Business Context and Reporting Period
Company: Transportadora de Gas del Sur S.A. (TGS)
Filing Type: Form 6-K (Annual Report and Financial Statements)
Reporting Period: Year ended December 31, 2015
Business Overview: TGS is a major natural gas transporter in Argentina and a producer/commercializer of natural gas liquids (LPG, ethane, natural gasoline). The company operates a regulated pipeline system and a non-regulated liquids processing complex (Cerri Complex). The 2015 fiscal year was characterized by significant macroeconomic volatility in Argentina, including a change in government, currency devaluation, and ongoing regulatory disputes regarding tariff adjustments.
Key Financial Metrics
| Metric | 2015 (Ps. Millions) | 2014 (Ps. Millions) | Change |
|---|---|---|---|
| Total Net Revenues | 4,226.6 | 4,304.0 | -1.8% |
| Comprehensive Loss | (172.1) | 105.0 (Income) | Turned to Loss |
| Operating Income | 688.2 | 932.6 | -26.2% |
| Net Financial Expenses | 974.2 | 765.7 | +27.2% |
| Cash Flow from Operations | Decreased by 529.7 | N/A | Negative Trend |
| Total Debt | 3,333.8 | 2,465.7 | +35.2% |
| Exchange Rate (Year End) | Ps. 13.04 / USD | Ps. 8.55 / USD | +52.5% |
Note: All figures in Argentine Pesos (Ps.). The increase in debt is primarily due to the revaluation of USD-denominated liabilities following the devaluation of the Argentine Peso.
Segment Performance
- Natural Gas Transportation (Regulated): Revenues increased to Ps. 1,014.0 million (+36.3%) due to tariff adjustments (44.3% increase in May 2015). However, the segment recorded an operating loss of Ps. 298.2 million due to costs outpacing tariff increases and a Ps. 324.4 million charge for acquiring arbitration rights.
- Liquids Production & Commercialization: Revenues decreased to Ps. 2,907.8 million (-10.3%) driven by a ~50% drop in international reference prices for LPG and natural gasoline. Operating income remained positive at Ps. 863.4 million.
- Other Services: Revenues slightly decreased to Ps. 304.8 million (-3.7%).
Material Changes vs. Prior Period
- Profitability Reversal: The company swung from a net comprehensive income of Ps. 105.0 million in 2014 to a loss of Ps. 172.1 million in 2015. This was driven by a 26.2% drop in operating profit and a 27.2% increase in net financial expenses.
- Exchange Rate Impact: The lifting of foreign exchange restrictions in December 2015 caused the Peso to devalue by 52.5% against the USD. Since TGS's debt is 90% USD-denominated, this resulted in significant exchange losses (Ps. 318.1 million) impacting the bottom line.
- Arbitration Rights Acquisition: TGS acquired the rights to an ICSID arbitration claim against the Argentine Republic (originally held by Enron creditors) for Ps. 324.4 million. This was a strategic move to facilitate the renegotiation of its transportation license but resulted in a significant non-cash operating charge.
- Liquids Price Collapse: International prices for propane, butane, and natural gasoline fell by 82.2%, 66.3%, and 83.9% respectively since late 2013, severely compressing margins in the liquids segment.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Tariff Renegotiation: The primary strategic goal is the signing and implementation of the "Integral Renegotiation Agreement" with the Argentine government. Management views the 2015 tariff increases as insufficient to cover cost escalations (CPI up 582.6% over 15 years vs. 73.2% total tariff increase).
- Liquids Segment: Management expects continued challenges due to global oversupply and low prices. They are seeking government solutions for the "New Stabilization Program" which forces sales at subsidized prices below production costs.
- Financial Strategy: Focus on mitigating exchange rate risk through forward contracts (US$ 52.5 million hedged as of year-end) and partial amortization of USD debt.
Risks and Contingencies
- Regulatory Risk: Uncertainty regarding the timing and magnitude of future tariff adjustments for the transportation segment. The "Integral Renegotiation Agreement" has been drafted but not yet signed by the government.
- Subsidized Sales: Participation in government-mandated LPG supply programs (Programa Hogares) results in negative operating margins. Compensation for these sales is often delayed (Ps. 114.4 million outstanding as of Dec 31, 2015).
- Legal Proceedings: Ongoing disputes regarding the "Gas Tariff Resolutions" (increased processing charges) and Turnover Tax exemptions. TGS currently holds a preliminary injunction suspending the increased processing charges until April 2016.
- Commodity Price Risk: Exposure to volatile international prices for LPG and natural gasoline without hedging instruments for commodity prices.
Investor Verification Checklist
- Tariff Agreement Status: Verify the current status of the "Integral Renegotiation Agreement" with the Argentine government and the likelihood of its implementation in 2016.
- Government Receivables: Assess the collectability of the Ps. 114.4 million owed by the Federal Energy Bureau for subsidized LPG sales and the Ps. 69.4 million VAT/Income tax credit claim.
- Debt Covenants: Review compliance with debt covenants (2007 and 2014 Notes) given the deterioration in operating income and the impact of exchange rate fluctuations on the debt-to-EBITDA ratio.
- Arbitration Claim Value: Evaluate the strategic value and potential financial recovery from the acquired ICSID arbitration rights against the Argentine Republic.
- Exchange Rate Exposure: Monitor the effectiveness of the company's hedging strategy (forward contracts) against further devaluation of the Argentine Peso.