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: Six months ended June 30, 2006
Business Overview: TGS is a major natural gas transporter in Argentina and a producer/commercializer of Natural Gas Liquids (NGL). The company operates a pipeline system connecting southern/western gas fields to distributors and the Buenos Aires area. Its NGL operations are conducted at the Cerri Complex. The company is subject to regulation by ENARGAS for transportation, while NGL activities are largely unregulated.

Key Financial Metrics (Six Months Ended June 30, 2006)

Note: All figures are in millions of Argentine Pesos (constant) unless otherwise noted. Financial statements are prepared under Argentine GAAP.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased by 37.4% (Ps. 174.4 million). This was driven primarily by the NGL segment, which saw a Ps. 135.3 million increase due to higher international reference prices, increased export volumes, and higher ethane prices. Gas transportation revenue rose 10.3% due to the San Martín pipeline expansion.
• Profitability: Net income increased by 14.1% (Ps. 22.2 million) despite a significant rise in financial expenses.
• Financial Expenses: Net financial expense surged by Ps. 82.1 million (from Ps. 31.6m to Ps. 113.7m). This was caused by a foreign exchange loss of Ps. 29.6 million due to the devaluation of the Argentine Peso in 2006, contrasting with a Ps. 68.0 million gain in 2005 from currency revaluation.
• Costs: Costs of sales and operating expenses increased by Ps. 55.2 million and Ps. 57.6 million respectively, driven by higher NGL production costs, easement expenses, taxes, and labor costs.

Outlook, Risks, and Management Commentary

• Regulatory Renegotiation: The company is engaged in ongoing renegotiations with UNIREN regarding its gas transportation license. Key issues include tariff adjustments to restore profitability and the abandonment of shareholder claims against the Argentine government. The Public Emergency Law, which suspended original tariff adjustment mechanisms, remains valid until December 31, 2006.
• Expansion Strategy: TGS supports initiatives to increase pipeline capacity. A new expansion project (financed via a trust fund) aims to add 20 MMm³/d of capacity, with TGS contributing approximately 7.0 MMm³/d. The San Martín expansion (completed Aug 2005) added 2.9 MMm³/d.
• NGL Strategy: Focus is on improving margins and increasing production volumes through long-term supply agreements and strategic alliances.
• Legal Contingencies:
  • Tax Dispute: A dispute with the Province of Buenos Aires regarding turnover tax exemptions on NGL sales (2002–2003) remains pending. TGS has recorded a provision of Ps. 21.1 million.
  • Debt Taxation: The CNV questioned the tax-exempt status of certain notes issued in 2004. TGS has appealed, but the outcome is uncertain.
• Debt Covenants: The company is subject to restrictive covenants regarding new debt, capital expenditures, and dividend payments, tied to debt-to-EBITDA and coverage ratios.

Investor Verification Checklist

• Currency Risk: Verify the impact of Argentine Peso volatility on financial results, specifically the foreign exchange losses on dollar-denominated debt.
• Regulatory Resolution: Monitor the status of the license renegotiation with UNIREN and the potential for tariff adjustments to restore regulated business profitability.
• Legal Provisions: Review the outcome of the Buenos Aires Province turnover tax dispute and the CNV ruling on debt tax exemptions.
• Debt Compliance: Confirm adherence to debt covenants, particularly regarding the consolidated debt ratio and coverage ratios required for dividend payments.
• Accounting Standards: Note that financials are prepared under Argentine GAAP, which differs from US GAAP, particularly regarding inflation accounting and deferred tax treatments.