volumes.
• Monitor international market prices for propane, butane, and natural gasoline to assess revenue recovery potential.
• Review the company's hedging strategies or exposure to Argentine peso devaluation given the significant foreign exchange losses reported.
• Confirm the utilization rates of the new 78-million-cubic-feet-per-day pipeline capacity expansion.
• Assess the impact of the new Argentine government tariff charge on NGL variable costs on future margins.