TGS

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: Fourth Quarter and Full Year ended December 31, 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 and marketer of natural gas liquids. The company operates under regulated tariffs set by ENARGAS and faces significant macroeconomic challenges in Argentina, including high inflation and currency devaluation.

Key Financial Metrics

Profitability (Full Year 2015 vs. 2014):

• Net Comprehensive Income/Loss: Loss of Ps. 172.1 million (2015) vs. Income of Ps. 105.0 million (2014).
• Earnings Per Share: Ps. 0.217 loss per share (2015) vs. Ps. 0.132 income per share (2014).
• Operating Profit: Decreased by Ps. 244.4 million (26.2% decline).
• Net Financial Results: Deteriorated by Ps. 208.5 million (27.2% decline), driven by exchange losses.

Revenue (Full Year 2015 vs. 2014):

• Total Net Revenue: Ps. 4,226.6 million (2015) vs. Ps. 4,304.0 million (2014), a 1.8% decrease.
• Natural Gas Transportation: Increased Ps. 269.9 million (36.3% growth) due to tariff adjustments, though still resulting in a segment operating loss of Ps. 298.2 million.
• Liquids Production & Commercialization: Decreased Ps. 335.5 million (10.3% decline) due to a ~50% drop in international reference prices.

Cash Flow and Liquidity:

• Cash and Cash Equivalents: Increased by Ps. 83.1 million in 2015 (vs. a decrease of Ps. 104.4 million in 2014).
• Operating Cash Flow: Decreased by Ps. 529.6 million compared to the prior year.
• Investing Activities: Cash used increased to Ps. 56.1 million for property, plant, and equipment.
• Debt: Lower debt cancellations of Ps. 475.3 million contributed to the cash increase.

Material Changes vs. Prior Period

Fourth Quarter 2015 Performance:

• Revenue: Total net revenues rose 21.6% to Ps. 1,387.3 million (from Ps. 1,140.9 million in Q4 2014).
• Profitability: Reported a net comprehensive loss of Ps. 160.9 million, compared to a net income of Ps. 27.2 million in Q4 2014.
• Financial Expenses: Negative financial results increased by Ps. 547.5 million quarter-over-quarter, primarily due to exchange losses following the lifting of foreign exchange restrictions on December 17, 2015.

Key Drivers of Change:

• Cost Inflation vs. Tariffs: Operating costs rose significantly (Salary Index up 1,323.1% over 15 years) while tariffs only increased 20% in 2014 and 44.3% in 2015, leading to an operating loss in the transportation segment.
• Arbitration Proceeding Charge: A one-time loss of Ps. 324.2 million was recorded for the acquisition of rights related to an ICSID lawsuit involving Enron Creditors Recovery Corp.
• Subsidized Sales: The "Hogares con Garrafa" program forced the sale of butane below cost, generating an approximate loss of Ps. 100 million in 2015.
• Currency Devaluation: The Argentine peso depreciated 52.5% against the US dollar in 2015 (closing at Ps. 13.04/USD), exacerbating financial expenses on dollar-denominated liabilities.

Outlook, Risks, and Management Commentary

Management Commentary:

• Integral Renegotiation Agreement: Management states that sustainable recovery of the Natural Gas Transportation segment depends on signing and implementing this agreement. TGS has accepted a new draft and expects the government may sign it in the short term to establish a fair tariff scheme.
• Tariff Adequacy: Current tariff increases are insufficient to offset cost inflation; the company emphasizes the strategic importance of the gas matrix for the Argentine economy.

Risks and Contingencies:

• Regulatory Risk: Reliance on government approval for tariff renegotiations and the "Integral Renegotiation Agreement."
• Macroeconomic Risk: Continued volatility in the Argentine peso and high inflation rates impacting operating costs and financial results.
• Legal Contingency: Ongoing implications of the ICSID claim and the associated acquisition of arbitration rights.
• Market Risk: Exposure to international commodity prices for liquids and the impact of government-mandated subsidized sales programs.

Investor Verification Checklist

• Renegotiation Status: Verify the current status and expected timeline for the signing of the "Integral Renegotiation Agreement" with the Argentine government.
• Arbitration Rights: Confirm the legal standing and financial implications of the acquired "Rights of the Arbitration Proceeding" regarding the Enron/ICSID claim.
• Currency Exposure: Assess the company's hedging strategies and net liability position in US dollars given the recent lifting of exchange controls.
• Subsidy Impact: Monitor the scope and duration of the "Hogares con Garrafa" program and its continued impact on the Liquids segment margins.
• Debt Schedule: Review upcoming debt maturities and the company's ability to service debt given the decline in operating cash flow.