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: Nine months ended September 30, 2006 (with specific Q3 2006 data)
Business Overview: Argentina's leading natural gas transporter and processor, and a major marketer of natural gas liquids (NGL). The company operates regulated gas transportation pipelines and an NGL production facility (Cerri Complex). It is controlled by Compañía de Inversiones de Energía S.A. (CIESA).

Key Financial Metrics

Revenue and Profitability (Nine Months Ended Sept 30, 2006)

• Total Net Revenues: Ps. 959.2 million (vs. Ps. 736.3 million in 2005).
• Net Income: Ps. 272.8 million (Ps. 0.343 per share; Ps. 1.717 per ADS).
• Operating Income: Ps. 430.9 million (vs. Ps. 307.0 million in 2005).
• Net Financial Expense: Ps. 159.5 million (vs. Ps. 92.5 million in 2005).

Revenue by Segment (Nine Months 2006)

• NGL Production and Commercialization: Ps. 524.9 million (55% of total revenue).
• Gas Transportation: Ps. 368.2 million (38% of total revenue).
• Other Services: Ps. 66.1 million (7% of total revenue).

Liquidity and Cash Flow

• Cash Flow from Operating Activities: Ps. 499.7 million.
• Capital Expenditures (Additions to PP&E): Ps. 76.6 million.
• Financing Activities: Net outflow of Ps. 124.5 million.
• Investment Activities: Net outflow of Ps. 80.3 million.

Material Changes vs. Prior Period

Revenue Growth Drivers

• NGL Segment: Revenue increased 49.6% year-over-year due to higher international reference prices, a new ethane price agreement with PBB-Polisur S.A., and increased production volumes.
• Gas Transportation: Revenue increased 8.6% year-over-year, driven by additional firm transportation services (Ps. 20.8 million), largely from the San Martín pipeline expansion.
• Other Services: Revenue increased 42.8% due to higher volumes of construction and telecommunication services.

Expense and Financial Variations

• Costs of Sales: Increased by Ps. 99.0 million, primarily due to higher natural gas wellhead prices (Ps. 38.0 million), increased easement expenses (Ps. 16.8 million), and higher labor costs (Ps. 14.2 million).
• Net Financial Expense: Increased significantly by Ps. 67.0 million. This was driven by a foreign exchange loss of Ps. 39.3 million due to Argentine peso devaluation in 2006, contrasting with a Ps. 52.5 million exchange gain in 2005.
• Other Income: Increased by Ps. 19.1 million, largely due to a Ps. 24.7 million gain from an insurance liquidation regarding 2005 facility damage.

Outlook, Risks, and Management Commentary

• Regulatory Environment: The Economic Emergency Law (2002) fixed regulated tariffs at US$1 = Ps.1 and prohibited price adjustments. Management notes that the tariff renegotiation process has been delayed with no significant progress.
• Capital Strategy: The company relies on cash generated from operations as its primary source of financing for future activities.
• Forward-Looking Statements: The filing includes standard disclaimers that actual results may differ due to known and unknown risks, including currency fluctuations and regulatory changes.
• Unusual Items: The financial results include a one-time gain from insurance liquidation related to prior-year facility damage.

Investor Verification Checklist

• Currency Risk: Verify the impact of Argentine peso devaluation on future financial expenses and net income, given the significant exchange loss recorded in 2006.
• Regulatory Tariffs: Monitor the status of the tariff renegotiation process with ENARGAS, as current revenues are constrained by the 2002 "pesification" law.
• NGL Price Volatility: Assess the sustainability of NGL revenue growth, which is heavily dependent on international reference prices and specific ethane contracts.
• One-Time Gains: Adjust earnings analysis to exclude the Ps. 24.7 million insurance liquidation gain to understand core operational performance.
• Debt Structure: Review the breakdown of liabilities (Ps. 2,717.3 million identifiable liabilities) to understand exposure to foreign currency debt.