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, 2017
Business Overview: TGS operates in Argentina, primarily engaged in natural gas transportation and the production and commercialization of natural gas liquids (ethane, propane, butane, and natural gasoline). The company also provides midstream services and telecommunications. The financial statements are presented in Argentine Pesos (Ps.) and have been subject to a limited review by Price Waterhouse & Co. S.R.L.
Key Financial Metrics
Profitability and Income:
- Total Comprehensive Income: Ps. 664.8 million (Q1 2017) vs. a loss of Ps. 52.1 million (Q1 2016).
- Operating Income: Ps. 1,067.3 million (Q1 2017) vs. Ps. 318.3 million (Q1 2016).
- Net Financial Results: Positive variation of Ps. 404.5 million due to the appreciation of the Argentine peso.
- Income Tax: Reported a tax loss of Ps. 409.0 million in Q1 2017, compared to a tax gain of Ps. 26.6 million in Q1 2016.
- Liquids Production and Commercialization: Ps. 1,654.3 million (64.7% of total revenue). Increased by Ps. 606.4 million year-over-year, driven by higher international reference prices.
- Natural Gas Transportation: Increased by Ps. 461.2 million year-over-year, primarily due to tariff increases (Resolutions No. 3724/2016 and No. 4054/2016).
- Other Services: Increased by Ps. 61.9 million, driven by gas compression and treatment services.
- Cash and Cash Equivalents: Increased by Ps. 907.4 million during the period.
- Operating Cash Flow: Increased by Ps. 547.0 million, reflecting improved operating income.
- Investing Activities: Cash used increased by Ps. 114.1 million, mainly for property, plant, and equipment acquisitions.
- Financing Activities: Positive variation of Ps. 101.9 million compared to Q1 2016, as dividends were paid in the prior year but not in the current period.
- The filing does not provide a specific total debt figure in the summary text, but notes that the company plans to access financing for its Five-Year Investment Plan.
- Dividend distribution is currently restricted without prior authorization from ENARGAS until the final tariff schedule is in force.
Material Changes vs. Prior Period
Revenue Growth: Net revenues increased significantly, driven by a Ps. 606.4 million rise in the Liquids segment and a Ps. 461.2 million rise in the Transportation segment. This was partially offset by a Ps. 466.7 million increase in operating and administrative expenses (42.8% increase), attributed to higher natural gas processing costs, labor costs, maintenance, and depreciation.
Financial Results: The shift from a comprehensive loss in Q1 2016 to a profit in Q1 2017 was largely driven by the appreciation of the Argentine peso (exchange rate decreased 3.1% to Ps. 15.39/USD), which reduced exchange losses by Ps. 459.5 million.
Regulatory Environment: The company executed a significant investment plan of Ps. 452.5 million as of March 31, 2017, enabled by recent tariff increases. A new "Five-Year Investment Plan" (2017-2022) was approved, totaling Ps. 6,786.5 million.
Guidance, Outlook, and Risks
Outlook and Strategy:
- Transportation Segment: Management expects a framework of certainty following the signing of the 2017 Transitional Agreement and the approval of the Five-Year Investment Plan. The focus is on compliance and maintenance to ensure a reliable pipeline system.
- Liquids Segment: Facing challenges from high domestic natural gas costs and global economic slowdowns. Strategy involves optimizing the production mix for higher margins and maximizing access to Replacement Thermal Plant (RTP) gas at reasonable costs.
- Contract Renewals: The ethane sales agreement with Polisur expired May 1, 2017; negotiations for renewal are ongoing.
- Tariff Implementation: The full tariff increase from the Integral Tariff Review (RTI) is being implemented in stages (30% in April 2017, 40% in Dec 2017, 30% in April 2018). The 2017 Integral Renegotiation Agreement is pending ratification by the National Congress and Executive Branch.
- Government Receivables: Significant delays exist in collecting compensation for the "Propane Network Agreement" and "Plan Hogar." As of March 31, 2017, the government owed Ps. 178.5 million for these concepts.
- Legal Claims:
- Arbitration: Pan American Energy filed a claim for US$ 306.3 million (nominal damages plus interest). TGS believes the claim is unsupported and intends to defend vigorously.
- Tax Disputes: Ongoing disputes regarding turnover tax with provinces (Santa Cruz, Tierra del Fuego, Buenos Aires). Provisions of Ps. 279.3 million were recorded for these contingencies.
- Other operating results improved by Ps. 86.2 million due to recovery from an incident at the Polisur production plant.
Investor Verification Checklist
- Tariff Ratification Status: Verify the progress of the 2017 Integral Renegotiation Agreement ratification by the Argentine National Congress and Executive Branch, as full tariff recovery depends on this.
- Government Receivables Collection: Monitor the collection of the Ps. 178.5 million owed by the National Government for propane and butane compensation programs.
- Arbitration Outcome: Track the status of the US$ 306.3 million arbitration claim filed by Pan American Energy.
- Ethane Contract Renewal: Confirm the terms and status of the new ethane sales agreement with Polisur following the May 1, 2017 expiration.
- Investment Plan Execution: Assess the company's ability to execute the Ps. 6.8 billion Five-Year Investment Plan given the staged tariff increases and financing requirements.
- Dividend Restrictions: Note that dividend payments are currently restricted without ENARGAS authorization until the final tariff schedule is effective.