Business Context and Reporting Period
Company: Transportadora de Gas del Sur S.A. (TGS)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Third Quarter and Nine-Month Period ended September 30, 2013
Business Overview: Argentina's leading natural gas transporter (approx. 2.9 Bcf/d firm capacity) and leading natural gas processor. The company operates three segments: Natural Gas Transportation, Liquids Production and Commercialization, and Other Services (midstream, construction, telecommunications).
Key Financial Metrics
Third Quarter 2013 (vs. Q3 2012)
- Net Income/Loss: Net loss of Ps. 44.4 million (Ps. 0.056 per share) vs. Net income of Ps. 32.8 million in Q3 2012.
- Total Net Revenues: Ps. 548.5 million (up from Ps. 517.8 million).
- Operating Costs: Cost of sales and administrative expenses increased to Ps. 465.1 million from Ps. 380.2 million.
- Net Financial Expense: Ps. 150.8 million (up from Ps. 86.8 million).
Nine-Month Period Ended September 30, 2013 (vs. Prior Year)
- Net Income: Ps. 49.0 million (Ps. 0.062 per share) vs. Ps. 131.4 million in the prior period.
- Total Net Revenues: Ps. 1,849.5 million (up Ps. 150.2 million).
- Operating Income: Ps. 448.6 million (up Ps. 36.7 million from Ps. 411.9 million).
- Net Financial Expense: Ps. 368.3 million (up Ps. 159.2 million from Ps. 209.1 million).
- Income Tax Expense: Ps. 71.7 million (up from Ps. 31.2 million).
- Cash Flow: Operating cash flow increased by Ps. 89.1 million; however, total cash generation declined by Ps. 175.9 million due to dividend payments of Ps. 263.7 million.
Material Changes and Drivers
- Regulatory Tariff Freeze: The Natural Gas Transportation segment has not received a tariff increase since the 2002 Public Emergency Law. Revenue growth in this segment is driven solely by higher volumes under interruptible contracts, which failed to offset higher fixed costs.
- Foreign Exchange Impact: Significant foreign exchange losses on U.S. dollar-denominated debt (used to finance 90% of fixed assets) drove the increase in net financial expenses. The nine-month FX loss increased by Ps. 156.5 million due to local currency devaluation.
- Liquids Segment Performance: Revenue increased in the nine-month period due to FX rate variations and better sales terms (valid until April 2013), partially offset by lower international reference prices and reduced export volumes to satisfy local demand.
- Cost Structure: Operating costs rose due to increased fixed costs in gas transportation and higher variable production costs in the liquids segment.
Outlook, Risks, and Management Commentary
- Outlook: Management notes the current situation does not allow TGS to restore low operating income levels until a tariff adjustment is implemented.
- Risks: The filing highlights risks associated with forward-looking statements, including regulatory delays in tariff adjustments and currency devaluation impacting debt servicing costs.
- Contingencies: Provisions for contingencies accruals recorded in Q2 2013 contributed to a positive variation in other operating results for the nine-month period.
Investor Verification Checklist
- Tariff Status: Verify the current status of the Public Emergency Law and any pending regulatory decisions regarding gas tariff adjustments in Argentina.
- Debt Exposure: Confirm the exact maturity profile and currency denomination of the U.S. dollar-denominated debt to assess sensitivity to further peso devaluation.
- Liquidity Position: Review the impact of the Ps. 263.7 million dividend payment on the company's remaining cash reserves and ability to fund future capital expenditures.
- Volume vs. Price: Analyze the sustainability of revenue growth in the Natural Gas Transportation segment, which relies on volume increases rather than price hikes.