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, 2011
Business Overview: TGS operates a natural gas transportation pipeline system in Argentina and produces/commercializes natural gas liquids (NGLs) at the Cerri Complex. The company is regulated by ENARGAS for transportation services, while its liquids segment is unregulated. The controlling shareholder is Compañía de Inversiones de Energía S.A. (CIESA), owned primarily by Petrobras Argentina.
Key Financial Metrics (Six Months Ended June 30, 2011)
| Metric (in millions of ARS) | 2011 | 2010 | Variation |
|---|---|---|---|
| Net Revenues | 896.6 | 871.2 | +25.4 |
| Gross Profit | 445.4 | 426.3 | +19.1 |
| Operating Income | 273.8 | 261.2 | +12.6 |
| Net Income | 118.7 | 52.5 | +66.2 |
| Operating Cash Flow | 218.4 | 131.9 | +86.5 |
| Net Financial Expense | (72.7) | (145.4) | +72.7 (Improvement) |
| Income Tax Expense | (89.4) | (47.6) | (41.8) |
Liquidity & Balance Sheet:
- Current Ratio: 1.27 (down from 2.59 in 2010).
- Total Assets: 4,744.3 million ARS.
- Total Liabilities: 2,308.5 million ARS.
- Shareholders' Equity: 2,435.8 million ARS.
- Cash & Equivalents: 240.5 million ARS (down from 1,000.5 million ARS in 2010).
Material Changes vs. Prior Period
- Net Income Surge: Net income more than doubled (126% increase) primarily due to higher international prices for NGLs (propane, butane, natural gasoline) and the absence of a Ps. 54.6 million loss recognized in 2010 related to the value adjustment of a tariff increase receivable.
- Revenue Mix Shift:
- Liquids Segment: Revenues increased by Ps. 53.4 million (64% of total revenue) driven by higher international reference prices, despite a 6.4% decrease in volumes sold.
- Gas Transportation: Revenues decreased by Ps. 23.0 million (32% of total revenue). This decline is attributed to the non-recognition of Ps. 30.2 million in revenues associated with a 20% tariff increase granted in late 2009, which was reversed in 2010 due to regulatory delays.
- Financial Expenses: Net financial expenses improved significantly (decreased by Ps. 72.7 million) largely because the 2010 period included a Ps. 54.6 million loss on the discounting of the tariff receivable.
- Cash Flow: Operating cash flow increased by 66% due to higher cash generation from the liquids business and lower income tax payments. However, financing activities consumed Ps. 976.0 million, primarily due to a large dividend payment in June 2011.
Outlook, Risks, and Management Commentary
Regulatory & Tariff Risks:
- Tariff Renegotiation: The company is in ongoing negotiations with the Argentine government (via UNIREN) to re-compose transportation tariffs. A 20% transitional tariff increase ratified in Decree No. 1,918/09 remains uncollected due to regulatory delays and legal appeals. TGS discontinued recognizing this revenue in Dec 2010 but maintains its right to it.
- Emergency Law Expiry: The Public Emergency Law, which suspended original tariff adjustment mechanisms, is set to expire on December 31, 2011. TGS aims to reach a consensus on a comprehensive license renegotiation before this date.
Operational Outlook:
- Liquids Optimization: Management plans to optimize production and negotiate new supply agreements to mitigate lower gas volumes arriving at the processing plant.
- Expansion: TGS continues to act as the works manager for pipeline capacity expansion projects financed by gas trust funds.
- Telecommunications: The company aims to commercialize available telecommunications capacity through its subsidiary, Telcosur.
Contingencies & Legal Matters:
- MetroGAS Reorganization: TGS has an allowance for doubtful accounts of Ps. 27.2 million related to MetroGAS S.A., which filed for reorganization in 2010.
- Tax Disputes: Significant provisions exist for turnover tax disputes (Ps. 31.6 million) and fuel tax assessments (Ps. 67.0 million). The company believes it has grounds to recover these via tariff increases if the legal position fails.
- ICSID Arbitration: Shareholders (Enron/Ponderosa) have filed new claims against the Argentine Republic at the ICSID regarding the Emergency Law's impact on the license.
Accounting Standards: The company is preparing to adopt International Financial Reporting Standards (IFRS) effective January 1, 2012. Implementation of certain valuation criteria was delayed until late 2011.
Investor Verification Checklist
- Tariff Resolution Status: Verify the current status of the 20% tariff increase (Decree 1,918/09) and the timeline for the comprehensive license renegotiation with UNIREN before the Dec 31, 2011 deadline.
- Liquids Volume Trends: Monitor the trend of natural gas volumes arriving at the Cerri Complex, as lower volumes could offset the benefits of higher international prices.
- Dividend Sustainability: Assess the impact of the Ps. 976 million dividend payment on future liquidity and the ability to meet debt covenants (coverage ratio and debt ratio).
- Legal Provisions: Review the potential cash outflow risks associated with the Ps. 67.0 million provision for fuel tax and the Ps. 27.2 million MetroGAS receivable.
- IFRS Transition: Confirm the impact of the upcoming IFRS adoption (Jan 1, 2012) on the recognition of deferred tax liabilities related to inflation adjustments.