Business Context and Reporting Period
Company: Transportadora de Gas del Sur S.A. (TGS)
Filing Type: Form 6-K (Current Report)
Reporting Period: Third Quarter and Nine-Month Period ended September 30, 2004
Business Overview: TGS is Argentina's leading natural gas transporter (63.4 MMm³/d capacity) and a major processor and marketer of natural gas liquids (NGL). The company operates under regulated tariffs for gas transportation and market-based pricing for NGL. Financial statements are presented in historical Argentine Pesos (Ps.) as inflation accounting was suspended effective February 28, 2003.
Key Financial Metrics
Third Quarter 2004 vs. Third Quarter 2003
- Net Income: Ps. 21.4 million (Q3 2004) vs. Net Loss of Ps. (70.5) million (Q3 2003).
- Earnings Per Share: Ps. 0.027 per share (Ps. 0.135 per ADS) vs. Ps. (0.089) per share (Ps. (0.444) per ADS).
- Total Net Revenue: Ps. 261.5 million (15.3% increase).
- Segment Revenue:
- Gas Transportation: Ps. 111.1 million (4.7% increase).
- NGL Production/Commercialization: Ps. 135.8 million (21% increase).
- Other Services: Ps. 14.6 million (71.8% increase).
- Costs of Sales & Admin Expenses: Ps. 141.6 million (19% increase).
- Net Financial Expense: Ps. 86.3 million (decrease from Ps. 150.6 million).
Nine-Month Period Ended September 30, 2004 vs. 2003
- Net Income: Ps. 69.2 million (2004) vs. Ps. 243.5 million (2003).
- Earnings Per Share: Ps. 0.087 per share (Ps. 0.435 per ADS) vs. Ps. 0.306 per share (Ps. 1.532 per ADS).
- Total Net Revenue: Ps. 741.2 million (11.4% increase).
- Segment Revenue:
- Gas Transportation: Ps. 325.5 million (3.1% increase).
- NGL Production/Commercialization: Ps. 375.3 million (17.3% increase).
- Other Services: Ps. 40.4 million (35.6% increase).
- Costs of Sales & Admin Expenses: Ps. 399.2 million (7.1% increase).
- Net Financial Expense: Ps. 246.5 million (increase from Ps. 159.7 million).
- Income Tax: Expense of Ps. 14.9 million (2004) vs. Gain of Ps. 131.8 million (2003).
- Cash Flow from Operations: Ps. 372.4 million.
Material Changes and Drivers
Q3 2004 Improvement: The shift from a net loss in Q3 2003 to a net profit in Q3 2004 is primarily attributed to higher NGL revenues driven by international price increases and the stability of the US dollar in Q3 2004. In contrast, Q3 2003 was negatively impacted by local currency devaluation.
YTD 2004 Decline: Despite revenue growth, YTD net income decreased significantly compared to 2003. This is largely due to two non-cash positive items in the 2003 period that were absent in 2004:
- A Ps. 137.0 million reduction in deferred income tax liability (related to exchange loss capitalization).
- A Ps. 31.4 million exchange rate gain from Peso appreciation in 2003.
Expense Drivers:
- Costs: Increased due to higher NGL production costs, a rise in export taxes (from 5% to 20% effective May 2004), and higher construction/maintenance costs.
- Financial Expenses: YTD financial expenses increased due to a Ps. 37.6 million foreign exchange loss in 2004, whereas 2003 benefited from a foreign exchange gain due to Peso appreciation.
Outlook, Risks, and Contingencies
Debt Restructuring: TGS has postponed interest and principal payments since May 2003. On October 1, 2004, the company announced a new debt restructuring proposal. The deadline for creditor consent is November 5, 2004. Success is critical for achieving a sustainable capital structure.
Regulatory Environment: Gas transportation tariffs remain "pesified" at a 1:1 USD/Peso rate with no indexation adjustments since the 2002 Economic Emergency Law. Tariff renegotiation has been delayed with no significant progress, impacting the segment's revenue share (dropped from ~80% historically to ~42% in Q3 2004).
Litigation: A decrease in "Other expenses" in 2004 compared to 2003 is due to a one-time accrual in 2003 regarding a Supreme Court resolution on a lawsuit filed by Gas del Estado S.E. regarding privatization assets.
Forward-Looking Statements: Management notes that actual results may differ due to risks including currency fluctuations, regulatory changes, and the outcome of debt restructuring negotiations.
Investor Verification Checklist
- Debt Restructuring Status: Verify if the October 2004 debt proposal received sufficient creditor consent by the November 5, 2004 deadline.
- Tariff Renegotiation: Monitor progress on the renegotiation of regulated gas transportation tariffs, which have been frozen since 2002.
- Currency Exposure: Assess the impact of Argentine Peso volatility on financial expenses and NGL revenue (priced in USD).
- Export Tax Impact: Confirm the ongoing effect of the increased export tax rate (20%) on NGL profitability.
- Cash Position: Review the company's ability to fund operations and investments solely through operating cash flow given the debt payment deferrals.