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: Third Quarter and Nine-Month Period ended September 30, 2011
Business Overview: TGS is Argentina's leading natural gas transporter with approximately 2.9 Bcf/d of firm contracted capacity. It is also a leading processor of natural gas and a major marketer of natural gas liquids. The company operates in three main segments: Gas Transportation, Liquids Production and Commercialization, and Other Services.
Key Financial Metrics
Third Quarter 2011 (vs. Q3 2010)
- Net Revenues: Ps. 349.2 million (vs. Ps. 352.4 million in Q3 2010).
- Net Income: Ps. 10.0 million (Ps. 0.013 per share) vs. Ps. 37.6 million (Ps. 0.047 per share) in Q3 2010.
- Operating Income: Declined by Ps. 14.1 million year-over-year.
- Net Financial Expense: Increased to Ps. 64.0 million from Ps. 40.0 million, driven by a Ps. 26.4 million exchange rate loss due to peso devaluation.
- Costs of Sales & Expenses: Increased to Ps. 248.2 million from Ps. 237.3 million, primarily due to higher labor costs.
Nine-Month Period Ended September 30, 2011 (vs. 9M 2010)
- Net Revenues: Ps. 1,245.8 million (up 1.8% from Ps. 1,223.6 million).
- Net Income: Ps. 128.7 million (Ps. 0.162 per share) vs. Ps. 90.1 million (Ps. 0.113 per share) in 9M 2010.
- Operating Income: Ps. 374.8 million (vs. Ps. 376.4 million in 9M 2010).
- Net Financial Expense: Decreased to Ps. 136.7 million from Ps. 185.4 million, largely due to a Ps. 56.0 million adjustment related to a tariff receivable in the prior year.
- Operating Cash Flow: Ps. 289.7 million, more than double the prior year period.
- Financing Cash Flow: Used Ps. 792.6 million more than the prior year, primarily due to a Ps. 976.0 million dividend payment in June 2011.
Segment Performance (9M 2011)
| Segment | Net Revenues (Ps. Million) | Operating Income (Ps. Million) |
|---|---|---|
| Gas Transportation | 436.0 | 135.7 |
| Liquids Production & Commercialization | 745.1 | 319.0 |
| Other Services | 64.7 | 1.3 |
| Total | 1,245.8 | 374.8 |
Material Changes vs. Prior Period
- Q3 Net Income Decline: The significant drop in Q3 2011 net income compared to Q3 2010 was driven by a Ps. 14.1 million decrease in operating income and a Ps. 24.0 million increase in financial expenses due to currency devaluation.
- 9M Net Income Increase: The 9-month net income improvement is primarily attributable to a Ps. 56.0 million loss recognized in the 2010 period regarding the value adjustment of a 20% tariff increase receivable, which was not repeated in 2011.
- Revenue Composition: Gas transportation revenue decreased in both Q3 and 9M periods due to the non-recognition of tariff increase revenues in 2011 that were booked in 2010. Conversely, Liquids revenue increased due to higher international prices for natural gasoline, propane, and butane, despite lower export volumes.
- Dividend Payout: A substantial dividend of Ps. 976.0 million was paid in June 2011, significantly impacting financing cash flows compared to the prior year.
Outlook, Risks, and Management Commentary
- Regulatory Environment: Gas transportation revenues are subject to regulation by ENARGAS. The company noted that billing for a 20% tariff increase (ratified in 2009) was not recognized in 2011 due to pending regulatory authorization and legal appeals.
- Currency Risk: The company highlighted significant financial expenses related to the devaluation of the Argentine peso, impacting both Q3 and 9M results.
- Forward-Looking Statements: The filing includes standard disclaimers that actual results may differ materially from projections due to known and unknown risks, including regulatory changes and market conditions.
- Ownership Structure: The controlling shareholder, CIESA, holds 55.3% of common stock. CIESA is owned 50% by Petrobras Argentina, 40% by a trust, and 10% by Pampa Energía (following an acquisition in April 2011).
Key Facts for Investor Verification
- Verify the status of the 20% tariff increase receivable and any potential future recognition of these revenues.
- Monitor the impact of Argentine peso devaluation on future financial expenses and net income.
- Assess the sustainability of higher international prices for natural gas liquids (propane, butane, natural gasoline) driving the Liquids segment revenue.
- Review the company's capital allocation strategy, particularly regarding the large dividend payment in June 2011 and its impact on liquidity.
- Confirm the regulatory stance of ENARGAS regarding the billing of the tariff increase and the outcome of related legal appeals.