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, 2011
Business Overview: TGS operates a natural gas pipeline system in Argentina and produces/commercializes natural gas liquids (NGLs) at the Cerri Complex. The company is regulated by ENARGAS for transportation services, while the liquids segment is unregulated. The financial statements are prepared under Argentine GAAP in constant Argentine pesos.
Key Financial Metrics (Nine Months Ended Sept 30, 2011)
| Metric | 2011 (Ps. Millions) | 2010 (Ps. Millions) | Variation |
|---|---|---|---|
| Net Revenues | 1,245.8 | 1,223.6 | +22.2 |
| Operating Income | 374.8 | 376.3 | -1.5 |
| Net Income | 128.7 | 90.1 | +38.6 |
| Cash Flow from Operations | 289.7 | 118.9 | +170.8 |
| Net Financial Expense | (136.7) | (185.4) | +48.7 (Improvement) |
| Current Ratio | 1.39 | 2.56 | -1.17 |
Note: All figures are in millions of Argentine pesos unless otherwise noted.
Material Changes vs. Prior Period
- Net Income Increase: Net income rose 42.8% to Ps. 128.7 million. This was primarily driven by the absence of a Ps. 56.0 million loss recorded in the prior year related to the value adjustment of a tariff increase receivable.
- Revenue Mix Shift:
- Gas Transportation: Revenues decreased by Ps. 34.1 million (to Ps. 436.0 million) due to the discontinuation of recognizing revenues associated with a 20% tariff increase granted in 2009, which was recognized in 2010.
- Liquids Production: Revenues increased by Ps. 59.4 million (to Ps. 745.1 million), representing 60% of total revenue. This growth was driven by higher international prices for propane, butane, and natural gasoline, partially offset by an 8.2% decrease in volumes sold.
- Cost Structure: Total costs and expenses increased by Ps. 23.7 million, mainly due to higher labor costs (Ps. 39.4 million) and export taxes (Ps. 24.5 million).
- Financial Expenses: Net financial expenses improved by Ps. 48.7 million, largely due to the absence of the Ps. 56.0 million loss on receivable discounting recorded in 2010.
- Liquidity: Cash and cash equivalents decreased significantly by Ps. 744.9 million, primarily due to a Ps. 976.0 million dividend payment in June 2011.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Tariff Renegotiation: TGS is continuing negotiations with the Argentine government (via UNIREN) to re-compose transportation service tariffs to restore profitability. A transitional agreement for a 20% tariff increase was ratified in 2009 but has not been fully implemented due to regulatory delays.
- Liquids Segment: The company aims to optimize production and negotiate new supply agreements to mitigate lower gas volumes arriving at the processing plant.
- Other Services: Focus on commercializing telecommunications capacity via subsidiary Telcosur.
- IFRS Adoption: The company is implementing a plan to adopt International Financial Reporting Standards (IFRS) effective January 1, 2012.
Risks and Contingencies
- Regulatory Uncertainty: The Public Emergency Law, which suspended original tariff adjustment mechanisms, is set to expire on December 31, 2011. Failure to reach a consensus on license renegotiation could impact future revenue.
- Legal Proceedings:
- Tax Disputes: Ongoing disputes regarding Turnover Tax exemptions on liquids sales and taxes on natural gas used as fuel. Provisions of Ps. 32.8 million and Ps. 71.3 million have been recorded, respectively.
- GdE Lawsuit: A remaining provision of Ps. 5.9 million exists regarding a Supreme Court judgment for reimbursement of compressor plant construction costs.
- MetroGAS Reorganization: TGS has an allowance for doubtful accounts of Ps. 27.2 million related to receivables from MetroGAS, which is in reorganization.
- Asset Recoverability: The independent accountant's review report highlights uncertainty regarding the recoverable value of non-current assets related to the regulated business due to the ongoing tariff renegotiation.
Investor Verification Checklist
- Tariff Implementation Status: Verify the current status of the 20% tariff increase (Decree No. 1,918/09) and the timeline for its billing authorization by ENARGAS.
- License Renegotiation: Monitor the outcome of negotiations with UNIREN before the December 31, 2011, expiration of the Public Emergency Law.
- Liquids Volume Trends: Assess the sustainability of NGL revenue growth given the reported 8.2% decrease in volumes sold.
- Dividend Policy: Review the impact of the large dividend payment (Ps. 976.0 million) on future liquidity and debt covenants.
- IFRS Transition: Evaluate the potential impact of adopting IFRS on January 1, 2012, particularly regarding the revaluation of Property, Plant, and Equipment.
- Tax Provisions: Monitor the resolution of tax disputes regarding Turnover Tax, which could result in additional liabilities or refunds.