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: First Quarter ended March 31, 2015
Business Overview: TGS is Argentina's leading natural gas transporter, operating a pipeline system of approximately 5,600 miles with a firm contracted capacity of 2.8 Bcf/d. It is also a leading processor of natural gas and marketer of natural gas liquids (Liquids). The company is listed on the NYSE (TGS) and MERVAL (TGSU2).
Key Financial Metrics
| Metric (in millions of ARS) | Q1 2015 | Q1 2014 |
|---|---|---|
| Net Income | 45.0 | (77.7) Loss |
| Operating Profit | 180.9 | 348.8 |
| Total Net Revenues | 965.8 | 1,240.1 |
| Cost of Sales & Expenses | 785.6 | 893.4 |
| Net Financial Expense | 110.7 | 466.2 |
| Cash Flow from Operations | (75.7) Used | Filing text does not provide a clear value |
| Cash Flow from Investing | (93.7) Used | Filing text does not provide a clear value |
Segment Revenue Mix (Q1 2015):
- Liquids Production & Commercialization: 71% of total revenue
- Natural Gas Transportation: 22% of total revenue
- Other Services: 7% of total revenue
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a net income of Ps. 45.0 million in Q1 2015, a positive variation of Ps. 122.7 million compared to a comprehensive loss of Ps. 77.7 million in Q1 2014.
- Operating Profit Decline: Operating profit decreased 48.1% to Ps. 180.9 million. The Natural Gas Transportation segment operating profit turned negative due to a lack of tariff adjustments sufficient to cover rising operating costs.
- Revenue Decrease: Total net revenues fell 22.1% to Ps. 965.8 million. This was driven primarily by a Ps. 310.5 million drop in Liquids revenue due to falling international prices, partially offset by a Ps. 47.1 million increase in Transportation revenue.
- Financial Results Improvement: Net financial expenses dropped significantly by Ps. 355.5 million (from Ps. 466.2 million to Ps. 110.7 million). This was due to a lower foreign exchange loss resulting from the slowing depreciation of the Argentine peso (3.2% increase in Q1 2015 vs. 22.7% depreciation in Q1 2014) and a reduced net monetary liability position in USD.
- Cost Reduction: Cost of sales and administrative expenses decreased by Ps. 107.8 million, attributed to lower export withholding taxes and reduced natural gas purchase prices for the Cerri Complex.
Outlook, Risks, and Management Commentary
- Tariff Disputes: Management highlights that the Natural Gas Transportation segment is deteriorating. While Resolution No. I-2852 implemented a partial tariff increase (cumulative 20% starting Aug 2014), it is insufficient to address cost increases since 1999. TGS has lodged administrative and legal actions to enforce the full implementation of the 2008 Transitional Agreement.
- Liquids Market Volatility: The Liquids segment remains impacted by the decline in international prices for propane, butane, and natural gasoline. This was partially mitigated by a reduction in the variable export tax regime (minimum rate now 1%) and increased export volumes.
- Regulatory Risks: The company faces ongoing regulatory challenges with ENARGAS regarding the Charge for Access and Use (CAU), which has not been modified since 2005 despite rising operating costs.
- Liquidity: Cash and cash equivalents decreased by Ps. 166.3 million, driven by cash outflows in operating activities (payment of trade payables) and investing activities.
- Forward-Looking Statements: The filing includes standard disclaimers that actual results may differ materially from projections due to known and unknown risks, including regulatory changes and market volatility.
Key Facts for Investor Verification
- Legal Actions Status: Verify the current status of TGS's judicial and administrative appeals regarding the 2008 Transitional Agreement and the CAU adjustment, as these are critical to the profitability of the Transportation segment.
- Commodity Price Exposure: Monitor international prices for natural gas liquids (propane, butane, natural gasoline) given that this segment comprises 71% of revenue and is highly sensitive to global market fluctuations.
- Exchange Rate Volatility: Assess the impact of future Argentine peso depreciation on the company's USD-denominated debt and financial results, as the Q1 2015 profit improvement was heavily influenced by a temporary stabilization of the exchange rate.
- Regulatory Changes: Track any new resolutions from ENARGAS or the Argentine Ministry of Economy regarding export taxes and tariff adjustments.