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, 2006.
Business Overview: TGS is the largest natural gas transporter in Argentina, operating the southern gas pipeline system. Its operations are divided into three segments: regulated gas transportation, unregulated natural gas liquids (NGL) production and commercialization, and other services (midstream and telecommunications). The company operates under a 35-year license granted by the Argentine government, which is currently subject to a renegotiation process due to the 2002 Public Emergency Law.
Key Financial Metrics (Argentine GAAP)
| Metric (in thousands of pesos) | 2006 | 2005 | 2004 |
|---|---|---|---|
| Net Revenues | 1,309,502 | 1,064,738 | 994,084 |
| Operating Income | 570,130 | 442,897 | 453,750 |
| Net Financial Expense | (189,043) | (209,072) | (260,935) |
| Net Income | 358,022 | 217,507 | 147,928 |
| Net Income per Share (Ps.) | 0.45 | 0.27 | 0.19 |
| Net Income per ADS (Ps.) | 2.25 | 1.37 | 0.93 |
| Total Assets | 5,139,242 | 5,197,230 | 5,145,471 |
| Total Liabilities | 2,357,111 | 2,773,123 | 2,938,871 |
| Shareholders' Equity | 2,782,129 | 2,424,107 | 2,206,600 |
| Cash and Cash Equivalents (End of Year) | 478,256 | 512,944 | 335,797 |
Note: Financial statements are prepared in constant Argentine pesos. US GAAP net income for 2006 was Ps. 405,582 thousand.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 23.0% to Ps. 1.31 billion in 2006 compared to 2005. This was driven primarily by a 33.0% increase in NGL production and commercialization revenues (Ps. 726.4 million) due to higher international prices and increased volumes, and a 56.0% increase in "Other Services" revenues.
- Gas Transportation: Regulated gas transportation revenues grew 7.0% to Ps. 492.0 million, largely due to new firm contracts resulting from the San Martín pipeline expansion completed in August 2005.
- Profitability: Net income surged 64.6% to Ps. 358.0 million. This improvement was aided by a reduction in net financial expenses (down 9.6%) due to lower foreign exchange losses and higher interest income, as well as a reversal of a Ps. 144.5 million valuation allowance on tax loss carry-forwards.
- Debt Reduction: The company actively reduced its restructured debt during 2006, redeeming and prepaying US$130 million of indebtedness in December 2006. Subsequent to year-end (June 2007), the company refinanced its remaining debt with new US$500 million notes.
Guidance, Outlook, Risks, and Contingencies
- Tariff Renegotiation: The company is in an ongoing renegotiation process with UNIREN regarding its gas transportation license and tariffs. The Public Emergency Law suspended tariff indexing and fixed the peso-dollar exchange rate at 1:1 for tariffs, significantly impacting revenue. Progress has been slow, with no agreement reached as of the filing date.
- Regulatory Risks: The company faces risks related to the potential revocation of its license, government-mandated pipeline expansions that may not be commercially attractive, and the possibility of being required to interrupt firm transportation contracts to prioritize power stations and distribution companies during gas shortages.
- Exchange Rate Exposure: TGS has a significant net liability position in U.S. dollars (US$492.9 million as of Dec 31, 2006) while a portion of its revenues are peso-denominated. A devaluation of the peso would materially adversely affect its ability to service debt.
- Legal Contingencies:
- Tax Claims: The company has recorded provisions of Ps. 28.6 million and Ps. 16.2 million regarding turnover tax claims by the provinces of Buenos Aires, Santa Cruz, and Río Negro.
- CNV Inquiry: The Argentine Securities Commission (CNV) questioned the tax-exempt status of certain notes issued in 2004. The potential liability is estimated between US$5 million and US$14 million; no provision has been recorded as the company believes it has legal grounds to defend its position.
- ICSID Claim: Enron Corp. (a former shareholder) won a US$106.2 million award against the Argentine government regarding tariff pesification. The outcome of this and related claims could impact the tariff renegotiation process.
- Dividend Policy: The company has not paid dividends since 2001 due to the economic crisis and debt covenants. Current debt instruments prohibit dividends unless specific coverage and debt ratios are met.
Important Facts for Investor Verification
- Debt Refinancing Status: Verify the terms and covenants of the new US$500 million notes issued in May 2007, which replaced the restructured debt, and confirm compliance with the new financial ratios (Consolidated Coverage Ratio ≥ 2.0:1; Consolidated Debt Ratio ≤ 3.75:1).
- Tariff Renegotiation Progress: Monitor the status of negotiations with UNIREN and the Argentine government, as the resolution of tariff adjustments is critical for the long-term viability of the regulated gas transportation segment.
- Exchange Rate Sensitivity: Assess the impact of potential Argentine peso devaluation on the company's ability to service its US$500 million dollar-denominated debt, given the mismatch between peso revenues and dollar liabilities.
- NGL Price Volatility: Verify current international prices for LPG and natural gasoline, as the NGL segment contributed 55% of total revenues in 2006 and is highly sensitive to commodity price fluctuations.
- Legal Proceedings: Track the resolution of the CNV inquiry regarding the 2004 notes and the ongoing tax disputes with Argentine provinces, as these could result in significant unexpected liabilities.