Business Context and Reporting Period
Company: Transportadora de Gas del Sur S.A. (TGS), also known as Gas Transporter of the South Inc.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2015
Accounting Standards: International Financial Reporting Standards (IFRS)
Business Overview: TGS is the largest natural gas transporter in Argentina, operating a 5,675-mile pipeline system. Its operations are divided into four segments: Natural Gas Transportation (regulated), Liquids Production and Commercialization (non-regulated, extracting LPG, ethane, and natural gasoline), Other Services (midstream), and Telecommunications. The company is headquartered in Buenos Aires, Argentina.
Key Financial Metrics (Year Ended Dec 31, 2015)
| Metric | 2015 (Millions of Ps.) | 2014 (Millions of Ps.) |
|---|---|---|
| Revenues from Sales | 4,226.7 | 4,304.0 |
| Gross Profit | 1,466.7 | 1,738.4 |
| Operating Profit | 688.2 | 932.5 |
| Net Financial Results | (974.2) | (765.7) |
| Total Comprehensive Loss | (172.1) | 105.0 (Income) |
| Cash Flows from Operating Activities | 489.3 | 1,019.0 |
| Cash and Cash Equivalents (End of Period) | 872.5 | 789.4 |
Debt and Liquidity: As of December 31, 2015, total financial debt denominated in U.S. dollars was approximately US$254.7 million (Ps. 3,321.0 million). The company maintained a net monetary liability position of US$186.8 million. Cash flows from operations were sufficient to meet operating costs and capital expenditures, though operating cash flow decreased significantly year-over-year.
Material Changes vs. Prior Period
- Profitability Reversal: The company reported a total comprehensive loss of Ps. 172.1 million in 2015, compared to a profit of Ps. 105.0 million in 2014. This represents a swing of Ps. 277.1 million.
- Operating Segment Performance:
- Natural Gas Transportation: Recorded an operating loss of Ps. 298.2 million (vs. Ps. 42.4 million loss in 2014). Revenues increased 36.3% due to transitional tariff increases, but costs rose significantly due to labor negotiations and maintenance. A Ps. 324.4 million loss was recognized for the acquisition of arbitration rights.
- Liquids Production: Recorded an operating profit of Ps. 863.5 million (vs. Ps. 816.9 million in 2014). Revenues decreased 10.3% due to a >50% drop in international reference prices for LPG and natural gasoline, partially offset by lower export taxes and favorable exchange rates.
- Financial Expenses: Net financial results worsened by Ps. 208.5 million (27.2% increase in expense) primarily due to foreign exchange losses (Ps. 318.2 million) resulting from peso devaluation against the U.S. dollar.
- Dividends: No cash dividends were paid in 2015. A dividend of Ps. 99.7 million was declared in January 2016 (subsequent event) from a reserve created in 2015.
Guidance, Outlook, and Risks
Regulatory Outlook and Tariffs:
- Transitional Increases: In March 2016, ENARGAS approved a transitional tariff increase of 200.1% for the Natural Gas Transportation segment, effective April 1, 2016. This is intended to cover costs until an "Integral Renegotiation Agreement" is finalized.
- Renegotiation Process: The company is in negotiations with the Ministry of Energy to finalize the Integral Renegotiation Agreement. This process is critical for the long-term sustainability of the transportation segment.
- Investment Plan: The company is required to execute a mandatory Investment Plan of Ps. 794.3 million between April 2016 and March 2017. Dividend payments are restricted until compliance with this plan is evidenced.
Key Risks and Contingencies:
- Exchange Rate Volatility: The company has significant U.S. dollar-denominated debt while a portion of revenues (34.2% in 2015) is peso-denominated. Further devaluation of the peso would materially increase financial expenses.
- Commodity Prices: Liquids revenues are highly sensitive to international prices for LPG and natural gasoline, which have been volatile and trending downward. Domestic LPG sales are subject to price controls that result in negative operating margins.
- Legal Proceedings:
- ICSID Claim: The company acquired rights to an arbitration claim against the Argentine Government regarding tariff adjustments. The claim is currently suspended until July 2016 as part of the renegotiation process.
- PAE Arbitration: Pan American Energy initiated arbitration claiming US$163 million in damages regarding product allocation. Management believes the claim is unsupported.
- Tax Disputes: Ongoing disputes regarding turnover tax and natural gas processing charges. A preliminary injunction obtained in 2012 (extended through 2016) prevents the collection of increased gas processing charges.
- Gas Supply: Declining production in the Neuquina basin and government-mandated redirection of gas to residential users can reduce volumes available for the Cerri Complex (Liquids production).
Investor Verification Checklist
- Tariff Implementation: Verify the actual collection and impact of the 200.1% tariff increase approved in April 2016 on the Natural Gas Transportation segment's cash flow.
- Renegotiation Status: Monitor the progress of the "Integral Renegotiation Agreement" with the Argentine Government, as the long-term viability of the regulated segment depends on its finalization.
- Commodity Price Exposure: Assess the sensitivity of the Liquids segment to further declines in international LPG and natural gasoline prices, given the current low-price environment.
- Debt Service: Review the company's ability to service its US$254.7 million debt obligation amidst potential further peso devaluation and the mandatory Ps. 794.3 million investment plan.
- Legal Outcomes: Track the resolution of the PAE arbitration claim (US$163 million) and the status of the suspended ICSID claim against the Government.
- Dividend Restrictions: Confirm compliance with the Investment Plan requirements, as dividend payments are currently restricted by ENARGAS until compliance is demonstrated.