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: Six months ended June 30, 2008
Business Overview: TGS operates a natural gas transportation pipeline system connecting southern/western Argentina to the Buenos Aires area and produces/commercializes Natural Gas Liquids (NGL) at the Cerri Complex. The company is regulated by ENARGAS for transportation but operates NGL sales in the domestic and international markets. The controlling shareholder is Compañía de Inversiones de Energía S.A. (CIESA), owned by Group Petrobras Energía and a Trust.
Key Financial Metrics (Six Months Ended June 30, 2008)
| Metric (Millions of Pesos) | 2008 | 2007 | Variation |
|---|---|---|---|
| Net Revenues | 735.3 | 663.6 | +71.7 |
| Operating Income | 271.4 | 280.7 | -9.3 |
| Net Income | 136.1 | 119.8 | +16.3 |
| Cash Flow from Operations | 268.1 | 283.5 | -15.4 |
| Net Financial Expense | (33.9) | (72.3) | +38.4 (Improvement) |
| Total Assets | 5,008.0 | 4,877.0 | N/A |
| Total Liabilities | 1,974.3 | 1,975.1 | N/A |
| Shareholders' Equity | 3,033.7 | 2,901.9 | N/A |
Note: Financial statements are prepared in Argentine Pesos. The filing does not provide a clear value for total debt in a single line item, but total loans (current and non-current) were Ps. 1,527.5 million as of June 30, 2008.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased by Ps. 71.7 million (10.8%). This was driven primarily by the NGL segment (+Ps. 69.9 million) due to higher international reference prices for propane, butane, and natural gasoline. Gas transportation revenue remained relatively flat (+Ps. 2.8 million).
- Operating Income Decline: Despite revenue growth, operating income decreased by Ps. 9.3 million. This was caused by a Ps. 81.0 million increase in costs, specifically a Ps. 36.0 million rise in export taxes and a Ps. 23.6 million increase in NGL costs.
- Net Income Increase: Net income rose by Ps. 16.3 million. The primary driver was a Ps. 38.4 million improvement in net financial expense, largely due to a Ps. 36.0 million foreign exchange gain resulting from the appreciation of the Argentine peso.
- Q2 Volatility: In the second quarter alone, NGL revenues dropped Ps. 68.0 million compared to Q2 2007 due to a >25% volume decline caused by government-mandated natural gas supply interruptions to industries.
Guidance, Outlook, Risks, and Contingencies
Outlook and Strategy
Management's 2008 goals focus on recomposing the economic value of the business and developing alternative expansion mechanisms via client prepayments. Strategies include finding alternatives to natural gas availability for the NGL segment and focusing on efficiency and new technologies. The company plans to continue pipeline expansion works, with 60 MMcf/d completed in June 2008 and 169 MMcf/d planned for 2009.
Risks and Contingencies
- Regulatory Uncertainty: The Public Emergency Law (enacted 2002) suspended the original tariff adjustment regime (linking tariffs to the US dollar and PPI). Renegotiation of the License with the government (via UNIREN) is ongoing but has seen no significant progress as of the filing date. The Emergency Law is set to expire on December 31, 2008.
- Tax Disputes:
- Turnover Tax: A dispute with the Province of Buenos Aires regarding NGL sales tax exemptions. A provision of Ps. 18.2 million is maintained. The Tax Court ruled ethane sales are exempt, but propane/butane are not.
- Other Provinces: A provision of Ps. 22.4 million exists for potential turnover tax liabilities in Santa Cruz and Río Negro provinces.
- Legal Proceedings:
- GdE Lawsuit: A remaining balance of Ps. 47.9 million from a 2003 Supreme Court ruling regarding compressor plant costs. A net provision of Ps. 12.9 million is recorded after offsetting expansion costs.
- Bank of America: An arbitration claim for US$ 9 million regarding a cancelled fund transfer.
- Central Bank (BCRA): Summary proceedings initiated for alleged late settlement of foreign currencies (approx. US$ 14.7 million); no provision recorded as management contests the violation.
- Asset Valuation: The independent accountant's review report highlights uncertainty regarding the recoverable value of non-current assets related to the regulated business due to the lack of tariff readjustment and ongoing renegotiations.
Investor Verification Checklist
- Tariff Renegotiation Status: Verify the current status of negotiations with UNIREN and the Argentine government regarding the restoration of dollar-indexed tariffs or compensation for the "pesification" of contracts.
- Export Tax Impact: Confirm the sustainability of the variable export tax rates on NGL sales and their impact on future margins.
- Gas Supply Constraints: Assess the long-term impact of government-mandated gas supply interruptions on NGL production volumes at the Cerri Complex.
- Debt Covenants: Review compliance with debt covenants (coverage ratio ≥ 2.0:1, debt ratio ≤ 3.75:1) given the volatility in operating income.
- Legal Provisions: Monitor the resolution of the Buenos Aires turnover tax dispute and the GdE lawsuit to determine if current provisions (Ps. 18.2m and Ps. 12.9m respectively) are sufficient.