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: Three months ended March 31, 2015
Business Overview: TGS operates in Argentina, primarily engaged in natural gas transportation and the production and commercialization of natural gas liquids (ethane, propane, butane, and natural gasoline). The company also provides midstream services (gas conditioning, compression) and telecommunications through its subsidiary, Telcosur S.A.
Key Financial Metrics
Profitability:
- Net Income: Ps. 45.0 million (Q1 2015) vs. Ps. 77.7 million loss (Q1 2014).
- Operating Profit: Decreased by Ps. 167.9 million (48.1% decline) compared to Q1 2014.
- Net Financial Results: Net financial expense was Ps. 110.7 million, a significant improvement from Ps. 466.1 million in Q1 2014.
- Income Tax Expense: Ps. 25.2 million loss tax expense.
Revenue by Segment:
- Natural Gas Transportation: Revenues increased by Ps. 47.1 million (approx. 22% of total revenue). However, the segment reported an operating loss of Ps. 7.7 million.
- Liquids Production and Commercialization: Revenues decreased by Ps. 310.5 million (approx. 71% of total revenue) due to falling international prices. Total volumes sold dropped 5.8%.
- Other Services: Revenues decreased by Ps. 10.9 million.
Cash Flow and Liquidity:
- Cash and Cash Equivalents: Decreased by Ps. 166.3 million.
- Operating Cash Flow: Used Ps. 75.7 million, primarily due to a decrease in trade payables.
- Investing Activities: Higher cash outflows due to property, plant, and equipment acquisitions.
Debt and Foreign Exchange:
- Exchange Rate: Ps. 8.822 per US Dollar as of March 31, 2015 (3.2% increase vs. end of 2014).
- Financial Position: The company holds a net liability position in US dollars, largely due to debt financing fixed assets in the Natural Gas Transportation segment.
Material Changes vs. Prior Period
- Turnaround in Net Income: The company moved from a comprehensive loss of Ps. 77.7 million in Q1 2014 to a net income of Ps. 45.0 million in Q1 2015. This was driven primarily by a Ps. 355.5 million reduction in net negative financial results due to lower foreign exchange losses.
- Operating Profit Decline: Despite the net income improvement, operating profit fell significantly. The Natural Gas Transportation segment shifted from a profit of Ps. 1.4 million to a loss of Ps. 7.7 million. The Liquids segment suffered a revenue drop of Ps. 310.5 million due to global price declines.
- Cost Reductions: Cost of sales and administrative expenses decreased by Ps. 107.8 million, aided by lower export withholding taxes (minimum rate reduced to 1%) and lower natural gas purchase prices.
Guidance, Outlook, and Risks
Outlook and Management Commentary:
- Tariff Restructuring: Management continues to pursue the implementation of the 2008 Transitional Agreement and a comprehensive tariff restructuring for the Natural Gas Transportation segment. A recent 20% rate increase (Resolution I-2852/14) is deemed insufficient to cover costs.
- Liquids Market: The outlook for the Liquids business remains negative due to product oversupply and low international prices. The company plans to sell on the "spot" market and seek alternative markets.
- Government Regulations: New regulations effective April 1, 2015, regarding LPG bottle sales (Decree No. 470/2015) require selling volumes at prices significantly below market rates, likely resulting in negative operating margins for that portion of the business.
Risks and Contingencies:
- Legal Claims:
- Turnover Tax (Santa Cruz): Supreme Court rejected TGS's appeal; final decision requires payment of Ps. 1.6 million.
- Turnover Tax (Tierra del Fuego): Pending appeal. A provision of Ps. 126.3 million has been recorded.
- Presidential Decree Challenge: A preliminary injunction regarding the annulment of Presidential Decree No. 2067/08 was extended until September 2015. Without this injunction, the company estimates a potential net loss of Ps. 46.5 million for the quarter.
- Foreign Exchange Risk: Continued volatility in the Argentine peso against the US dollar impacts the company's net liability position and financial results.
Investor Verification Checklist
- Tariff Resolution Status: Verify the progress of negotiations regarding the 2008 Transitional Agreement and the adequacy of the recent 20% tariff increase to cover operating costs.
- Liquids Pricing: Monitor international propane and butane prices and the impact of the new Argentine government "New Program" for LPG sales on margins.
- Legal Provisions: Review the potential cash impact of the Ps. 126.3 million provision for Tierra del Fuego taxes and the outcome of the injunction regarding Presidential Decree No. 2067/08.
- Debt Maturity: Assess the schedule for US dollar-denominated debt repayments and the company's ability to service this debt given the exchange rate environment.
- Contract Renewals: Track the renewal status of the ethane sales contract with PBB-Polisur S.A., which expires in 2015.