Business Context and Reporting Period
Company: Transportadora de Gas del Sur S.A. (TGS), operating as Gas Transporter of the South Inc.
Reporting Period: Fiscal year ended December 31, 2012.
Business Overview: TGS is Argentina's largest natural gas transporter, operating the southern pipeline system. Its operations are divided into three segments: Natural Gas Transportation (regulated), Liquids Production and Commercialization (non-regulated, extracting LPG and natural gasoline), and Other Services (midstream and telecommunications). The company is subject to Argentine GAAP, with reconciliations provided for US GAAP.
Key Financial Metrics (Argentine GAAP)
| Metric (in thousands of Ps.) | 2012 | 2011 |
|---|---|---|
| Net Revenues | 2,574,968 | 1,853,875 |
| Operating Income | 705,733 | 552,493 |
| Net Income | 239,218 | 230,679 |
| Net Financial Expense | (325,085) | (188,813) |
| Operating Cash Flow | 535,113 | 440,436 |
| Total Assets | 5,565,439 | 5,024,166 |
| Total Liabilities | 3,522,729 | 3,070,674 |
| Shareholders' Equity | 2,042,709 | 1,953,491 |
Segment Revenue Mix (2012): Liquids Production and Commercialization accounted for approximately 71% of total revenues, while Natural Gas Transportation accounted for 23%.
Debt: Total indebtedness under the New Notes program was US$374.0 million as of the report date. A Ps. 20 million loan with Santander Río Bank was signed in August 2012.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased by 38.9% (Ps. 721.1 million) compared to 2011. This was primarily driven by a 55.7% increase in the Liquids segment (Ps. 656.5 million) due to higher export volumes, increased international prices for LPG/natural gasoline, and peso devaluation effects.
- Transportation Segment: Revenues increased by 4.8% (Ps. 27.8 million), attributed to increased volumes under firm contracts and revenues from the Charge for Access and Use (CAU) related to pipeline expansions.
- Costs: Costs of sales increased by 44.3% (Ps. 414.8 million), largely due to a Ps. 135.1 million increase in variable production costs from the gas processing tariff charge and higher natural gas prices.
- Financial Expenses: Net financial expenses surged by 72.2% (Ps. 136.3 million), primarily due to a Ps. 100.5 million increase in foreign exchange losses on U.S. dollar-denominated debt resulting from peso devaluation.
- Dividends: The Board approved cash dividends of Ps. 150 million in December 2012 (paid Jan 2013) and Ps. 118.3 million in March 2013, utilizing the Future Dividend Payment Reserve.
Guidance, Outlook, Risks, and Contingencies
- Tariff Renegotiation: TGS is in a prolonged renegotiation process with UNIREN regarding its gas transportation license. A 2008 Transitional Agreement provided for a 20% tariff increase retroactive to 2008, but implementation has been delayed by regulatory inaction and legal proceedings. Management assigned a 95% probability to reaching an agreement in impairment testing.
- Regulatory Risks: The company faces significant risks from Argentine government intervention, including exchange controls, restrictions on foreign currency transfers, and potential changes to the Public Emergency Law. The "pesification" of tariffs at a 1:1 rate in 2002 continues to erode the real value of transportation revenues.
- Gas Supply Constraints: Declining natural gas production in the Neuquén basin and government-mandated redirection of gas to residential users have impacted the Cerri Complex liquids processing facility, leading to interruptions and higher costs for purchasing gas from third parties.
- Legal Proceedings:
- Gas Tariff Resolutions: TGS obtained a preliminary injunction in July 2012 exempting it from a significant increase in the gas processing tariff charge. If overturned, management estimates an additional net expense of Ps. 56.3 million for 2012.
- Tax Claims: Ongoing disputes regarding turnover tax exemptions and withholding taxes on interest payments. Provisions of Ps. 39.1 million and Ps. 84.5 million have been recorded for specific tax contingencies.
- MetroGAS: A major customer, MetroGAS, underwent reorganization. TGS received notes to settle unsecured claims, but the customer has unilaterally extended payment terms for other obligations.
- Accounting Transition: TGS is required to adopt International Financial Reporting Standards (IFRS) for the fiscal year beginning January 1, 2013.
Key Facts for Investor Verification
- Currency Exposure: Verify the impact of the Argentine peso devaluation on the company's ability to service its US$374 million debt, given that a significant portion of transportation revenues is peso-denominated.
- Tariff Implementation: Monitor the status of the 20% tariff increase under the 2008 Transitional Agreement and the broader license renegotiation with UNIREN, as delays directly impact the transportation segment's profitability.
- Gas Supply Volumes: Assess the stability of natural gas supply to the Cerri Complex, as government redirection of gas to residential users and declining basin production threaten the high-margin liquids segment.
- Regulatory Compliance: Review the status of the preliminary injunction regarding the gas processing tariff charge and the potential for retroactive application if the ruling is reversed.
- Customer Credit Risk: Evaluate the financial health of major distribution customers, particularly MetroGAS, which has a history of payment delays and reorganization.