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: Second Quarter and First Half ended June 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 regulated transportation segments and commercial NGL production at the Cerri Complex.

Key Financial Metrics

Second Quarter 2009 (Three Months Ended June 30)

• Net Income: Ps. 24.6 million (Ps. 0.031 per share; Ps. 0.155 per ADS).
• Total Net Revenues: Ps. 337.9 million.
• Operating Income: Increased 19% year-over-year.
• Net Financial Expense: Ps. 52.5 million (compared to Ps. 9.6 million income in Q2 2008).
• Income Tax Expense: Ps. 23.4 million.

First Half 2009 (Six Months Ended June 30)

• Net Income: Ps. 12.9 million (Ps. 0.016 per share; Ps. 0.081 per ADS).
• Total Net Revenues: Ps. 664.3 million.
• Operating Income: Ps. 185.6 million.
• Net Financial Expense: Ps. 135.3 million (compared to Ps. 33.9 million expense in H1 2008).
• Cash Flow from Operating Activities: Ps. 247.4 million.
• Identifiable Assets: Ps. 5,268.2 million.
• Identifiable Liabilities: Ps. 2,212.6 million.

Material Changes vs. Prior Period

Revenue Trends

• Q2 2009 vs. Q2 2008: Total revenues increased 24.6% (Ps. 337.9M vs. Ps. 271.2M).
  • Natural Gas Transportation: Increased 4.6% to Ps. 134.9M due to new firm contracts and pipeline expansion.
  • NGL Production: Increased 51% to Ps. 168.9M driven by a 26% volume increase, despite lower international prices.
  • Other Services: Increased 11% to Ps. 34.1M.
• H1 2009 vs. H1 2008: Total revenues decreased 9.7% (Ps. 664.3M vs. Ps. 735.3M).
  • Natural Gas Transportation: Increased 4.7% to Ps. 268.3M.
  • NGL Production: Decreased 22% to Ps. 336.9M due to sharp declines in international propane, butane, and natural gasoline prices in late 2008.
  • Other Services: Increased 25.5% to Ps. 59.1M.

Profitability and Expenses

• Net Income Decline: Q2 net income fell 55.6% and H1 net income fell 90.5% compared to the prior year.
  • Primary Driver: Significant exchange rate losses due to the devaluation of the Argentine peso against the US dollar. Q2 saw a Ps. 13.0M loss (vs. Ps. 44.8M gain in 2008); H1 saw a Ps. 65.4M loss (vs. Ps. 36.0M gain in 2008).
  • Cost Increases: Costs of sales rose due to higher NGL direct costs and a new government tariff charge (effective Nov 2008) to cover the difference between import and local gas prices. Labor costs also increased by Ps. 19.8M in H1.

Outlook, Risks, and Management Commentary

• Management Commentary: The company highlighted that operating income growth in Q2 was driven by higher NGL volumes and gas availability. However, the financial results were heavily impacted by currency fluctuations and the global commodity price environment.
• Forward-Looking Statements: The filing includes standard disclaimers that future results may differ materially due to known and unknown risks.
• Key Risks Identified:
  • Currency Risk: Significant exposure to Argentine peso devaluation against the US dollar, impacting financial expenses and reported earnings.
  • Commodity Price Risk: Revenue volatility linked to international prices of propane, butane, and natural gasoline.
  • Regulatory Risk: Operations are subject to regulation by ENARGAS and government tariff adjustments.
• Liquidity: Operating cash flow of Ps. 247.4 million in H1 2009 was primarily used to increase the company's cash position. The filing does not provide specific details on debt maturities or credit facilities beyond the general liquidity statement.

Investor Verification Checklist

• Currency Impact: Verify the sensitivity of future earnings to Argentine peso/US dollar exchange rate fluctuations, given the Ps. 65.4M loss in H1 2009.
• NGL Price Exposure: Assess the correlation between international NGL prices and the company's revenue stability, noting the 22% revenue drop in H1 2009.
• Regulatory Tariffs: Confirm the ongoing impact of the November 2008 government tariff charge on natural gas costs and margins.
• Debt Structure: Review the full 20-F filing for detailed debt maturity schedules and interest rate exposure, as the 6-K summary only provides aggregate financial expense figures.
• ADS Conversion: Verify the current ADS-to-share ratio and conversion rates for accurate per-share valuation.