Business context and reporting period
Transportadora de Gas del Sur S.A. (TGS), translated as Gas Transporter of the South Inc., filed its annual Form 20-F for the fiscal year ended December 31, 2017. The consolidated financial statements cover TGS and its subsidiaries and were prepared under IFRS in Argentine pesos. TGS operates regulated natural gas transportation, liquids production and commercialization, midstream services and telecommunications in Argentina. Its ADSs trade on the NYSE, with each ADS representing five Class B shares.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue from sales | Ps. 12,246.7 million | Ps. 7,402.2 million | +65.4% |
| Gross profit | Ps. 5,723.3 million | Ps. 2,966.3 million | +92.9% |
| Operating profit | Ps. 4,716.1 million | Ps. 2,231.8 million | +111.3% |
| Net income | Ps. 2,793.3 million | Ps. 930.7 million | +200.1% |
| Operating margin | 38.5% | 30.1% | +8.4 percentage points |
| Net margin | 22.8% | 12.6% | +10.2 percentage points |
| Operating cash flow | Ps. 3,522.6 million | Ps. 2,137.5 million | +64.8% |
| Capital expenditures | Ps. 1,513.3 million | Ps. 1,407.8 million | +7.5% |
| Cash and cash equivalents | Ps. 2,652.8 million | Ps. 1,555.1 million | +70.6% |
| Total loans | Ps. 4,499.0 million | Ps. 3,917.0 million | +14.9% |
| Total equity | Ps. 5,319.6 million | Ps. 2,526.4 million | +110.5% |
Revenue was concentrated in liquids production and commercialization at Ps. 6,875.2 million and natural gas transportation at Ps. 4,559.7 million. Segment operating profit was Ps. 2,250.7 million for liquids and Ps. 2,161.6 million for transportation.
Net financial expense improved to Ps. 568.0 million from Ps. 813.4 million, primarily because of lower foreign-exchange losses associated with reduced U.S.-dollar liabilities. Income tax expense increased to Ps. 1,355.0 million from Ps. 489.3 million.
Year-end current assets were Ps. 7,153.3 million and current liabilities were Ps. 4,605.9 million, implying a current ratio of approximately 1.55. Cash exceeded current loans by approximately Ps. 1,323.5 million. All financial indebtedness was denominated in U.S. dollars; reported debt was U.S.$241.2 million at December 31, 2017. The company reported a U.S.-dollar net liability position of approximately U.S.$93.5 million.
Material changes versus the prior comparable period
- Transportation revenue increased 118.5%, driven by the full-year effect of prior tariff increases and staged 2017 tariff adjustments. Transportation operating profit increased 228.1%.
- Liquids revenue increased 44.2% and segment operating profit increased 70.9%, supported by higher international reference prices, increased volumes, peso depreciation and higher regulated domestic butane prices.
- Total liquids sales volume increased 5.4% to 1,059,319 short tons; export volume increased 13.5% to 395,956 short tons.
- Operating costs, including depreciation, increased 47.1%, mainly due to higher natural gas replacement costs for the Cerri Complex, butane purchases, maintenance, depreciation and labor costs.
- Operating cash flow increased substantially, but investing cash outflows rose to Ps. 2,529.9 million because of higher capital expenditures and increased investments in financial assets. Financing cash outflows were Ps. 40.4 million versus Ps. 1,016.2 million in 2016.
- TGS paid no dividends in 2017 and maintained a future-dividends reserve of Ps. 912.0 million. In April 2018, shareholders increased that reserve to Ps. 3,705.3 million, subject to legal, regulatory and debt-covenant restrictions.
Guidance, outlook, commentary and risks
- The 2017 tariff review was completed after year-end. Decree 250/2018 ratified the integral renegotiation agreement, and Resolution 310/2018 granted a further 50% transportation-tariff and CAU increase effective April 1, 2018.
- TGS is required to execute a five-year investment plan of Ps. 6,786.5 million, stated at December 2016 nominal values and adjustable by the Wholesale Price Index, for April 2017 through March 2022. Failure to meet the plan may result in fines.
- Management expects 2018-2020 capital expenditures of approximately U.S.$682.9 million, including transportation reliability projects, liquids investments, other services and the Vaca Muerta project. The filing states that funding is expected from operating cash flow, borrowings and other financing activities.
- The company’s largest exposures are Argentine inflation, peso depreciation, regulatory and tariff decisions, U.S.-dollar debt service, international LPG and natural gasoline prices, natural gas supply and quality, and government restrictions on domestic LPG pricing and exports.
- Government compensation receivables under LPG supply programs totaled Ps. 173.3 million at December 31, 2017. Management notes that collections have historically been delayed.
- A pending arbitration brought by Pan American Energy and Pan American Sur alleges contractual breaches related to natural gas processing. The claim was stated at U.S.$134.0 million of nominal damages or U.S.$306.3 million including interest as of March 15, 2017, plus subsequent interest. The award was postponed to April 30, 2018; management and external counsel believed TGS was more likely than not to prevail.
- TGS had a Ps. 189.4 million provision for turnover-tax claims related to natural gas used as fuel. It also disclosed a potential Ps. 601.6 million reduction to retained earnings if its injunction against the disputed natural gas processing charge had not been obtained.
- The company’s 2014 Notes bear fixed interest at 9.625% and require three equal principal installments in 2018, 2019 and 2020. TGS reported compliance with the related covenants as of December 31, 2017.
- Management concluded that Argentina was not hyperinflationary under IAS 29 at year-end, so the financial statements were not restated for inflation. The filing cautions that inflation and currency movements reduce comparability across periods.
Most important facts for investors to verify
- Confirm the realized cash impact and sustainability of the 2017-2018 transportation tariff increases, including ENARGAS approval of the investment plans and semiannual adjustments.
- Track progress, cost escalation and financing for the Ps. 6,786.5 million five-year plan and the projected U.S.$250.1 million Vaca Muerta project.
- Verify the maturity payments and refinancing capacity for the 2014 Notes, particularly the 2018 U.S.$63.9 million principal installment.
- Monitor the Pan American Energy arbitration, turnover-tax claims and the disputed natural gas processing charge.
- Assess exposure to peso depreciation, given U.S.-dollar debt and a reported U.S.$93.5 million net liability position.
- Evaluate the collectability and timing of the Ps. 173.3 million in government LPG compensation receivables.
- Review the renewal and pricing of the ethane agreement with PBB and the effect of declining LPG and natural gasoline prices after the fourth quarter of 2017.
- Confirm dividend capacity under the debt covenants, ENARGAS requirements and the future-dividends reserve.