WRITER'S DIRECT NUMBER:
(212) 848-5009
WRITER'S EMAIL ADDRESS:
astolper@shearman.com
October 26, 2010
BY EDGAR
MetroGAS S.A.
Form 20-F for Fiscal Year Ended December 31, 2009
Filed July 14, 2010
File No. 001-13442
Dear Mr. Mew:
MetroGAS S.A. (the "Company") has received a comment letter dated September 28, 2010 from the staff of the Division of Corporation Finance (the "Staff") of the United States Securities and Exchange Commission (the "Commission") concerning the Company's annual report on Form 20-F for fiscal year ended December 31, 2009 (the "Form 20-F"). On behalf of the Company, we advise you as follows regarding your comments noted below:
General
Response
In response to the Staff's comment, where a comment below requests additional disclosures to be included, the Company's responses below show what the revised disclosures would look like. These additional disclosures will be included in the Company's future filings.
Response
In response to the Staff's comment, the Company will number all of the pages of each future filing for easy reference, including each page of the financial statements.
Item 5. Operating and Financial Review and Prospects
A. Liquidity and Capital Resources
In response to the Staff's comment, the table below sets forth the material factors that impact the comparability of the Company's operating cash flows between comparative periods in terms of cash:
For the year ended December 31, | ||||
2009 | 2008 | Variation | ||
(in millions of Pesos) | ||||
Net cash provided by operating activities | 251.5 | 172.4 | 79.1 | |
Net loss for the year | (78.3) | (13.5) | (64.8) | |
Adjustments to reconcile net loss to cash flow provided by operating activities |
|
|
| |
Net loss for the year adjusted to reconcile to cash flow |
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|
| |
Changes in working capital | ||||
Trade receivables | (2.5) | (26.5) | 24.0 | |
Other receivables | (26.9) | (20.9) | (6.0) | |
Inventories | (8.2) | (3.4) | (4.8) | |
Accounts payable | 77.7 | 17.3 | 60.4 | |
Payroll and social security | 4.7 | 4.8 | (0.1) | |
Taxes payable | (1.6) | (8.1) | 6.5 | |
Other liabilities | 1.8 | (1.1) | 2.9 | |
Contingencies | (0.4) | (0.7) | 0.3 | |
Minimum presumed income tax paid | (7.1) | (9.6) | 2.5 | |
37.5 | (48.2) | 85.7 | ||
Net cash provided by operating activities | 251.5 | 172.4 | 79.1 | |
As shown in the table above, net cash provided by operating activities amounted to Ps. 251.5 million during 2009 compared to Ps. 172.4 million during 2008. Such increase in net cash flows provided by operating activities was mainly due to the decrease in cash flows required for working capital needs driven primarily by an increase in accounts payable and a decrease in trade receivables.
4. Critical Accounting Policies and Estimates
2. Impairment of long-lived assets
In light of the aforementioned considerations, summarize for us the results of your most recent impairment test pursuant to the guidance in ASC Topic 360-10. Please revise your future disclosure to provide an expanded discussion of your material assumptions with an analysis of how actual results have compared to your prior projections and how any differences were considered in your most recent analysis.
Response
In response to the Staff's comment, the Company supplementally advises the Staff that for fiscal year ended December 31, 2009 the Company identified impairment indicators and performed an impairment test on its property, plant and equipment based on the guidance in ASC Topic 360-10. Pursuant to such test, the Company compared the net carrying amounts of its long-lived assets to the estimated undiscounted future cash flows expected to be generated by such assets and determined that the assets were not impaired.
With respect to the material assumptions used in performing such impairment test, taking into account (i) the nature, timing and extent of the Company's a tariff renegotiation process with the Argentine National Government, (ii) the erosion of the Company's operating profit resulting from increases in the Company's operating costs (which in turn are the result of inflationary pressures and cannot be recovered through tariff adjustments due to the current tariff freeze), (iii) an analysis of how actual results have compared to the Company's projections for prior periods, (iv) the recent experience of the other gas distribution company in the Buenos Aires metropolitan area (the principal gas market in Argentina), Gas Natural Ban, who had its renegotiation agreement approved by the Argentine Executive Branch on April 10, 2006 (which was subsequently implemented by theEnte Nacional Regulador del Gas (the "National Gas Regulatory Board" or "ENARGAS") on April 9, 2007 and October 10, 2008) and has now begun its full rate tariff review and (v) the status of the Company's current negotiations with the Argentine National Government, the Company assembled three different cash flow scenarios using a probability-weighted approach which considered the likelihood of each possible outcome in accordance with ASC Topic 360-10-35. As further described below, each of these scenarios contemplates different assumptions and the Company assigned a probability of occurrence to each cash flow projection based on current, factual information. Additionally, all cash flow projections have been prepared taking into consideration the remaining term of the Company's gas license, which does not exceed the residual useful life of the Company's long-lived assets.
Below please find a summary of the material assumptions of the Company's different cash flow scenarios as well as the probability assigned to each:
Within this scenario, the Company considered three different possible cash flows associated with the magnitude of the expected maintenance expenditures and the tariff increases expected from the five-year tariff reviews contemplated by the Company's gas license. The Company assigned a probability of occurrence to each of the three possible cash flows in order to obtain the probability-weighted undiscounted cash flow for this scenario.
The Company assigned a probability of occurrence of 60% to this cash flow scenario based on:
(a) the execution of the Transition Agreement;
(b) the recent experience of the other gas distribution company in the Buenos Aires metropolitan area (the principal gas market in Argentina), Gas Natural Ban,who, as noted above, not only has executed a renegotiation agreement with the Argentine National Government but also had its new tariff schedules approved by ENARGAS, which enable it to invoice its distribution services under the new tariffs;
(c) the Company's current regulatory framework, which includes the Gas Act and the above-mentioned rules relating to gas tariffs; and
(d) the renegotiation agreements signed by all other gas distribution companies, except for the Company, and one other gas distribution company, which agreements permit the parties thereto to begin a full rate tariff review and establish (i) a semi-annual tariff review in order to adjust tariffs to the general cost index variation whenever such index varies by more than 5% and (ii) a five-year tariff review similar to the five year tariff review contemplated by the Company's gas license (see Item 4 "Information on the Company - Business Overview - Regulatory Framework - ENARGAS - Tariffs" in the Form 20-F).
Within this scenario, the Company considered three different possible cash flows associated with the magnitude of the tariff increases expected from the five-year tariff reviews contemplated by the Company's gas license. The Company assigned a probability of occurrence to each of the three possible cash flows in order to obtain the probability-weighted undiscounted cash flow for this scenario.
The Company assigned a probability of occurrence of 30% to this cash flow scenario based on Gas Natural Ban's recent experience. The Company also took into consideration the fact that the Gas Natural Ban tariff increases did not lead to social unrest, protests by customers or objections from consumer advocacy organizations or the National Ombudsman.
The Company assigned a probability of occurrence of 10% to this cash flow scenario based on (a) the Company's 10-year experience with delays in its tariff renegotiation process with the Argentine National Government and (b) the fact that, prior to the Argentine Executive Branch executing a renegotiation agreement with the Company, the Argentine Executive Branch requires the Company's majority shareholder, the BG Group, to suspend any and all claims or actions brought by it against the Argentine Government relating to Law No. 25,561 of January 2002, which among other things froze tariffs.
Taking into account the three scenarios outlined above, based on the probability-weighted undiscounted cash flows method, the Company determined that its undiscounted expected cash flows exceeded their net carrying value by more than 200%. Therefore, the Company did not proceed to step two of the ASC Topic 360-10 impairment analysis and concluded that its property, plant and equipment were not impaired.
Furthermore, in response to the Staff's comment, the Company will revise future filings to include a summary of its most recent impairment test and an expanded discussion of its material assumptions, along with an analysis of how actual results have compared to its prior projections and how any differences were considered in its most recent analysis.
Item 15. Controls and Procedures
3. Controls and Procedures
1. Disclosure Controls and Procedures
Response
In response to the Staff's comment, the Company confirms its disclosure controls and procedures conclusion was as of the end of the period covered by the report. Additionally, the Company will disclose in future filings that the conclusion by its officers was as of the end of the period covered by the report.
Response
In response to the Staff's comment, the Company's Management, including its Chief Executive Officer and Chief Financial Officer, concluded that the Company's controls and procedures were effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended is accumulated and communicated to the Company's Management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Exhibits 12.1 and 12.2 - Section 302 Certifications
Response
In response to the Staff's comment, the Company confirms that for each 302 certification signed by the Company's Chief Executive Officer and Chief Financial Officer the annual report disclosed any change in the Company's internal controls over financial reporting that occurred during the Company's fourth fiscal quarter in fiscal 2009 that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Additionally, the Company will revise paragraph 4(d) of each 302 certification to comply with Item 601(31) of Regulation S-K in future filings so that such paragraph reads as follows:
"Disclosed in this report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter (the Company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting."
******
In accordance with the requests at the end of your letter, the Company hereby acknowledges that it is responsible for the adequacy and accuracy of the disclosure in its filing; staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
If you have any questions or wish to discuss any matters relating to the foregoing, please contact me at 212-848-5009 or Eduardo Villegas Contte, Chief Financial Officer of the Company, at 011-54-11-4309-1434.
Very truly yours,
/s/ Antonia E. Stolper
cc: Andrés Cordero Gimenez - Chief Executive Officer - MetroGAS S.A.
Eduardo Villegas Contte - Chief Financial Officer - MetroGAS S.A.
