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 and third quarter ended September 30, 2016
Business Overview: TGS is Argentina's leading natural gas transporter (approx. 2.8 Bcf/d firm capacity) and a major processor and marketer of Natural Gas Liquids (Liquids). The company operates under Argentine regulation (ENARGAS) and is listed on the NYSE (TGS) and MERVAL (TGSU2).
Key Financial Metrics
Income Statement Highlights (Nine Months Ended Sept 30, 2016)
- Net Revenues: Ps. 4,868.4 million (vs. Ps. 2,839.3 million in 2015).
- Operating Profit: Ps. 1,381.8 million (vs. Ps. 293.7 million in 2015).
- Net Comprehensive Income: Ps. 468.6 million (vs. Net Loss of Ps. 11.2 million in 2015).
- Earnings Per Share: Ps. 0.590 (vs. Ps. 0.014 loss in 2015).
- Financial Results: Negative Ps. 327.3 million impact due to peso devaluation on USD-denominated debt.
Income Statement Highlights (Third Quarter Ended Sept 30, 2016)
- Net Revenues: Ps. 1,547.4 million (vs. Ps. 891.1 million in 2015).
- Net Comprehensive Income: Ps. 151.2 million (vs. Net Loss of Ps. 171.2 million in 2015).
- Earnings Per Share: Ps. 0.190 (vs. Ps. 0.215 loss in 2015).
Liquidity and Cash Flow
- Cash and Cash Equivalents: Increased by Ps. 644.0 million during the nine-month period.
- Operating Cash Flow: Increased by Ps. 978.2 million, driven by improved operating income and liquidation of derivative instruments.
- Investing/Financing Cash Flow: Net outflows of Ps. 218.3 million and Ps. 257.6 million, respectively, due to debt cancellation and dividend payments.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased by Ps. 2,029.1 million (71.5%) year-over-year.
- Liquids Segment: Revenue rose Ps. 1,288.7 million, driven by peso devaluation on USD revenues and higher volumes sold on own account, partially offset by lower international reference prices.
- Transportation Segment: Revenue rose Ps. 585.7 million, primarily due to partial implementation of tariff increases (Resolution 3724) and full effect of prior year adjustments.
- Profitability Turnaround: The company moved from a net loss in the prior year to significant net income. This was largely due to a Ps. 321.9 million loss recorded in 2015 related to the acquisition of "Rights of the Arbitral Judgment," which did not recur in 2016.
- Cost Increases: Cost of sales and administrative expenses rose by Ps. 1,208.9 million, attributed to higher natural gas costs for Replacement Thermal Plants (RTP), labor costs, and operating expenses.
- Financial Impact: Negative financial results nearly doubled due to the devaluation of the Argentine peso against the US dollar, impacting the company's net liability position in USD.
Outlook, Risks, and Management Commentary
Regulatory and Tariff Environment
- Tariff Stability: The Natural Gas Transportation segment faces challenges with costs rising while applicable rates have remained stable for nearly 15 years. Recent partial tariff increases (Resolution 3724) are insufficient to fully offset costs.
- Integral Tariff Revision (RTI): Management emphasizes the necessity of the RTI process to ensure long-term sustainability. Implementation is contingent on the "Integral Renegotiation Agreement," which was initialed in October 2015 but not yet subscribed due to reasons unrelated to TGS.
- Investment Plan Delays: Execution of the mandatory Investment Plan (Resolution 3724) has been delayed due to partial tariff increases. TGS is negotiating a financial assistance plan with the Government to fund these works.
Risks and Contingencies
- Supreme Court Ruling: A ruling on August 18, 2016, regarding MINEM resolutions delayed receivables collection in the transportation segment and hindered the Investment Plan.
- Exchange Rate Volatility: Continued devaluation of the peso negatively impacts financial results due to USD-denominated debt, though it boosts revenue recognition for USD-denominated sales.
- Liquids Margins: Despite a wellhead price increase (Resolution 28/2016), depressed international reference prices and participation in domestic supply programs could worsen operating margins for the Liquids segment.
Investor Verification Checklist
- RTI Agreement Status: Verify the current status of the "Integral Renegotiation Agreement" and the timeline for the Integral Tariff Revision (RTI) implementation.
- Government Assistance: Confirm the terms and likelihood of approval for the financial assistance plan requested to fund the mandatory Investment Plan.
- Receivables Collection: Assess the impact of the Supreme Court ruling on the collection of receivables in the Natural Gas Transportation segment.
- Debt Structure: Review the composition of financial debt and the specific exposure to USD exchange rate fluctuations.
- Liquids Pricing: Monitor international reference prices for propane and butane to evaluate the sustainability of the Liquids segment margins.