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: Nine months ended September 30, 2012
Business Overview: TGS operates a natural gas transportation pipeline system in southern and western Argentina and produces/commercializes natural gas liquids (ethane, propane, butane, natural gasoline) at the Cerri Complex. The company is regulated by ENARGAS and operates under a 35-year license subject to renegotiation with the Argentine government.
Key Financial Metrics (Nine Months Ended Sept 30, 2012)
| Metric | 2012 (Ps. Millions) | 2011 (Ps. Millions) | Variation |
|---|---|---|---|
| Net Revenues | 1,699.3 | 1,245.8 | +453.5 (+36.4%) |
| Gross Profit | 724.5 | 601.3 | +123.2 |
| Operating Income | 416.9 | 374.8 | +42.1 |
| Net Income | 135.7 | 151.6 | -15.9 (-10.5%) |
| Operating Cash Flow | 398.3 | 289.7 | +108.6 |
| Total Assets | 5,363.6 | 4,866.6 | +497.0 |
| Total Liabilities | 3,274.5 | 2,992.2 | +282.3 |
| Shareholders' Equity | 2,089.2 | 1,874.4 | +214.8 |
Note: All figures are in millions of Argentine Pesos (Ps.) unless otherwise noted. Financial statements are prepared under Argentine GAAP.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 36.4% year-over-year, driven primarily by the Liquids segment (up Ps. 398.9 million). This was due to higher volumes sold on TGS's own account, increased exports, and a >30% rise in ethane prices. Natural Gas Transportation revenue grew modestly (Ps. 10.4 million) due to new operation and maintenance contracts for gas trust assets.
- Net Income Decline: Despite higher operating income, Net Income fell by Ps. 15.9 million. The primary driver was a Ps. 68.7 million increase in foreign exchange losses resulting from the devaluation of the Argentine peso against the US dollar, impacting TGS's dollar-denominated net liability position.
- Cost Increases: Cost of sales rose by Ps. 330.3 million. A significant portion (Ps. 141 million) was attributed to a government-mandated tariff charge increase for natural gas imports (from Ps. 0.049 to Ps. 0.405 per cubic meter), effective December 2011.
- Liquidity: Cash and cash equivalents increased by Ps. 300.9 million, compared to a decrease of Ps. 744.9 million in the prior year. Operating cash flow improved significantly to Ps. 398.3 million.
Outlook, Risks, and Management Commentary
Outlook and Strategy
- License Renegotiation: TGS is actively working with the National Government to conclude the renegotiation of its transportation license and initiate a tariff review to restore profitability in the regulated segment.
- Expansion: The company continues to manage expansion works under the Gas Trust Fund Program, which will generate revenue from operation and maintenance of new assets.
- Liquids Segment: Management is focusing on mitigating incremental costs from new market regulations and securing natural gas supply at favorable prices to sustain production.
Material Risks and Contingencies
- Regulatory Uncertainty: The Public Emergency Law (expiring Dec 31, 2013) has suspended original tariff adjustment mechanisms. TGS is awaiting final approval of a 20% transitional tariff increase agreed in 2008 but not yet implemented by ENARGAS.
- Legal Action on Tariff Charge: TGS obtained a preliminary injunction on July 10, 2012, suspending the collection of the increased tariff charge for natural gas imports. If this injunction is overturned, the company estimates a potential net loss of Ps. 27.6 million.
- Tax Contingencies: Significant provisions exist for turnover tax disputes (Ps. 37.8 million) and fuel tax assessments (Ps. 85.3 million). Management believes these may be recoverable via future tariff increases.
- Customer Credit Risk: MetroGAS, a significant customer, completed a reorganization process in September 2012. TGS holds unsecured claims being settled via new debt instruments.
- IFRS Adoption: Mandatory adoption of International Financial Reporting Standards (IFRS) was postponed to January 1, 2013, to evaluate the impact of IFRIC 12 on service concession arrangements.
Investor Verification Checklist
- FX Exposure: Verify the sensitivity of net income to Argentine peso devaluation, given the Ps. 68.7 million foreign exchange loss in the period.
- Tariff Renegotiation Status: Monitor the progress of the license renegotiation with UNIREN and the implementation of the 20% transitional tariff increase.
- Legal Injunction Outcome: Track the status of the appeal regarding the preliminary injunction on the natural gas import tariff charge.
- Liquids Margin Sustainability: Assess the long-term impact of government-mandated price controls and tariff charges on the high-margin Liquids segment.
- Debt Covenants: Review compliance with debt covenants (coverage ratio ≥ 2.0:1, debt ratio ≤ 3.75:1) given the high level of dollar-denominated debt (approx. US$ 374 million outstanding).