Business Context and Reporting Period
Company: Transportadora de Gas del Sur S.A. (TGS), also known as Gas Transporter of the South Inc.
Reporting Period: Fiscal year ended December 31, 2010.
Business Overview: TGS is the largest natural gas transporter in Argentina, operating the southern gas transportation system. Its operations are divided into three segments: regulated gas transportation (approx. 33% of revenue), non-regulated liquids production and commercialization (approx. 61% of revenue), and other services (midstream and telecommunications). The company operates under a 35-year license (extendable) granted by the Argentine government.
Accounting Basis: Financial statements are prepared in accordance with Argentine GAAP. Significant reconciliations to US GAAP are provided in the notes.
Key Financial Metrics (Argentine GAAP)
| Metric (in millions of Pesos) | 2010 | 2009 |
|---|---|---|
| Net Revenues | 1,653.0 | 1,600.6 |
| Operating Income | 363.4 | 561.5 |
| Net Income | 102.2 | 178.4 |
| Net Financial Expense | (163.2) | (212.1) |
| Total Assets | 5,611.3 | 5,619.2 |
| Total Liabilities | 2,318.3 | 2,398.1 |
| Shareholders' Equity | 3,293.0 | 3,221.1 |
| Cash and Cash Equivalents (Year End) | 1,089.5 | 1,025.2 |
US GAAP Reconciliation (Net Income): Under US GAAP, Net Income for 2010 was Ps. 226.1 million compared to Ps. 102.2 million under Argentine GAAP. The primary difference relates to the recognition of a tariff increase revenue.
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased by 42.7% (Ps. 76.2 million) compared to 2009. This was primarily driven by the derecognition of Ps. 122.1 million in revenue related to a 20% tariff increase that was ratified in 2009 but not yet billable due to regulatory delays.
- Segment Performance:
- Gas Transportation: Revenues decreased by 17.7% (Ps. 118.4 million) due to the reversal of the previously accrued tariff increase revenue.
- Liquids Production: Revenues increased by 26.2% (Ps. 209.9 million) driven by higher international prices for LPG and natural gasoline, offsetting lower export volumes.
- Other Services: Revenues decreased by 29.9% due to lower construction and midstream service revenues.
- Financial Expenses: Net financial expenses decreased by 23.1% (Ps. 48.9 million), largely due to a lower foreign exchange loss compared to the previous year.
- Dividends: Shareholders approved a dividend of Ps. 976.0 million in May 2011, payable from retained earnings.
Guidance, Outlook, Risks, and Contingencies
Regulatory Risks and Tariff Renegotiation:
- The company is engaged in a prolonged renegotiation of its public service license with the Argentine government (UNIREN). A transitional agreement for a 20% tariff increase was ratified in December 2009, but the regulator (ENARGAS) has not yet published the schedule to bill it.
- TGS filed an acción de amparo (injunction) to enforce the tariff increase. While a court ruled in TGS's favor in late 2010, the regulator appealed. The company suspended the legal action temporarily to facilitate negotiations.
- Failure to reach a comprehensive agreement by the December 31, 2011 deadline of the Public Emergency Law could materially adversely affect profitability.
Operational and Market Risks:
- Currency Exposure: TGS has a significant net liability position in U.S. dollars (US$115.5 million as of Dec 31, 2010). A devaluation of the Argentine peso would increase the peso cost of servicing its dollar-denominated debt while revenues from gas transportation are peso-denominated.
- Liquids Volatility: The liquids segment is exposed to international commodity price fluctuations. However, a variable export tax regime caps the post-tax price the company can receive for exports.
- Gas Supply: The company faces risks related to natural gas supply shortages and government-mandated interruptions of firm transportation contracts to prioritize residential and power plant users.
Legal Contingencies:
- Tax Claims: TGS faces tax assessments from various provinces regarding turnover tax on liquids sales and gas used as fuel. Provisions of Ps. 29.1 million and Ps. 57.4 million have been recorded for these matters.
- Debt Tax Withholding: A potential contingency of US$8 million to US$24 million exists regarding withholding tax on interest payments for notes issued in 2004, though no provision has been recorded.
Investor Verification Checklist
- Tariff Implementation Status: Verify if ENARGAS has published the tariff schedule for the 20% increase ratified in 2009, as this is critical for future revenue recognition.
- License Renegotiation Progress: Monitor the status of the comprehensive license renegotiation with UNIREN, specifically the requirement to abandon shareholder claims against the Argentine government.
- Exchange Rate Sensitivity: Assess the impact of the Argentine peso/U.S. dollar exchange rate on the company's ability to service its US$374 million debt obligation.
- US GAAP vs. Argentine GAAP: Review the reconciliation of net income, noting the significant difference caused by the treatment of the tariff increase revenue under US GAAP (not recognized) vs. Argentine GAAP (recognized then reversed).
- Shareholder Structure: Note the involvement of ANSES (state pension fund) as a major minority shareholder (approx. 22.4%) and the ongoing restructuring of the controlling shareholder, CIESA.