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, 2019 (1Q2019)
Business Overview: TGS is Argentina's leading natural gas transporter, moving approximately 59% of the country's gas consumption through over 5,700 miles of pipelines. The company also operates as a major natural gas processor and is expanding infrastructure in the Vaca Muerta basin. Financial results are presented in constant Argentine pesos (Ps.) in accordance with IFRS and IAS 29 (Hyperinflationary Economies).
Key Financial Metrics
| Metric | 1Q2019 (Ps. Million) | 1Q2018 (Ps. Million) |
|---|---|---|
| Total Revenues | 9,179.8 | 7,790.7 |
| Operating Profit | 3,885.1 | 3,686.0 |
| Income Tax | (929.7) | (1,284.9) |
| Net Income | 2,379.6 | 2,300.6 |
| Earnings Per Share | Ps. 3.018 | Ps. 2.896 |
| Capital Expenditures | 3,278.8 | Filing text does not provide a clear value |
| Dividends Declared (2018 Results) | 7,182.5 | Filing text does not provide a clear value |
Liquidity and Cash Flow: Net cash flow provided by operating activities decreased by Ps. 19.7 million compared to 1Q2018, primarily due to higher income tax payments. Net cash flow used in investment activities increased by Ps. 2,984.9 million, driven by capital expenditures for the Five-Year Investment Plan and the Vaca Muerta project. The overall net positive variation in cash and cash equivalents was Ps. 3,018.1 million lower than in 1Q2018.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by Ps. 1,389.1 million (17.8%).
- Liquids Production: Revenues rose by Ps. 917.0 million, driven by a Ps. 2,217.8 million positive impact from peso depreciation on USD-denominated sales and a 9.5% increase in dispatched volumes. This was partially offset by a Ps. 451.8 million decrease due to lower international reference prices.
- Natural Gas Transportation: Revenues increased by Ps. 521.8 million, attributed to weighted average tariff increases (50% in April 2018 and 19.7% in October 2018), partially offset by inflation restatements under IAS 29.
- Other Services: Revenues decreased by Ps. 49.7 million due to inflation restatements and lower operation/maintenance services, offset by nominal exchange rate gains.
- Cost Increases: Operating costs rose by Ps. 874.5 million (24.5%) and administrative/selling expenses increased by Ps. 294.1 million. Key cost drivers included higher shrinkage gas prices/volumes (Ps. 645.6 million), increased taxes (Ps. 294.0 million), and higher maintenance/labor costs.
- Financial Results: Financial results deteriorated by Ps. 468.3 million, primarily due to negative exchange differences (Ps. 463.0 million), higher interest on liabilities, and losses on derivative instruments. These were partially offset by a Ps. 252.3 million gain on monetary position due to inflation.
Outlook, Management Commentary, and Risks
- Investment Plan: TGS is executing a five-year investment plan (April 2017 - March 2022) with total capital expenditures of Ps. 3,278.8 million in 1Q2019, including Ps. 1,040.9 million related to the Comprehensive Tariff Review (RTI).
- Tariff Adjustments: ENARGAS Resolution No. 192/2019 authorized a 26% biannual tariff adjustment effective April 1, 2019.
- Strategic Projects: TGS submitted a proposal for a new 600+ mile pipeline connecting the Neuquén basin to Greater Buenos Aires to replace LNG imports. The first section of the Vaca Muerta Gas Pipeline was enabled in May 2019, adding 0.8 MMm3/d of firm contracted capacity.
- Corporate Actions:
- Approved a third stock buyback program totaling Ps. 1,500 million, expiring September 23, 2019.
- Declared cash dividends of Ps. 7,182.5 million for the fiscal year ended December 31, 2018.
- CEO transition: Jorge Javier Gremes Cordero resigned; Oscar José Sardi appointed as CEO effective April 30, 2019.
- Risks: The filing includes standard forward-looking statement disclaimers. Key risks inherent in the results include exposure to Argentine peso depreciation, inflation adjustments under IAS 29, and regulatory changes by ENARGAS.
Key Facts for Investor Verification
- Currency Impact: Verify the sensitivity of future earnings to Argentine peso depreciation, which significantly boosted Liquids revenues but negatively impacted financial results via exchange differences.
- Inflation Accounting: Confirm the application of IAS 29 restatements, which offset nominal revenue and cost increases in the reported figures.
- Capital Allocation: Monitor the execution of the Ps. 1,500 million stock buyback program and the progress of the Vaca Muerta pipeline expansion.
- Regulatory Environment: Track the implementation of the 26% tariff adjustment and the status of the proposed new pipeline project to replace LNG imports.
- Liquidity Position: Assess the impact of the Ps. 7,182.5 million dividend payout and increased capital expenditures on the company's net cash flow and debt levels.