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, 2009.
Business Overview: TGS is the largest natural gas transporter in Argentina, operating a 5,500-mile pipeline system connecting southern and western gas fields to the Buenos Aires area. The company also operates the Cerri Complex for Natural Gas Liquids (NGL) production and commercialization, and provides midstream and telecommunications services. Operations are subject to Argentine GAAP, with significant reconciliations required for US GAAP reporting.
Key Financial Metrics (Argentine GAAP)
| Metric (in thousands of pesos) | 2009 | 2008 |
|---|---|---|
| Net Revenues | 1,600,648 | 1,419,202 |
| Operating Income | 561,517 | 431,432 |
| Net Income | 178,380 | 175,091 |
| Net Financial Expense | (212,120) | (98,531) |
| Total Assets | 5,619,190 | 5,033,324 |
| Total Liabilities | 2,398,081 | 1,960,595 |
| Shareholders' Equity | 3,221,108 | 3,072,728 |
| Cash and Cash Equivalents | 1,025,142 | 604,690 |
US GAAP Reconciliation: Under US GAAP, 2009 Net Income was Ps. 132,739 thousand (vs. Ps. 178,380 thousand under Argentine GAAP), primarily due to differences in revenue recognition regarding a retroactive tariff increase and deferred tax treatments.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 12.8% to Ps. 1.6 billion. This was driven by a 32.2% increase in Gas Transportation revenues (Ps. 669.4 million), largely due to the accrual of a 20% tariff increase retroactive to September 2008. NGL revenues remained relatively flat, decreasing 0.8% due to lower international prices, partially offset by peso devaluation.
- Operating Income: Increased 30.2% to Ps. 561.5 million, reflecting higher transportation revenues and stable NGL margins.
- Financial Expenses: Net financial expense surged 115.3% to Ps. 212.1 million. This increase was primarily due to the absence of a Ps. 114 million gain recorded in 2008 from the early repurchase of debt notes.
- Liquidity: Cash and cash equivalents increased significantly by 70% to Ps. 1.025 billion, supported by strong operating cash flows (Ps. 511.6 million) and reduced investing outflows.
Guidance, Outlook, Risks, and Contingencies
Regulatory Outlook: The company is engaged in ongoing license renegotiations with the Argentine government (UNIREN). A transitional agreement ratified in December 2009 granted a 20% tariff increase, but the timing of billing and collection remains dependent on the regulator (ENARGAS) publishing new schedules. The Public Emergency Law, allowing for contract renegotiation, is extended until December 31, 2011.
Key Risks:
- Currency Exposure: Approximately half of revenues are peso-denominated, while substantially all debt is US dollar-denominated. Further peso devaluation could materially adversely affect liquidity and debt service ability.
- Commodity Prices: NGL revenues are sensitive to international LPG and natural gasoline prices. A variable export tax regime caps post-tax prices, limiting upside potential.
- Gas Supply: Declining gas reserves in the Neuquén basin and government-mandated supply interruptions to prioritize residential users pose risks to NGL production volumes.
Contingencies:
- Tax Disputes: Significant provisions exist for turnover tax disputes with provincial authorities (Buenos Aires, Santa Cruz, Río Negro, Tierra del Fuego), totaling approximately Ps. 67.5 million.
- Debt Tax Withholding: A potential contingency of US$7 million to US$22 million exists regarding withholding taxes on interest payments for notes issued in 2004, though no provision has been recorded.
Investor Verification Checklist
- Tariff Collection Timing: Verify when ENARGAS will publish the billing schedule for the retroactive 20% tariff increase to confirm cash flow realization.
- US GAAP vs. Argentine GAAP: Review Note 12 of the financial statements to understand the Ps. 45.6 million difference in Net Income driven by revenue recognition criteria for the tariff increase.
- Debt Covenants: Confirm compliance with debt covenants (coverage ratio > 2.0:1, debt ratio < 3.75:1) which restrict dividend payments and additional borrowing.
- Export Tax Regime: Monitor the variable export tax rates on NGLs, which effectively cap the company's net revenue per ton regardless of international price spikes.
- License Renegotiation: Track the status of the integral license renegotiation with UNIREN, which is critical for long-term tariff stability and investment recovery.