TGS

Business Context and Reporting Period

Company: Gas Transporter of the South Inc. (Transportadora de Gas del Sur S.A. or "TGS")
Reporting Period: Year ended December 31, 2003
Industry: Natural gas transportation, Natural Gas Liquids (NGL) production, and midstream/telecommunications services in Argentina.
Context: TGS operates in a highly volatile macroeconomic environment following the 2002 Argentine economic crisis. The company faces significant challenges regarding the "pesification" of tariffs (conversion to local currency without adjustment), delays in regulatory renegotiations with the government, and a substantial foreign currency-denominated debt burden. Despite these headwinds, the company reported a return to profitability in 2003 driven by operational efficiency, increased demand for natural gas, and favorable international NGL prices.

Key Financial Metrics (2003 vs. 2002)

Note: Figures are in millions of Argentine pesos, restated to constant pesos as of February 28, 2003, except where noted.

Segment Performance

• Gas Transportation (Regulated): Revenues decreased 20% to Ps. 422.1 million due to the lack of tariff adjustments following the 2002 devaluation. This segment represented 47% of total revenue (down from 57% in 2002). However, average daily deliveries increased to 52.6 MMm3/d.
• NGL Production (Non-Regulated): Revenues increased 23% to Ps. 428.4 million, becoming the largest revenue contributor (48% of total). Growth was driven by high international prices and contract renegotiations.
• Other Services: Revenues decreased to Ps. 42.3 million (5% of total), primarily due to lower construction services compared to 2002.

Material Changes and Financial Condition

Profitability Turnaround: The company swung from a net loss of Ps. 608.4 million in 2002 to a net income of Ps. 286.2 million in 2003. This improvement was primarily driven by a significant reduction in net financial losses (from Ps. 1,071.4 million to Ps. 219.8 million) due to the appreciation of the Argentine peso against the US dollar and the adoption of new deferred tax accounting rules.

Debt Restructuring Status: In May 2003, TGS withdrew a proposed debt restructuring plan after failing to secure the requisite majority of creditor approval. Consequently, the company announced the deferral of principal and interest payments on its financial indebtedness to preserve assets and operations. As of December 31, 2003, negotiations with major creditors were ongoing. Total debt was reclassified as current liabilities due to the default status.

Liquidity: Operating cash flow improved significantly to Ps. 527.6 million, largely due to the deferral of debt service payments. The company maintained a liquidity ratio of 0.24 (current assets to current liabilities).

Outlook, Risks, and Management Commentary

Management Outlook

Management expresses "moderate optimism" for 2004, contingent upon two critical resolutions:

1. Regulatory Renegotiation: The company expects the government to finalize the renegotiation of the transportation license and tariff adjustment methodology by the end of 2004. This is deemed essential to recover investment capacity and ensure long-term viability.
2. Debt Restructuring: TGS aims to complete the restructuring of its financial indebtedness in 2004 to align debt service with operational cash flows.

The company plans to focus on optimizing existing assets to meet incremental gas demand and developing expansion projects with international partners using innovative contractual structures.

Risks and Contingencies

• Going Concern Uncertainty: The independent auditors (Price Waterhouse & Co.) have issued a report stating that the uncertainties regarding the regulatory framework and debt restructuring raise "substantial doubt" about the company's ability to continue as a going concern. The financial statements do not include adjustments that might result from the resolution of these uncertainties.
• Regulatory Risk: Delays in the renegotiation process with the Executive Branch (UNIREN) continue to frustrate the economic recomposition of the regulated gas transportation business.
• Legal Proceedings: TGS is involved in significant litigation, including a Supreme Court ruling requiring payment for compressor plants acquired during privatization (amount to be determined by expert assessment) and various provincial stamp tax claims totaling hundreds of millions of pesos (though injunctions have been granted in several cases).
• Accounting Departures: The financial statements depart from standard accounting principles regarding the treatment of inflation (suspended per government decree) and the classification of defaulted debt.

Key Facts for Investor Verification

• Debt Default Status: Verify the current status of negotiations with creditors regarding the deferral of principal and interest payments announced in May 2003.
• Regulatory Timeline: Confirm the progress of the UNIREN-led renegotiation process and the likelihood of tariff adjustments being approved by the end of 2004.
• Going Concern Assessment: Review the auditor's qualification regarding the substantial doubt on the company's ability to continue as a going concern.
• Legal Liabilities: Monitor the outcome of the Supreme Court ruling regarding the valuation of compressor plants and the resolution of provincial stamp tax disputes.
• Currency Exposure: Assess the impact of future Argentine peso fluctuations on the company's dollar-denominated debt and peso-denominated revenues.