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, 2010
Business Overview: TGS operates a natural gas pipeline system in Argentina and produces/commercializes natural gas liquids (NGL). The company is regulated by ENARGAS for transportation services, while NGL activities are market-driven. The financial statements are prepared under Argentine GAAP in constant Argentine pesos.
Key Financial Metrics (Six Months Ended June 30, 2010)
| Metric (Millions of Pesos) | 2010 | 2009 | Variation |
|---|---|---|---|
| Net Revenues | 871.2 | 664.3 | +206.9 |
| Operating Income | 261.2 | 185.6 | +75.6 |
| Net Income | 52.5 | 12.9 | +39.6 |
| Cash Flow from Operations | 131.9 | 247.4 | -115.5 |
| Net Financial Results (Expense) | (145.4) | (135.3) | -10.1 |
| Total Assets | 5,501.2 | 5,268.2 | +233.0 |
| Total Liabilities | 2,257.9 | 2,212.6 | +45.3 |
| Shareholders' Equity | 3,243.2 | 3,055.6 | +187.6 |
Liquidity Ratio (Current Assets/Current Liabilities): 2.59 (as of June 30, 2010) vs. 2.90 (2009).
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 31% to Ps. 871.2 million. This was driven primarily by a Ps. 180.0 million increase in NGL production and commercialization due to a >60% rise in international prices for propane, butane, and natural gasoline. Gas transportation revenue rose Ps. 39.0 million, reflecting a 20% tariff increase ratified by the Argentine Government.
- Profitability: Net income surged to Ps. 52.5 million from Ps. 12.9 million, largely due to higher operating income from NGL prices and the tariff adjustment.
- Cost Increases: Costs of sales and administrative expenses rose Ps. 131.3 million. Key drivers included higher natural gas costs, increased export taxes (Ps. 76.9 million), and a Ps. 27.4 million allowance for doubtful accounts related to MetroGAS S.A. reorganization.
- Cash Flow Decline: Operating cash flow dropped significantly to Ps. 131.9 million (from Ps. 247.4 million) primarily due to higher income tax payments of Ps. 151.0 million.
- Financial Expenses: Net financial expenses increased by Ps. 10.1 million, mainly due to a Ps. 54.6 million loss on the discounting of the tariff increase receivable, partially offset by lower foreign exchange losses.
Guidance, Outlook, and Risks
- Tariff Renegotiation: TGS is negotiating an overall tariff review with UNIREN. A transitional agreement ratified in late 2009 provided a 20% tariff increase, but the funds are subject to a trust fund mechanism until an integral license renegotiation is signed. The Emergency Law governing these terms expires December 31, 2011.
- Expansion Projects: The company is managing the second expansion of the gas pipeline system (247 MMcf/d capacity), with 222 MMcf/d already operational. A new pipeline in the Magellan Strait was completed in March 2010.
- Regulatory Risks: Significant uncertainty remains regarding the final outcome of the license renegotiation and the recoverable value of non-current assets related to the regulated business. The auditor noted this uncertainty in their review report.
- Legal Contingencies: The company faces various tax disputes (turnover tax on NGL sales and fuel usage) and a lawsuit regarding compressor plant costs. Provisions of Ps. 26.6 million and Ps. 51.6 million have been recorded for specific tax contingencies.
- Accounting Standards: TGS is implementing a plan to adopt International Financial Reporting Standards (IFRS) effective for fiscal years beginning January 1, 2012.
Key Facts for Investor Verification
- Tariff Implementation: Verify the status of the billing schedule for the retroactive 20% tariff increase and the timeline for the integral license renegotiation with the Argentine government.
- MetroGAS Receivables: Confirm the collectability of the Ps. 27.4 million allowance for doubtful accounts related to MetroGAS S.A. and any further credit risk exposure.
- NGL Price Sensitivity: Assess the sustainability of the current high international prices for propane, butane, and natural gasoline which drove the majority of the revenue growth.
- Debt Covenants: Review compliance with debt covenants, specifically the consolidated coverage ratio (EBITDA/Interest) and debt ratio, which restrict new debt and dividend payments.
- Asset Valuation: Monitor the auditor's qualified opinion regarding the recoverable value of non-current assets in the regulated business segment given the regulatory uncertainty.