TGS

Business Context and Reporting Period

Company: Transportadora de Gas del Sur S.A. (TGS)
Reporting Period: Fourth Quarter and Fiscal Year ended December 31, 2002
Context: TGS, Argentina's leading natural gas transporter and NGL processor, reported results heavily impacted by the Argentine economic crisis, the enactment of the Public Emergency Law, and the devaluation of the peso. Financial statements are presented in constant Argentine pesos as of December 31, 2002, incorporating inflation accounting reintroduced in 2002.

Key Financial Metrics

Note: Revenue and profit figures are in constant Argentine pesos. The filing does not provide a clear value for total debt or liquidity ratios, though specific debt maturities are listed below.

Material Changes vs. Prior Period

• Revenue Decline: Total net revenue decreased 25.4% in Q4 2002 and 23.3% for the full year 2002 compared to 2001. Gas transportation revenue, the core business, dropped 57.4% in Q4 and 23.3% for the year due to the suspension of tariff adjustments under the Economic Emergency Law.
• Profitability Reversal: The company swung from a net income of Ps. 236.6 million in 2001 to a net loss of Ps. 633.4 million in 2002. This was driven primarily by a Ps. 858.8 million increase in net financial expenses due to peso devaluation on dollar-denominated debt and inflation accounting effects.
• Segment Shift: While gas transportation revenue share fell from 79% to 45% of total revenue in Q4, NGL Production and Commercialization revenue rose 49.7% for the year, increasing its share to 41% due to higher local prices and export volumes benefiting from devaluation.
• Cost Management: Administrative and selling expenses decreased 36% for the year due to cost-saving measures. However, depreciation increased Ps. 35.2 million due to the amortization of capitalized exchange losses.

Outlook, Risks, and Management Commentary

• Management Commentary: CEO Eduardo Ojea Quintana described 2002 as the most challenging year since inception. The company implemented cost-saving measures and reduced capital expenditures to preserve cash.
• 2003 Challenges: Management anticipates two critical challenges: (i) renegotiation of regulated tariffs with the Executive Branch, and (ii) reaching an agreement with financial creditors.
• Liquidity and Debt Risk: TGS faces significant scheduled debt maturities in 2003 totaling US$ 400 million (US$ 100m on March 18, US$ 150m on March 27, and US$ 150m on April 15). The company explicitly states it does not currently have available cash to meet these obligations and is analyzing options to amend indebtedness.
• Accounting Adjustments: The company capitalized Ps. 584.1 million in exchange losses related to foreign currency liabilities into Property, Plant, and Equipment. No income tax was accrued for 2002 due to tax loss carry-forwards generated by the devaluation.

Investor Verification Checklist

• Debt Restructuring Status: Verify the outcome of negotiations with creditors regarding the US$ 400 million in debt maturing in Q1/Q2 2003.
• Tariff Renegotiation: Monitor progress on the renegotiation of regulated gas transportation tariffs with the Argentine Executive Branch.
• Cash Position: Confirm current cash balances and liquidity sources given the stated inability to meet upcoming maturities.
• Exchange Loss Capitalization: Review the impact of the Ps. 584.1 million capitalized exchange loss on future depreciation and asset recoverability.
• Export Tax Impact: Assess the long-term effect of the 5% export tax on NGL revenues, which currently offsets some benefits of the peso devaluation.