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, 2010 (Interim)
Business Overview: TGS operates a natural gas pipeline system in Argentina and produces/commercializes natural gas liquids (ethane, propane, butane, natural gasoline) at the Cerri Complex. The company is regulated by ENARGAS for transportation services, while liquids production is unregulated. The controlling shareholder is Compañía de Inversiones de Energía S.A. (CIESA), owned largely by Petrobras Argentina.
Key Financial Metrics (Nine Months Ended Sept 30, 2010)
| Metric | 2010 (Ps. Millions) | 2009 (Ps. Millions) | Variation |
|---|---|---|---|
| Net Revenues | 1,223.6 | 1,001.6 | +222.0 |
| Operating Income | 376.3 | 288.1 | +88.2 |
| Net Income | 90.1 | 38.7 | +51.4 |
| Operating Cash Flow | 118.9 | 380.6 | (261.7) |
| Net Financial Results | (185.4) | (179.1) | (6.3) |
| Total Assets | 5,510.5 | 5,342.6 | +167.9 |
| Total Liabilities | 2,229.6 | 2,262.8 | (33.2) |
| Shareholders' Equity | 3,280.9 | 3,079.8 | +201.1 |
Note: All figures in Argentine Pesos (Ps.). Financial statements are prepared under Argentine GAAP.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 22.2% driven by a 37.5% surge in liquids production/commercialization revenues (due to international price increases of propane, butane, and natural gasoline) and a 15.2% increase in gas transportation revenues (partially due to a ratified 20% tariff increase).
- Profitability: Net income more than doubled (132.8% increase) primarily due to higher operating income from liquids and transportation.
- Cash Flow Decline: Operating cash flow dropped significantly by 68.8% (from Ps. 380.6M to Ps. 118.9M). This was mainly caused by a Ps. 181.0 million increase in income tax payments.
- Cost Increases: Costs of sales and administrative expenses rose by Ps. 133.8 million, attributed to higher export taxes (Ps. 44.0M), increased liquids costs (Ps. 28.6M), and a Ps. 27.4M allowance for doubtful accounts related to MetroGAS S.A.'s reorganization.
- Financial Results: Net financial results worsened slightly (Ps. 6.3M) due to a Ps. 56.0M loss on the discounted value of trade receivables related to the tariff increase, partially offset by lower foreign exchange losses.
Guidance, Outlook, Risks, and Contingencies
Outlook and Management Commentary
- Tariff Implementation: TGS is actively pursuing the implementation of the 20% tariff increase schedule ratified by Presidential Decree No. 1,918/09. On November 8, 2010, a court judgment upheld TGS's injunction, ordering the regulator (ENARGAS) to set the new tariff chart and retroactive collection methodology.
- Renegotiation: The company continues negotiations with UNIREN for an overall tariff review and license renegotiation, with the Public Emergency Law set to expire on December 31, 2011.
- Expansion: TGS is managing the second expansion of the gas pipeline system (Gas Trust Fund Program), with 222 MMcf/d already operational and a Magellan Strait pipeline completed.
- Liquids Strategy: Focus remains on optimizing production and securing natural gas supply agreements to maintain business sustainability.
Risks and Contingencies
- Regulatory Uncertainty: The suspension of the original tariff adjustment regime and the ongoing renegotiation process create uncertainty regarding future revenue recovery and asset valuation.
- Legal Proceedings:
- Tax Disputes: Significant provisions exist for turnover tax disputes with provinces (Buenos Aires, Santa Cruz, Río Negro, Tierra del Fuego). Total provisions for these contingencies amount to Ps. 82.8 million (Ps. 27.8M for Buenos Aires; Ps. 55.0M for others).
- GdE Lawsuit: A remaining balance of Ps. 57.6 million from a 2003 Supreme Court ruling regarding compressor plant costs is being offset by expansion work costs, leaving a net provision of Ps. 4.9 million.
- Central Bank Proceedings: Summary proceedings initiated by the Argentine Central Bank regarding late foreign currency settlements (approx. US$ 14.7M) are pending resolution in Economic Criminal Courts. No provision has been recorded.
- Credit Risk: A Ps. 27.4 million allowance for doubtful accounts was recorded for receivables from MetroGAS S.A. following its reorganization.
Investor Verification Checklist
- Tariff Collection Status: Verify the actual implementation and cash collection of the 20% tariff increase following the November 2010 court ruling.
- International Commodity Prices: Monitor global prices for propane, butane, and natural gasoline, as they drive the majority of revenue growth.
- Tax Litigation Outcomes: Track the resolution of turnover tax disputes with Argentine provinces, which could impact future cash flows.
- Debt Covenants: Review compliance with debt covenants (coverage ratio ≥ 2.0:1; debt ratio ≤ 3.75:1) given the high level of financial indebtedness (US$ 374M).
- Regulatory Timeline: Assess the progress of the overall license renegotiation with UNIREN before the December 31, 2011 deadline of the Public Emergency Law.