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: Third Quarter and Nine-Month Period ended September 30, 2015
Business Overview: TGS is Argentina's leading natural gas transporter with a firm contracted capacity of approximately 2.8 Bcf/d and a major processor of natural gas liquids. The company operates under regulated tariffs set by ENARGAS and is subject to ongoing tariff renegotiation efforts with the Argentine government.
Key Financial Metrics
Profitability (Nine-Month Period ended Sept 30, 2015):
- Net Comprehensive Income: Ps. 11.2 million loss (vs. Ps. 77.8 million income in 2014).
- Earnings Per Share: Ps. 0.014 loss per share (vs. Ps. 0.098 income in 2014).
- Operating Profit/Loss: Operating results decreased by Ps. 493.3 million (62.7% decline) compared to the prior year.
Revenue (Nine-Month Period):
- Total Net Revenues: Ps. 2,839.3 million (down 10.2% from Ps. 3,163.1 million in 2014).
- Natural Gas Transportation: Ps. 192.4 million increase (34.5% growth) driven by tariff adjustments.
- Liquids Production & Commercialization: Ps. 1,865.0 million (down 21.4% due to lower international prices and volumes).
Expenses and Margins:
- Operating Costs: Decreased by Ps. 159.8 million (6.7%) primarily due to lower export taxes.
- Net Financial Expenses: Ps. 333.4 million (down 50.4% from Ps. 672.4 million in 2014) due to lower peso depreciation impact and reduced net dollar liability.
- Unusual Items: A charge of Ps. 321.9 million was recorded for the acquisition of "Rights of the Arbitration Proceeding" related to an ICSID claim.
Liquidity and Cash Flow:
- Cash and Cash Equivalents: Decreased by Ps. 74.6 million.
- Operating Cash Flow: Generated Ps. 370.2 million.
- Investing Cash Flow: Used Ps. 153.5 million for property, plant, and equipment.
- Debt Service: The second installment of principal notes was cancelled in May 2015 using operating cash flow.
Material Changes vs. Prior Period
- Profitability Reversal: The company shifted from a net income of Ps. 77.8 million in the first nine months of 2014 to a net loss of Ps. 11.2 million in 2015. This was primarily driven by a Ps. 321.9 million charge for arbitration rights and a Ps. 267.5 million operating loss in the Natural Gas Transportation segment.
- Revenue Mix Shift: While Liquids revenue fell significantly due to global price drops, Natural Gas Transportation revenue grew 34.5% due to two tariff increases (Resolutions I-2852/14 and I-3347/15), the first granted since 1999.
- Financial Expense Reduction: Net financial expenses dropped by over 50% due to a stabilization in the Argentine peso exchange rate compared to the previous year's volatility.
Outlook, Risks, and Management Commentary
Management Commentary:
Management highlights that recent tariff increases provide only temporary support against rising operating costs. The acquisition of the "Rights of the Arbitration Proceeding" is a strategic move to enable the signing of an "Integral Renegotiation Agreement" with the government, which is necessary to implement a fair tariff scheme and achieve financial recovery.
Risks and Contingencies:
- Regulatory Risk: Continued dependence on government tariff approvals; the current tariff structure has not fully offset cost increases since 2005.
- Market Risk: Liquids segment performance is highly sensitive to international reference prices, which have trended downward.
- Legal/Arbitration: Ongoing ICSID claim involving Enron Creditors Recovery Corp. and Ponderosa Assets LLP regarding a 2011 loan to Pampa Energía.
- Foreign Exchange: The Argentine peso appreciated 10.2% against the USD by Sept 30, 2015, compared to a 29.3% depreciation in the same period of 2014, impacting financial results.
Guidance:
The filing contains forward-looking statements regarding the tariff renegotiation process but does not provide specific numerical financial guidance for future periods.
Key Facts for Investor Verification
- Arbitration Charge Impact: Verify the accounting treatment and future cash flow implications of the Ps. 321.9 million charge for arbitration rights.
- Tariff Renegotiation Status: Monitor progress on the "Integral Renegotiation Agreement" with the Argentine government, as current tariffs are insufficient for long-term recovery.
- Liquids Price Sensitivity: Assess the exposure of the Liquids segment to continued declines in international natural gas liquid prices.
- Debt Maturity Profile: Review the schedule for remaining debt principal payments, given the recent use of operating cash flow to service debt.
- Exchange Rate Volatility: Evaluate the impact of potential future Argentine peso devaluation on financial expenses and reported earnings.