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: Three months ended March 31, 2011
Business Overview: TGS operates a natural gas pipeline system in Argentina and produces/commercializes natural gas liquids (ethane, propane, butane, natural gasoline) at the Cerri Complex. The company is regulated by ENARGAS for transportation services, while liquids production is unregulated. The financial statements are prepared under Argentine GAAP in historical Argentine pesos.
Key Financial Metrics
| Metric (in millions of ARS) | Q1 2011 | Q1 2010 |
|---|---|---|
| Net Revenues | 531.5 | 486.4 |
| Operating Income | 186.2 | 181.7 |
| Net Income | 81.3 | 75.4 |
| Cash Flow from Operations | 120.3 | 142.9 |
| Total Assets | 5,709.3 | 5,724.8 |
| Total Liabilities | 2,335.0 | 2,428.3 |
| Shareholders' Equity | 3,374.3 | 3,296.5 |
| Liquidity Ratio (Current Assets/Liabilities) | 2.86 | 2.46 |
Debt Profile: Total loans amounted to Ps. 1,561.1 million as of March 31, 2011, primarily consisting of the 2007 EMTN Program notes (US$ 374 million outstanding). The company maintains a consolidated coverage ratio and debt ratio compliant with covenants.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased by Ps. 45.1 million (9.3%) driven by a Ps. 79.0 million surge in the Liquids segment due to higher international reference prices for propane, butane, and natural gasoline.
- Transportation Decline: Gas transportation revenues decreased by Ps. 26.5 million. This was primarily due to the discontinuation of revenue recognition for a 20% tariff increase granted in late 2009, which was not yet authorized for billing by the regulator (ENARGAS) and was subject to legal appeals.
- Cost Increases: Costs of sales and administrative expenses rose by Ps. 40.6 million, attributed to a Ps. 27.4 million increase in export taxes and Ps. 13.1 million in higher labor costs.
- Profitability: Despite higher costs and lower transportation revenue, Net Income increased by Ps. 5.9 million (7.8%) to Ps. 81.3 million, supported by the strong performance of the liquids segment.
- Cash Flow: Operating cash flow decreased by Ps. 22.6 million, mainly due to higher income tax payments (Ps. 64.0 million) in the current period.
Outlook, Risks, and Management Commentary
- Tariff Renegotiation: Management is actively negotiating with the Argentine government (via UNIREN) to re-compose transportation tariffs to restore profitability. A transitional agreement for a 20% tariff increase (Decree No. 1,918/09) remains pending full implementation due to regulatory delays and legal appeals.
- Liquids Strategy: The company aims to optimize production and negotiate new supply agreements to mitigate lower gas volumes arriving at the processing plant.
- Regulatory Risks: The Public Emergency Law, which suspended original tariff adjustment mechanisms, is set to expire on December 31, 2011. Failure to reach a consensus on license renegotiation before this date could impact future operations.
- Legal Contingencies: Significant provisions exist for tax disputes (turnover tax on liquids and fuel) totaling Ps. 92.5 million. The company also faces ongoing litigation regarding the GdE compressor plant lawsuit (net provision Ps. 5.4 million) and potential tax liabilities related to debt issuance.
- Dividends: The Ordinary Shareholders' Meeting approved a dividend payment of Ps. 976 million, payable on May 27, 2011.
- IFRS Adoption: The company is implementing a plan to adopt International Financial Reporting Standards (IFRS) effective for fiscal years beginning January 1, 2012.
Investor Verification Checklist
- Tariff Implementation Status: Verify the current status of the 20% tariff increase (Decree No. 1,918/09) and the outcome of the legal appeals filed by ENARGAS against the court ruling favoring TGS.
- Liquids Price Sensitivity: Assess the sustainability of the revenue growth in the liquids segment, which is heavily dependent on volatile international commodity prices.
- Tax Provision Adequacy: Review the details of the Ps. 92.5 million provision for tax contingencies and the likelihood of recovery through tariff adjustments if the company loses these disputes.
- Debt Covenant Compliance: Confirm that the large dividend payment (Ps. 976 million) does not breach debt covenants regarding the consolidated coverage ratio and debt-to-EBITDA ratio.
- Regulatory Expiry: Monitor the progress of license renegotiations with UNIREN ahead of the December 31, 2011, expiration of the Public Emergency Law.