Business Context and Reporting Period
This Form 6-K filing by Transportadora de Gas del Sur S.A. (TGS) covers the fourth quarter and full year ended December 31, 2014. TGS is Argentina's leading natural gas transporter, operating a pipeline system of approximately 5,600 miles with a firm contracted capacity of 2.9 Bcf/d. The company also processes natural gas and markets natural gas liquids (Liquids). The controlling shareholder is Compañía de Inversiones de Energía S.A. (CIESA), held by Petrobras Argentina and other entities.
Key Financial Metrics
Fourth Quarter 2014 vs. Fourth Quarter 2013
- Total Net Revenues: Ps. 1,140.9 million (Q4 2014) vs. Ps. 1,015.4 million (Q4 2013).
- Total Comprehensive Income: Ps. 27.2 million (Q4 2014) vs. Ps. 58.5 million (Q4 2013), a 54% decrease.
- Operating Income: The Natural Gas Transportation segment reported an operating deficit of Ps. 45.0 million, an increase of Ps. 30.5 million from the prior year.
- Net Financial Expense: Ps. 93.3 million (Q4 2014) vs. Ps. 164.4 million (Q4 2013).
- Income Tax Expense: Ps. 25.2 million (Q4 2014) vs. Ps. 34.7 million (Q4 2013).
Full Year 2014 vs. Full Year 2013
- Total Net Revenues: Ps. 4,304.0 million (2014) vs. Ps. 2,864.9 million (2013).
- Total Comprehensive Income: Ps. 105.0 million (2014) vs. Ps. 107.5 million (2013).
- Operating Income: Ps. 226.0 million (2014). The Natural Gas Transportation segment recorded an annual operating loss of Ps. 42.4 million, the first in company history.
- Net Financial Expense: Ps. 765.7 million (2014) vs. Ps. 532.7 million (2013).
- Income Tax Expense: Ps. 64.8 million (2014) vs. Ps. 65.9 million (2013).
Material Changes and Drivers
Revenue Growth: Revenue increases in both the quarter and full year were driven by higher foreign exchange rates (Argentine peso vs. U.S. dollar), increased volumes sold in the Liquids segment, and new rate schedules for natural gas transportation tariffs (Resolution I-2852).
Profitability Decline: Despite revenue growth, profitability suffered due to:
- Regulatory Constraints: Frozen tariffs for 15 years and delayed tariff adequacy implementation by the National Government failed to offset sustained increases in operational costs for the Natural Gas Transportation segment.
- Liquids Segment Costs: Rising variable production costs, specifically natural gas purchased for the Cerri Complex, and lower international reference prices for propane, butane, and natural gasoline.
- Government Programs: The "Garrafa para Todos" program required selling butane at prices that resulted in negative margins due to high variable costs.
- Financial Expenses: Higher net financial expenses in 2014 were driven by losses on derivative financial instruments and foreign exchange variations on U.S. dollar-denominated debt.
Outlook, Risks, and Contingencies
Management Commentary: Management highlights that the new tariff schedule (Resolution I-2852) does not comply with the 2008 Transitional Agreement and fails to cover cost increases. TGS has filed judicial and administrative appeals against this breach. The company is seeking a revision of the variable export tax regime and the "Garrafa para Todos" program.
Liquidity and Capital Resources: Cash and cash equivalents decreased by Ps. 104.3 million, primarily due to the payment of the first amortization of financial debt principal (Ps. 762.5 million) in May 2014. The Board approved a cash dividend of Ps. 260.5 million for 2014.
Risks: Key risks include the inability to recover costs through regulated tariffs, volatility in international commodity prices, foreign exchange fluctuations affecting U.S. dollar-denominated liabilities, and the impact of government-mandated pricing programs on margins.
Investor Verification Checklist
- Verify the status of judicial and administrative appeals regarding the breach of the 2008 Transitional Agreement and the adequacy of Resolution I-2852 tariffs.
- Monitor the evolution of international natural gas liquids prices and their impact on the Liquids segment margins.
- Assess the sustainability of the Natural Gas Transportation segment's operating deficit given the regulatory environment.
- Review the company's debt maturity schedule and refinancing capabilities, particularly regarding U.S. dollar-denominated liabilities.
- Confirm the impact of the "Garrafa para Todos" program on future profitability and potential government policy changes.