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: Three months ended March 31, 2018
Business Overview: TGS is a leading natural gas transporter in Argentina, operating a pipeline system connecting major gas fields to distributors and industries. Its operations are divided into Natural Gas Transportation, Liquids Production and Commercialization, Other Services, and Telecommunications. The company operates under a 35-year license with a potential 10-year extension.

Key Financial Metrics

Revenue and Profit:

• Total Comprehensive Income: Ps. 1,734.9 million (Q1 2018) vs. Ps. 664.8 million (Q1 2017), an increase of Ps. 1,070.1 million.
• Operating Income: Ps. 2,598.6 million (Q1 2018) vs. Ps. 1,067.3 million (Q1 2017), an increase of Ps. 1,531.2 million.
• Net Revenues by Segment:
  • Natural Gas Transportation: Increased by Ps. 1,452.3 million (44.0% of total revenue).
  • Liquids Production and Commercialization: Ps. 2,485.7 million, a 50.3% increase (50.2% of total revenue).
  • Other Services: Increased by Ps. 108.4 million.

• Cost of Sales and Admin/Selling Expenses: Increased by Ps. 785.9 million (50.5% YoY) due to higher natural gas prices for thermal plant replacement, third-party fees, turnover tax, and labor costs.
• Net Financial Results: Negative variation of Ps. 140.9 million, primarily driven by a Ps. 229.8 million foreign exchange loss due to Argentine peso depreciation.
• Income Tax Expense: Ps. 729.4 million loss (Q1 2018) vs. Ps. 409.0 million loss (Q1 2017), reflecting higher taxable income partially offset by a tax rate reduction from 35% to 30%.

• Net Cash Flow from Operations: Increased by Ps. 1,008.4 million YoY, driven by improved operating income.
• Net Cash Flow from Investing Activities: Used Ps. 61.4 million more than the prior period, largely due to increased financial assets and capital expenditures for the Five-Year Investment Plan.
• Debt Issuance: On May 2, 2018, issued US$ 500 million in Series 2 Notes (2018 Notes) at 6.75% annual interest, maturing May 2, 2025. Net proceeds were US$ 495.5 million.
• Debt Repayment: Repurchased US$ 86.5 million of 2014 Notes in April 2018. Remaining 2014 Notes (US$ 111.5 million) are scheduled for full redemption on June 1, 2018.

• As of March 31, 2018, the selling exchange rate was Ps. 20.149 per US dollar, an 8.0% depreciation compared to year-end 2017.

Material Changes vs. Prior Period

• Tariff Increases: Significant revenue growth in Natural Gas Transportation resulted from the full application of tariff increases granted by Resolution No. 120/2017 and Resolution No. 4362/2017. A further 50% tariff increase (Resolution 310/2018) became effective April 1, 2018.
• Liquids Prices: Liquids segment revenue grew 50.3% due to higher international reference prices and a 3.4% increase in shipped volumes (8,572 short tons), primarily ethane.
• Regulatory Milestone: The Integral Tariff Review (RTI) process concluded with Decree No. 250/2018, ratifying the 2017 Integral Renegotiation Agreement. This resolved the 17-year license renegotiation.
• Legal Claims: As part of the RTI conclusion, TGS and its shareholders must withdraw all claims against the Argentine Government (including the ICSID Claim) by June 26, 2018.

Guidance, Outlook, and Risks

Outlook and Strategy:

• Investment Plan: TGS is committed to a Five-Year Investment Plan to ensure pipeline capacity meets Argentina's energy development needs.
• Vaca Muerta Project: Signed an agreement on April 3, 2018, to invest US$ 250 million in a gathering pipeline (1.3 Bcf/d capacity) and treatment plant in the Vaca Muerta formation. Execution is expected throughout 2018 and part of 2019.
• Financial Strategy: Plans to access financing for the investment plan while maintaining an optimal capital structure. Focus on cost reduction without compromising reliability.

• Foreign Exchange Risk: Continued depreciation of the Argentine peso negatively impacts financial results due to dollar-denominated debt and assets.
• Regulatory Compliance: Must withdraw government claims by June 26, 2018, to maintain tariff benefits.
• Legal Proceedings:
  • ICSID Claim: Suspended until July 15, 2018, pending withdrawal.
  • ICC Arbitration: A draft judgment was received in April 2018; final result pending as of filing date. Management believes their position will prevail.
  • ENARGAS Resolutions: Precautionary measure regarding annulment of resolutions extended until September 2018.
• Contract Expirations: Ethane contract with Polisur expired May 1, 2018; negotiations for a new agreement are ongoing.

Key Facts for Investor Verification

• Tariff Implementation: Verify the effective application of the 50% tariff increase (Resolution 310) starting April 1, 2018, and its impact on Q2 2018 revenues.
• Debt Redemption: Confirm the full redemption of the remaining US$ 111.5 million of 2014 Notes on June 1, 2018, and the associated cash outflow.
• ICSID Claim Withdrawal: Monitor the status of the withdrawal of the ICSID claim by the June 26, 2018 deadline to ensure no regulatory penalties or tariff reversals.
• Vaca Muerta Investment: Track the progress and capital expenditure timeline for the US$ 250 million Vaca Muerta gathering pipeline project.
• Exchange Rate Volatility: Assess the ongoing impact of Argentine peso depreciation on financial results and debt servicing costs.
• Ethane Contract Renewal: Verify the terms and pricing of the new ethane supply agreement with Polisur following the May 1, 2018 expiration.