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, 2009
Business Overview: TGS operates a natural gas pipeline system in Argentina and produces/commercializes natural gas liquids (NGL). The company is regulated by ENARGAS for transportation tariffs, which were "pesified" (fixed at 1:1 USD/ARS) in 2002, creating significant exposure to currency devaluation. The NGL segment is unregulated and exposed to international commodity prices.

Key Financial Metrics (Six Months Ended June 30, 2009)

Note: Financial statements are prepared in Argentine Pesos (ARS). The filing does not provide a clear value for total equity in the summary tables, though the balance sheet summary indicates Shareholders' Equity of Ps. 3,055.6 million as of June 30, 2009.

Material Changes vs. Prior Period

• Revenue Decline: Net revenues fell 9.7% year-over-year. While Gas Transportation revenue increased by Ps. 12.0 million due to new firm contracts and pipeline expansion, NGL production revenue plummeted by Ps. 95.0 million due to a sharp drop in international propane, butane, and natural gasoline prices.
• Profitability Collapse: Net income dropped 90.5% to Ps. 12.9 million. This was driven by lower NGL margins and a significant deterioration in net financial results.
• Financial Expenses: Net financial expenses surged by Ps. 101.4 million (from Ps. 33.9 million expense to Ps. 135.3 million expense). This was primarily caused by a Ps. 65.4 million exchange rate loss due to the 9% devaluation of the Argentine peso in the first half of 2009, contrasting with a Ps. 36.0 million gain in the same period of 2008.
• Cost Increases: Costs of sales and operating expenses rose by Ps. 18.5 million and Ps. 17.1 million respectively, driven by higher labor costs and a new government tariff charge (Ps. 0.049 per cubic meter) to cover natural gas import price differentials.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Tariff Renegotiation: TGS is focused on recomposing natural gas transportation tariffs. A provisional agreement signed in October 2008 provides for a 20% tariff increase retroactive to September 1, 2008, pending ratification by Presidential Decree. Funds generated are to be invested in the pipeline system via a trust fund.
• Expansion: The company continues to manage expansion works under the Gas Trust Program. A 78 MMcf/d expansion was completed in 2008, and a 169 MMcf/d expansion (including a new pipeline in the Magellan Strait) was planned for 2009.
• NGL Strategy: Management aims to defend sales margins in the NGL segment through permanent monitoring of indicators, given the volatility of international prices.

Risks and Contingencies

• Regulatory Uncertainty: The "Emergency Law" (pesification) remains in force until December 31, 2009. The outcome of the integral license renegotiation with the Argentine government is uncertain and critical for future asset valuation.
• Shareholder Solvency: The controlling shareholder, CIESA, is facing a bankruptcy petition of US$ 127 million from Ashmore Energy International Limited (AEI). A New York court has ordered CIESA to prove its solvency. This creates uncertainty regarding the stability of TGS's ownership structure.
• Legal and Tax Disputes: TGS faces ongoing tax assessments regarding turnover tax on NGL sales (provision of Ps. 21.1 million) and fuel usage (provision of Ps. 35.6 million). There is also a pending lawsuit from the former state-owned gas company (GdE) regarding compressor plant costs, with a net provision of Ps. 8.5 million.
• Currency Risk: The company holds significant foreign currency debt. Continued devaluation of the Argentine peso will result in further exchange rate losses.

Investor Verification Checklist

• Tariff Ratification: Verify if the 20% tariff increase provisional agreement has been ratified by Presidential Decree and when it will become effective.
• CIESA Bankruptcy Status: Monitor the outcome of the US$ 127 million bankruptcy petition against CIESA and its impact on TGS's governance and operations.
• License Renegotiation: Track the progress of the integral license renegotiation with the Argentine government, which is essential for long-term asset valuation and tariff recovery.
• Exchange Rate Exposure: Assess the impact of further Argentine peso devaluation on the company's net financial results and debt service capacity.
• NGL Price Sensitivity: Evaluate the correlation between international NGL prices and TGS's revenue stability, as this segment is unregulated and highly volatile.