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: Nine months ended September 30, 2013
Business Overview: TGS operates in three segments: Natural Gas Transportation (regulated), Production and Commercialization of Liquids (unregulated), and Other Services. The company is currently in the process of adopting International Financial Reporting Standards (IFRS) for the first time, with the transition date of January 1, 2012.
Key Financial Metrics
Currency: Argentine Pesos (Ps.) in thousands, unless otherwise noted.
| Metric | Nine Months Ended Sep 30, 2013 | Nine Months Ended Sep 30, 2012 |
|---|---|---|
| Net Income | Ps. 49.0 million | Ps. 131.4 million |
| Operating Income | Increased by Ps. 36.7 million vs. prior year | N/A |
| Net Financial Results | Ps. 159.2 million negative variation (expense) | N/A |
| Income Tax Expense | Ps. 31.2 million | Ps. 71.7 million (implied) |
| Cash Flow from Operations | Increased by Ps. 89.1 million vs. prior year | N/A |
| Dividends Paid | Ps. 263.6 million total | N/A |
Revenue Breakdown (Nine Months 2013):
- Liquids Segment: ~68% of total net revenues. Increased by Ps. 105.7 million due to FX rates and sales terms, partially offset by lower international prices and volumes.
- Natural Gas Transportation: ~27% of total net revenues. Increased by Ps. 55.7 million due to higher demand for interruptible contracts, despite no tariff increase implementation.
- Other Services: Decreased by Ps. 11.2 million due to lower construction service revenues.
Material Changes vs. Prior Period
- Net Income Decline: Net income dropped significantly from Ps. 131.4 million to Ps. 49.0 million. The primary driver was a Ps. 159.2 million increase in net financial expenses, specifically foreign exchange losses on U.S. dollar-denominated debt used to finance fixed assets.
- Operating Performance: Operating income improved by Ps. 36.7 million, driven by revenue growth in the Liquids and Transportation segments. However, this was partially offset by higher fixed costs in the Transportation segment and increased variable costs in the Liquids segment.
- Cost Structure: Costs of sales, administrative, and selling expenses increased by Ps. 113.5 million year-over-year.
- Liquidity: While operating cash flow increased, total cash generation declined by Ps. 175.9 million due to significant dividend payments totaling Ps. 263.6 million.
Outlook, Risks, and Contingencies
Management Outlook:
- Tariff Renegotiation: TGS plans to conclude the license renegotiation with the National Government in 2013 to initiate a tariff review process, aiming to restore profitability in the Natural Gas Transportation segment.
- Liquids Segment: Focus on ensuring natural gas availability for processing and maximizing export prices through new tenders and alternative markets.
- Cost Control: Commitment to restrain operating and maintenance cost increases without compromising system reliability.
Key Risks and Contingencies:
- Regulatory Uncertainty: The Public Emergency Law has suspended tariff adjustments since 2002. The outcome of the license renegotiation is critical for future cash flows and asset impairment assessments.
- Foreign Exchange Risk: Significant exposure to the devaluation of the Argentine peso against the U.S. dollar, impacting debt service costs.
- Legal and Tax Disputes:
- Turnover Tax: Provisions of Ps. 42.1 million (sales of liquids) and Ps. 80.7 million (fuel tax) are recorded for potential tax liabilities.
- MetroGAS Receivables: Ps. 127.0 million is due and unpaid from MetroGAS (a major customer), of which Ps. 108.9 million is overdue. Management does not currently view this as a default risk but is pursuing collection.
- Presidential Decree Challenge: TGS is litigating against a tariff charge (Decree No. 2,067/08). An injunction is currently in place; if lost, the estimated impact would be an additional net expense of Ps. 62.3 million.
Investor Verification Checklist
- Tariff Renegotiation Status: Verify the progress of the license renegotiation with the Argentine Government, as this is the primary determinant of future profitability for the regulated segment.
- FX Exposure: Assess the impact of continued Argentine peso devaluation on the company's U.S. dollar-denominated debt service obligations.
- MetroGAS Collectability: Monitor the collection status of the Ps. 127.0 million receivable from MetroGAS and any changes in its financial reorganization.
- Legal Outcomes: Track the resolution of the turnover tax disputes and the injunction regarding Presidential Decree No. 2,067/08, as these could materially affect provisions and expenses.
- Dividend Policy: Review the sustainability of dividend payments given the decline in net income and the heavy reliance on operating cash flow.