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: Full Year and Fourth Quarter ended December 31, 2018

Business Overview: TGS is Argentina's leading natural gas transporter, moving approximately 59% of the country's gas consumption via over 5,700 miles of pipelines. It is also a major natural gas processor with significant infrastructure investments in the Vaca Muerta basin. The company is controlled by Compañía de Inversiones de Energía S.A. (CIESA), which holds 51% of the share capital.

Key Financial Metrics (FY2018)

Note: All figures are in millions of Argentine Pesos (Ps.) unless otherwise noted, based on constant pesos as of Dec 31, 2018.

Debt and Liquidity: In FY2018, TGS successfully placed US$ 500 million in Class 2 Notes (2018 Notes) at a fixed interest rate of 6.75%. Proceeds were used to repurchase and redeem Class 1 Notes totaling US$ 207.2 million, with the remainder allocated to capital expenditures. The company also allocated Ps. 1,420.9 million to stock buybacks and distributed Ps. 4,329.2 million in cash dividends.

Material Changes vs. Prior Period

• Revenue Growth: Total net revenues increased by Ps. 14,109.4 million (70.7% YoY). This was driven by tariff increases in the Natural Gas Transportation segment (Ps. 8,006.0 million increase) and foreign exchange effects plus volume growth in the Liquids segment (Ps. 5,453.4 million increase).
• Profitability: Operating profit rose by Ps. 8,052.3 million YoY. However, financial results deteriorated by Ps. 2,318.0 million due to the depreciation of the Argentine peso against the US dollar and higher interest costs on new debt.
• Cost Structure: Operating costs increased by Ps. 4,252.6 million (35.6% YoY), primarily due to higher natural gas prices for thermal plant replacement (RTP) and increased third-party services.
• Production: Liquids production at the Cerri Complex reached 1,171,807 short tons, the highest in 10 years, up 169,948 short tons from FY2017.

Guidance, Outlook, and Risks

Management Commentary and Outlook:

• Investment Plan: TGS is executing a five-year investment plan (April 2017 – March 2022) under the Integral Tariff Review (RTI) process. FY2018 capital expenditures included Ps. 2,835 million related to this plan.
• Vaca Muerta Expansion: The company received a concession extension in November 2018 for a 15.5-mile pipeline in the Vaca Muerta basin, capable of transporting 550 Mcf/d. The total project investment is estimated at US$ 250 million.
• Dividends: The Board proposed a cash dividend of Ps. 6,500 million for approval at the April 11, 2019 shareholder meeting.

Risks and Contingencies:

• Foreign Exchange: Financial results are heavily impacted by the volatility of the Argentine peso against the US dollar. FY2018 saw a negative FX variation of Ps. 4,402.2 million.
• Arbitration: The company made a payment of Ps. 685.4 million (US$ 21.3 million) in FY2018 to resolve an arbitration initiated by Pan American Energy LLC.
• Taxation: Comprehensive income included a one-time positive effect of Ps. 3,653.8 million from exercising a tax revaluation option under Law No. 27,430, though this also resulted in a one-time tax payment.

Key Facts for Investor Verification

• Currency Impact: Verify the sensitivity of future earnings to Argentine peso devaluation, as financial results were significantly negatively impacted by FX losses in 2018.
• Tax Revaluation: Confirm the sustainability of the Ps. 3,653.8 million tax benefit recognized in FY2018, as this was a one-time event under specific legislation.
• Debt Servicing: Monitor the impact of the new US$ 500 million Class 2 Notes (6.75% interest) on future cash flows, especially given the company's exposure to USD-denominated debt.
• Regulatory Tariffs: Track the implementation of future tariff resolutions (e.g., Resolutions 4362, 120, 310, 265) which drove the 2018 revenue increase.
• Arbitration Resolution: Ensure no further liabilities remain from the Pan American Energy arbitration settled in 2018.