TGS

Business Context and Reporting Period

Company: Transportadora de Gas del Sur S.A. (TGS)
Reporting Period: Third Quarter and Nine-Month Period ended September 30, 2003
Business Overview: Argentina's leading natural gas transporter (62.5 MMm³/d capacity) and processor of natural gas liquids (NGL). The company operates under Argentine GAAP with financial statements restated to constant pesos as of February 28, 2003, due to the suspension of inflation accounting by the Executive Branch.

Key Financial Metrics

Note: All figures are in millions of constant Argentine Pesos as of February 28, 2003, unless otherwise noted.

Material Changes vs. Prior Period

• Revenue Mix Shift: Total revenue for the nine-month period decreased 6.5% year-over-year. Gas transportation revenue declined 26.4% (9-month) due to the lack of tariff adjustments and inflation restatements. Conversely, NGL production and commercialization revenue increased 26.1% (9-month) driven by higher international prices.
• Profitability Turnaround: The company reported a net income of Ps. 243.5 million for the nine-month period, a significant improvement from the Ps. 587.4 million net loss in the same period of 2002. This was primarily driven by a massive reduction in net financial expenses (from Ps. 953.4 million to Ps. 159.7 million) and a Ps. 131.8 million income tax gain.
• Cost Management: Costs of sales and administrative expenses decreased slightly (6.2% in Q3, 0.7% in 9-month) due to inflation adjustments and lower depreciation/amortization linked to reduced exchange loss capitalization.
• Financial Expenses: The sharp decline in financial expenses is attributed to the absence of the massive devaluation impact seen in 2002 and lower average interest rates.

Outlook, Risks, and Unusual Items

• Debt Restructuring: TGS has postponed principal and interest payments on its debt agreements following the withdrawal of a restructuring proposal in May 2003. The company is currently in negotiations with creditors to resolve its financial situation.
• Litigation Contingency: The company recorded an increase in "Other Expenses" (Ps. 24.5 million in Q3; Ps. 24.0 million in 9-month) due to an allowance for an adverse result in a Supreme Court litigation against Gas del Estado S.E. regarding assets transferred during privatization.
• Accounting Changes: Financial results are heavily influenced by the application of new accounting rules (Resolution No. 434/03) regarding deferred income tax and the capitalization of exchange losses on foreign currency liabilities. The net book value of capitalized exchange loss was Ps. 163.1 million as of September 30, 2003.
• Regulatory Environment: Gas transportation tariffs remain frozen due to the Economic Emergency Law, preventing adjustments based on international indexes or inflation, which continues to pressure the core transportation segment.

Investor Verification Checklist

• Debt Status: Verify the current status of negotiations with creditors regarding the postponed principal and interest payments.
• Litigation Outcome: Monitor the resolution of the Supreme Court case against Gas del Estado S.E. and the potential impact of the recorded allowance.
• Tariff Adjustments: Assess the likelihood of future regulatory tariff adjustments for gas transportation services to reverse the revenue decline in the core segment.
• Currency Volatility: Evaluate the sensitivity of future financial results to Argentine Peso exchange rate fluctuations, given the company's foreign currency liabilities and the capitalization of exchange losses.
• NGL Price Dependency: Confirm the sustainability of NGL revenue growth, which now accounts for approximately 49% of total revenue, making the company more dependent on volatile international commodity prices.