TGS

Business Context and Reporting Period

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

Reporting Period: Three months ended March 31, 2003

Business Overview: TGS operates a natural gas transportation pipeline system connecting southern/western Argentina to the Buenos Aires area and produces/commercializes Natural Gas Liquids (NGL) at the Cerri Complex. The company is subject to Argentine GAAP and regulations by ENARGAS. The reporting period is heavily influenced by Argentina's economic crisis, including currency devaluation, inflation accounting changes, and regulatory tariff suspensions.

Key Financial Metrics

Key Ratios: Current Ratio improved to 0.28 (from 0.21); Total Liabilities to Equity decreased to 1.64 (from 2.07). Earnings per share were Ps. 0.27 compared to a loss of Ps. 0.87 in the prior year.

Material Changes vs. Prior Period

• Turnaround in Net Income: The company reported a net income of Ps. 217.6 million, a reversal from a Ps. 689.7 million loss in Q1 2002. This swing is primarily driven by a Ps. 892.9 million improvement in net financial results due to a lower exchange rate on dollar-denominated debt and a Ps. 94.4 million gain from deferred income tax adjustments.
• Revenue Decline: Net revenues decreased by 17.5% (Ps. 45.2 million). Gas transportation revenue fell 46% due to a lack of tariff adjustments and inflation restatement effects, despite stable contracted capacity.
• NGL Segment Growth: NGL production and commercialization revenue increased by Ps. 46.8 million (82.5% growth), driven by higher international LPG prices, local price increases, and renegotiated dollar-tied agreements.
• Cost Reduction: Costs of sales and administrative expenses declined by Ps. 7.2 million, largely due to reduced depreciation and amortization resulting from lower exchange loss capitalization.

Guidance, Outlook, Risks, and Unusual Items

Outlook and Management Commentary

Management identifies two primary challenges for the remainder of the year: debt restructuring and tariff recomposition. The company failed to achieve the requisite majorities to file an "Acuerdo Preventivo Extrajudicial" (APE) for debt restructuring and is evaluating alternative courses of action to align loan maturities with cash flows. TGS expects to seek partial tariff adjustments via judicial appeal or legislative amendment to the Economic Emergency Law, anticipating a full regulatory renegotiation once the new government takes office in May 2003.

Risks and Contingencies

• Debt Maturity Wall: Approximately US$ 492 million in debt is due in 2003. Failure to restructure could trigger defaults on long-term loans.
• Regulatory Uncertainty: The Public Emergency Law (Law 25,561) eliminated tariff indexing to the US dollar and foreign price indexes, fixing the rate at Ps. 1 = US$ 1. Tariff increases approved by the Executive Branch have been suspended by courts.
• Inflation Accounting Suspension: Effective March 1, 2003, the company suspended inflation accounting per government decree. This resulted in an unrecognized asset decrease of Ps. 29 million and an unrecognized loss of Ps. 18 million for the quarter.
• Legal Disputes: Significant ongoing litigation includes claims by the former state-owned entity (GdE) regarding compressor plant costs and provincial stamp tax assessments totaling hundreds of millions of pesos, though the company believes it has meritorious defenses.

Investor Verification Checklist

• Debt Restructuring Status: Verify the outcome of the ongoing negotiations with creditors regarding the US$ 1.027 billion debt portfolio and the feasibility of alternative restructuring plans if the APE fails.
• Tariff Recovery: Monitor the status of the 10% tariff increase authorized in January 2003 and the likelihood of further adjustments given the suspension of the Public Emergency Law by courts.
• Currency Exposure: Assess the impact of the suspended inflation accounting on future financial statements and the company's ability to service dollar-denominated debt with peso-denominated revenues.
• Liquidity Position: Review the company's cash burn rate and ability to meet the US$ 400 million+ in debt maturities due in 2003 without external financing.
• Legal Reserves: Confirm the adequacy of provisions for the provincial stamp tax claims and the GdE compressor plant litigation.