Transportadora de Gas del Sur SA TGS (TGS)

Year-Ended December 31, 2004 versus 2003

In the year ended December 31, 2004, TGS posted total net revenue of Ps. 994.1 million in comparison with the Ps. 892.8 million earned in 2003.

Gas Transportation revenue for the year was Ps. 434.3 million, showing a 2.9% increase when compared to the Ps. 422.1 million earned in 2003. The increase was driven basically by higher sales of firm (new firm transportation capacity agreements effective May 2004) and interruptible gas transportation services.

Gas Transportation revenues are derived principally from firm contracts, under which pipeline capacity is reserved and paid for regardless of actual usage by the shipper. TGS also provides interruptible transportation services subject to available pipeline capacity.  This segment is subject to regulation by Ente Nacional Regulador del Gas (“ENARGAS”).  The gas transportation segment represents approximately 44% and 47% of the Company’s total revenue for the fiscal years of 2004 and 2003, respectively. The Economic Emergency Law passed by the Argentine Congress on January 6, 2002, determined the “pesification” of regulated tariffs at an exchange rate of US$ 1=Ps. 1, as well as the prohibition to apply variations of local and international indexes, or any other type of price adjustment thereon. Since that time, the tariff renegotiation process has been delayed with no significant progress thus.

The NGL Production and Commercialization segment revenue increased to Ps. 506.3 million in the year ended December 31, 2004 from Ps. 428.4 million for the previous year, representing a 18.2% rise. Increased revenue is mainly the result of a rise in the international reference prices and, to a lesser extent, of the higher volumes sold.

NGL Production and Commercialization revenue accounted for approximately 51% and 48% of the total revenue for 2004 and 2003, respectively.  NGL production and commercialization consists of natural gas processing activities, conducted at the Cerri Complex, located near the city of Bahía Blanca which connect to each of TGS’s main pipelines, where ethane, propane, butane and natural gasoline are recovered. This segment also includes the commercialization of NGL for the Company’s own account and on behalf of its clients.

In the year ended December 31, 2004, Other Services revenues amounted to Ps. 53.5 million, a 26.5% increase when compared to 2003. This increase is due to the effect of higher services provided, including : (i) a Ps. 5. 3 million increase in construction services , (ii) a Ps. 4. 8 million increase in midstream and (iii) a Ps. 3.1 million increase associated with telecommunications services , which also includes the effect of tariff adjustments tied to domestic inflation or denominated in US dollars.

The Other Services segment mainly includes midstream and telecommunication activities. Its share in the Company’s total revenue accounted for approximately 5% of the total revenue in both 2004 and 2003. Midstream activities consist of gas treatment, separation, and removal of impurities from the natural gas stream and gas compression, rendered at wellhead, typically to gas producers. In addition, TGS provides services related to pipeline and compression plant construction and related operation and maintenance services. Telecommunication services are rendered through Telcosur S.A., a company controlled by TGS. Telcosur S.A. provides services as an independent carrier of carriers to leading telecommunication operators and corporate customers located in its service area.  

Costs of Sales and Administrative and Selling Expenses for the year ended December 31, 2004 rose by Ps. 54. 5 million, from Ps. 485.9 million registered in 2003 to Ps. 540.4 million in 2004, mainly

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due to: (i) a Ps. 18 million increase in NGL production costs originated in higher cost s of natural gas and its richness, (ii) an increase of Ps. 14. 5 million for higher tax on exports (where rates increased from 5% to 20% effective May 2004), and (iii) a Ps. 8.6 million increase in pipeline system maintenance expenses.

Net Financial Expense increased from Ps. 219.8 million, reported in 2003, to Ps. 260.9 million reported in 2004. This negative variation is principally a consequence of the Peso appreciation in 2003, which generated a foreign exchange gain of Ps. 30.7 million. Additionally, the Peso was devalued in 2004 which caused a Ps. 26 million loss. Finally, in 2004, an accounting gain of Ps. 33.1 million was generated as a consequence of the successful closing of the debt restructuring process.

Other Expenses, Net increased from Ps. 26.4 million in 2003 to Ps. 33.7 million in 2004. The increase is mostly because of the Ps. 13 million allowance accounted in 2004 regarding a turnover tax claim, made by Buenos Aires Province, on the NGL sales billed since 2002. The Company also accrued a loss of Ps. 16.1 million during 2004 (in addition to the Ps. 24 million loss recorded in this line in 2003) , in connection with a resolution from the Argentine Supreme Court, in a lawsuit filed by Gas del Estado S.E. (“GdE”) against TGS, relating to transferred assets upon the privatization of such company.

For the fiscal year ended December 31, 2004, the Company reported a Ps. 10. 6 million Income Tax expense, compared with a Ps. 121.5 million gain for 2003. This negative variation of Ps. 132 .1 million is due principally to the Ps. 137.0 million decline in the deferred tax liability generated by the reduction of the exchange loss capitalization in the period of 2003.