TGS

Business Context and Reporting Period

Company: Transportadora de Gas del Sur S.A. (TGS)
Reporting Period: Fiscal Year ended December 31, 2004 (and Fourth Quarter 2004)
Business Overview: TGS is Argentina's leading natural gas transporter with a delivery capacity of approximately 63.4 MMm³/d. The company also operates as a leading natural gas processor and marketer of natural gas liquids (NGL). Its operations are divided into Gas Transportation, NGL Production and Commercialization, and Other Services (midstream and telecommunications).

Key Financial Metrics

Segment Revenue Breakdown (FY 2004):

• NGL Production & Commercialization: Ps. 506.3 million (51% of total revenue).
• Gas Transportation: Ps. 434.3 million (44% of total revenue).
• Other Services: Ps. 53.5 million (5% of total revenue).

Expenses: Costs of Sales and Administrative/Selling Expenses totaled Ps. 540.4 million. Net Financial Expenses were Ps. 260.9 million.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 11.4% year-over-year. NGL revenue rose 18.2% driven by higher international reference prices, while Gas Transportation revenue grew 2.9% due to new firm capacity agreements.
• Net Income Decline: Full-year net income dropped 48% to Ps. 147.9 million. The 2003 prior year included significant one-time positive accounting results related to income tax and Peso revaluation which were not repeated in 2004.
• Quarterly Improvement: Q4 2004 Net Income was Ps. 78.7 million, a 84% increase over Q4 2003 (Ps. 42.7 million), primarily due to an accounting gain from the conclusion of the debt restructuring process.
• Cost Increases: Operating costs rose Ps. 54.5 million, driven by higher NGL production costs, increased export taxes (rates rose from 5% to 20% in May 2004), and higher pipeline maintenance expenses.
• Financial Expenses: Net financial expenses increased to Ps. 260.9 million due to Peso devaluation losses in 2004, partially offset by a Ps. 33.1 million accounting gain from debt restructuring.

Guidance, Outlook, Risks, and Unusual Items

Debt Restructuring: TGS successfully concluded a debt restructuring process in December 2004. Creditors holding 99.76% of the principal debt accepted a proposal involving a cash payment of past due interest and 11% of the principal, with the remaining 89% exchanged for new or amended debt obligations. This improved the liquidity ratio from 0.24x to 1.72x.

Unusual Items & Contingencies:

• Turnover Tax Claim: The company accrued a Ps. 13 million allowance regarding a turnover tax claim by Buenos Aires Province on NGL sales billed since 2002.
• Legal Litigation: A Ps. 16.1 million loss was accrued in 2004 (plus Ps. 24 million in 2003) related to a lawsuit filed by Gas del Estado S.E. regarding assets transferred during privatization.
• Taxation: Income tax expense was Ps. 10.6 million in 2004, compared to a Ps. 121.5 million gain in 2003, largely due to the reduction in deferred tax liability from exchange loss capitalization.

Regulatory Environment: Gas transportation tariffs remain subject to the "pesification" of 2002 (US$1 = Ps.1) with no significant progress on renegotiation. Tariffs are regulated by ENARGAS.

Forward-Looking Statements: The filing includes standard disclaimers that actual results may differ materially from projections due to known and unknown risks.

Investor Verification Checklist

• Debt Profile: Verify the specific terms and maturity schedule of the new debt obligations issued during the December 2004 restructuring.
• Regulatory Tariffs: Monitor the status of the tariff renegotiation process with ENARGAS, as current rates are fixed at 2002 levels.
• Legal Exposure: Track the status of the lawsuit filed by Gas del Estado S.E. and the Buenos Aires Province tax claim to assess potential future accruals.
• Export Tax Impact: Evaluate the long-term impact of the increased export tax rate (20%) on NGL margins.
• Currency Risk: Assess the company's exposure to Argentine Peso devaluation given the history of foreign exchange losses impacting financial expenses.