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: Full fiscal year and fourth quarter ended December 31, 2011
Business Overview: Argentina's leading natural gas transporter with approximately 2.9 Bcf/d of firm contracted capacity. The company also operates as a leading processor of natural gas and a major marketer of natural gas liquids (Liquids) via the Cerri Complex. TGS is listed on the NYSE (TGS) and MERVAL (TGSU2).
Key Financial Metrics
| Metric (Million ARS) | 2011 Full Year | 2010 Full Year | 2011 Q4 | 2010 Q4 |
|---|---|---|---|---|
| Total Net Revenues | 1,853.9 | 1,653.0 | 608.1 | 429.4 |
| Net Income | 230.7 | 133.1 | 79.0 | 20.1 |
| Operating Income | 552.5 | 363.4 | N/A | N/A |
| Cash Flow from Operations | 440.4 | 321.5 (implied) | N/A | N/A |
| Net Financial Expense | (188.8) | (163.2) | N/A | N/A |
| Dividends Paid | 976.0 (Q2 2011) | 30.3 (Q2 2010) | N/A | N/A |
Segment Revenue Breakdown (2011):
- Liquids Production & Commercialization: Ps. 1,179.2 million (64% of total)
- Gas Transportation: Ps. 575.6 million (31% of total)
- Other Services: Ps. 99.1 million (5% of total)
Material Changes vs. Prior Period
- Net Income Growth: Full-year net income increased by Ps. 97.6 million (73.3%) to Ps. 230.7 million. Q4 net income surged to Ps. 79.0 million from Ps. 20.1 million.
- Revenue Drivers: Total revenue rose 12.2% year-over-year. The Liquids segment grew 16.7% due to higher international prices (15-24% increase) and better export contract adjustments. Gas transportation revenue increased 4.5% due to new assets from gas trusts.
- Cost Increases: Costs of sales and administrative expenses rose by Ps. 133.9 million, driven by a Ps. 63.7 million increase in export taxes and Ps. 57.9 million in higher labor costs.
- Financial Expenses: Net financial expense increased to Ps. 188.8 million, primarily due to a Ps. 37.9 million higher foreign exchange loss resulting from local currency depreciation.
- One-Time 2010 Impact: The 2010 results were negatively impacted by the derecognition of Ps. 122.1 million in revenue related to a retroactive 20% tariff increase that was not authorized by the regulator (ENARGAS) at the time. This non-recurring item significantly depressed 2010 comparables.
Outlook, Risks, and Management Commentary
- Regulatory Environment: The company remains subject to regulation by ENARGAS. The 2010 tariff dispute highlights the risk of regulatory delays in implementing approved rate increases.
- Foreign Exchange Risk: Significant exposure to currency fluctuations, as evidenced by the Ps. 37.9 million increase in foreign exchange losses in 2011 due to the depreciation of the Argentine peso.
- Operational Expansion: Continued investment in pipeline expansion and maintenance services, contributing to revenue growth in the transportation segment.
- Liquidity: Operating cash flow increased 37% to Ps. 440.4 million. However, financing cash outflows increased significantly due to a large dividend payment of Ps. 976.0 million in June 2011.
- Forward-Looking Statements: Management notes that actual results may differ from projections due to known and unknown risks, including regulatory changes and market conditions.
Investor Verification Checklist
- Tariff Implementation: Verify the current status of the 20% tariff increase granted retroactively to 2008 and whether it has been fully recognized in subsequent periods.
- Currency Exposure: Assess the company's hedging strategies given the significant impact of peso depreciation on financial expenses.
- Export Tax Volatility: Monitor changes in Argentine export tax rates, which contributed Ps. 63.7 million to cost increases in 2011.
- Dividend Policy: Review the sustainability of dividend payouts relative to operating cash flow, noting the Ps. 976.0 million payout in 2011.
- Regulatory Appeals: Confirm the resolution of any ongoing appeals by ENARGAS or the Ministry of Federal Planning regarding tariff adjustments.