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: Three months ended March 31, 2013
Business Overview: TGS operates a natural gas transportation pipeline system in Argentina and produces/commercializes natural gas liquids (ethane, propane, butane, natural gasoline) at the Cerri Complex. The company is transitioning to International Financial Reporting Standards (IFRS) for the first time in this reporting period.
Key Financial Metrics
| Metric (in millions of Argentine Pesos) | Q1 2013 | Q1 2012 |
|---|---|---|
| Net Income | 114.0 | 78.5 |
| Operating Income | 269.9 | 174.6 |
| Net Revenues | 825.7 | 645.0 |
| Operating Costs | 389.3 | 303.9 |
| Net Financial Expense | 40.4 (increase vs prior) | - |
| Income Tax Expense | 61.9 | 42.7 |
| Cash Flow from Operating Activities | Increased by 101.9 | - |
Segment Performance (Q1 2013):
- Liquids Production & Commercialization: Generated Ps. 625.8 million in revenue (76% of total) and Ps. 213.4 million in operating profit.
- Gas Transportation: Generated Ps. 171.6 million in revenue (21% of total) and Ps. 51.2 million in operating profit.
- Other Services: Generated Ps. 28.3 million in revenue and Ps. 5.4 million in operating profit.
Material Changes vs. Prior Period
- Revenue Growth: Total net revenues increased by Ps. 180.7 million (28%) compared to Q1 2012. This was driven primarily by the Liquids segment (+Ps. 175.2 million) due to higher volumes sold and a higher foreign exchange rate. Gas transportation revenue increased by Ps. 28.0 million due to higher demand for interruptible services.
- Profitability: Net income rose 45% to Ps. 114.0 million. Operating income increased by Ps. 95.1 million.
- Cost Increases: Operating costs rose by Ps. 85.4 million, primarily due to a Ps. 49.1 million increase in export taxes (linked to peso devaluation) and Ps. 34.8 million in higher variable costs for liquids (higher natural gas prices).
- Financial Expenses: Net financial expense increased by Ps. 40.4 million, largely attributable to a Ps. 44.3 million increase in foreign exchange losses.
- Cash Flow: While operating cash flow increased by Ps. 101.9 million, total cash generation declined by Ps. 26.4 million due to a Ps. 145.3 million dividend payment made in January 2013.
Outlook, Risks, and Contingencies
Management Outlook:
- Regulatory Renegotiation: TGS plans to conclude the renegotiation of its natural gas transportation license with the National Government in 2013 to re-compose profitability.
- Expansion: The company will manage expansion works under the Gas Trust Fund Program, generating revenue from management fees and future O&M of new assets.
- Liquids Strategy: Focus on ensuring natural gas availability for processing and maximizing export prices through competitive bidding.
Key Risks and Contingencies:
- Tax Disputes: TGS maintains provisions for contingencies totaling Ps. 109.1 million (Ps. 39.6 million for Buenos Aires turnover tax exemption and Ps. 69.5 million for turnover tax on fuel consumption). Management believes it has the right to recover these costs via tariff increases if the legal position fails.
- MetroGAS Receivables: A major customer, MetroGAS, is undergoing financial reorganization. As of March 31, 2013, Ps. 86.8 million is due and unpaid (Ps. 69.6 million overdue). TGS received debt notes (Class A and B) totaling US$6.18 million as part of the reorganization.
- Regulatory Uncertainty: The Public Emergency Law limits tariff adjustments. TGS is awaiting the finalization of the license renegotiation process to restore the original tariff adjustment mechanism.
- Foreign Exchange: The company has a significant net monetary liability position subject to exchange rate fluctuations, though partially offset by foreign currency revenues from the Liquids segment.
Investor Verification Checklist
- License Renegotiation Status: Verify the progress of the license renegotiation with the Argentine Government, as this is critical for future tariff adjustments and profitability in the transportation segment.
- MetroGAS Recovery: Monitor the collection status of the Ps. 86.8 million receivable from MetroGAS and the terms of the Class A/B notes received.
- Tax Provision Resolution: Track the outcome of the turnover tax disputes in Buenos Aires and Santa Cruz, which could impact future cash flows if provisions are insufficient or if tariff recovery rights are denied.
- IFRS Transition Impact: Review the reconciliation between Argentine GAAP and IFRS to understand the impact of the accounting standard change on reported equity and income.
- Dividend Policy: Assess the sustainability of dividend payments given the cash outflow of Ps. 145.3 million in Q1 2013 and the company's debt covenants.