TGS

Business Context and Reporting Period

Company: Transportadora de Gas del Sur S.A. (TGS)

Reporting Period: Nine months ended September 30, 2004

Business Overview: TGS operates natural gas transportation pipelines and produces/commercializes Natural Gas Liquids (NGL) in Argentina. The company is regulated by ENARGAS for transportation services. The financial statements are prepared under Argentine GAAP, though the company suspended inflation accounting effective March 1, 2003, per government decree, deviating from standard accounting principles.

Key Financial Metrics

Liquidity Ratio (Current Assets/Current Liabilities): 0.34 (as of Sept 30, 2004) vs 0.21 (2003).

Material Changes vs. Prior Period

• Net Income Decline: Net income dropped 71.6% to Ps. 69.2 million. This decrease is primarily due to the absence of a Ps. 131.8 million income tax benefit recorded in 2003 (related to deferred tax liability reductions) and a Ps. 37.6 million foreign exchange loss in 2004 due to peso devaluation.
• Revenue Growth: Total net revenues increased 11.4% to Ps. 741.2 million.
  • NGL Segment: Revenues rose Ps. 55.4 million (17.3%) driven by higher international oil prices and an 8% volume increase.
  • Gas Transportation: Revenues increased 3.1% due to new firm contracts (effective May 2004) and higher interruptible service sales.
• Financial Expenses: Net financial expenses increased Ps. 86.8 million (54.3%) due to exchange losses on dollar-denominated liabilities and higher interest costs.
• Cost Increases: Cost of sales and administrative expenses rose Ps. 26.5 million, driven by higher NGL production costs and an increase in export withholding taxes on propane and butane (from 5% to 20% in May 2004).

Outlook, Risks, and Management Commentary

• Debt Restructuring: The company faces significant liquidity challenges and has not paid principal or interest on debt since May 2003. On October 1, 2004, TGS submitted a new restructuring proposal offering creditors 11% cash and new debt instruments for the remaining 89%. Success depends on achieving 96% creditor consent.
• Tariff Renegotiation: The company is in the process of renegotiating its transportation license with the Argentine government. Management expects to start formal renegotiation by the end of 2004 to adjust tariffs to cover operating costs and investments.
• Regulatory Risks: The creation of a Gas Electronic Market (MEG) may impact interruptible transportation revenues. Additionally, the suspension of tariff adjustments linked to the US Producer Price Index (PPI) since 2002 remains a critical issue.
• Going Concern: The auditor's report expresses substantial doubt about the company's ability to continue as a going concern due to debt defaults, covenant breaches, and regulatory uncertainty. The financial statements do not include adjustments that might result from the resolution of these uncertainties.
• Investment Plans: TGS submitted a project to expand the San Martin pipeline capacity (2.9 MMm3/d) with an estimated cost of US$ 285 million, partially funded by a government Trust Fund.

Key Facts for Investor Verification

• Debt Default Status: Verify the current status of the October 2004 debt restructuring proposal and whether the required 96% creditor consent has been achieved.
• Tariff Renegotiation Progress: Confirm if the regulatory framework renegotiation with the Argentine government has commenced and the timeline for tariff adjustments.
• Liquidity Position: Assess the company's ability to meet operational expenses given the low current ratio (0.34) and reliance on deferred debt payments.
• Legal Contingencies: Review the status of the Supreme Court decision regarding the Gas del Estado (GdE) lawsuit concerning compressor plant costs and provincial stamp tax claims.
• Accounting Departures: Note that the financial statements deviate from Argentine GAAP regarding inflation accounting and deferred tax valuation, which may affect comparability.