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: Nine months ended September 30, 2018 (9M2018)
Business Overview: TGS is a major natural gas transporter in Argentina and a producer/commercializer of natural gas liquids. Its operations are divided into Natural Gas Transportation (regulated), 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 (9M2018)
| Metric | Value (Argentine Pesos - Ps.) | Notes |
|---|---|---|
| Net Revenues | Ps. 19,818.0 million | Increase of Ps. 11,310.8 million vs. 9M2017 |
| Cost of Sales & Expenses | Ps. 9,313.0 million (approx.) | Increase of 90.2% vs. 9M2017 |
| Net Financial Results | (Ps. 4,001.9 million) | Negative impact primarily from FX losses |
| Income Tax Expense | (Ps. 1,518.7 million) | Tax loss reported |
| Net Cash Flow from Operations | Ps. 4,613.3 million (increase) | Driven by improved operating profit |
| Cash and Cash Equivalents | Ps. 4,467.9 million (net increase) | Positive variation for the period |
| Dividends Distributed | Ps. 3,705.3 million | Cash dividends paid in 9M2018 |
| Treasury Shares Repurchased | Ps. 869.0 million | Under approved repurchase programs |
Segment Performance (9M2018)
- Natural Gas Transportation: Revenues of Ps. 8,993.6 million (46.3% of total). Driven by tariff increases (Resolutions 4362, 120, 310).
- Liquids Production & Commercialization: Revenues of Ps. 9,256.1 million (47.7% of total). Driven by exchange rate effects, higher international prices, and increased volumes (15.2% volume increase).
- Other Services: Revenues increased by Ps. 568.3 million due to FX effects and higher service volumes.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues surged by Ps. 11,310.8 million compared to 9M2017. This is largely attributable to regulatory tariff adjustments in the transportation segment and favorable exchange rate impacts on dollar-denominated liquid sales.
- Cost Inflation: Costs of sales and administrative expenses rose by 90.2% (Ps. 4,406.5 million). Key drivers include higher natural gas costs for thermal plant replacement, increased third-party fees, turnover taxes, and labor costs.
- Foreign Exchange Impact: The Argentine peso depreciated significantly (121.2% increase in the selling rate vs. end of 2017). This resulted in a net foreign exchange loss of Ps. 4,846.8 million, heavily impacting net financial results.
- Arbitration Payment: A one-time payment of Ps. 553.4 million was made in May 2018 following an adverse ruling by the International Court of Arbitration (ICC) regarding a claim by Pan American Energy.
Guidance, Outlook, and Risks
Outlook and Strategy
- Tariff Certainty: The conclusion of the Integral Tariff Review (RTI) provides a stable framework for the Natural Gas Transportation business. A 19.7% semi-annual tariff increase was approved effective October 1, 2018.
- Investment Plan: TGS is executing a Five-Year Investment Plan. Key projects include the "North Tranche" (US$ 250 million) and "South Tranche" (US$ 41 million) of gathering pipelines and a conditioning plant in the Vaca Muerta formation.
- Liquids Strategy: Focus on optimizing the production mix to prioritize higher-margin products and managing access to Replacement of Thermal Plant Reduction (RTP) gas at reasonable costs.
- Capital Structure: The company aims to maintain an optimal capital structure to fund investments. In May 2018, it issued US$ 500 million in Class 2 Notes (2018 Notes) at a 6.75% fixed rate to refinance debt and fund capex.
Risks and Contingencies
- Hyperinflation (IAS 29): While the Argentine Securities Commission (CNV) currently excludes IAS 29 (Financial Reporting in Hyperinflationary Economies) from its framework, management acknowledges Argentina is a hyperinflationary economy. The company estimates that applying IAS 29 would have significant effects on financial statements, though these are not currently quantified in the filing.
- Exchange Rate Volatility: The company holds a net liability position in US dollars. Further depreciation of the peso will result in significant financial losses. Management notes that 82% of fund placements are in USD to mitigate this risk.
- Regulatory Disputes: TGS is evaluating actions regarding the methodology used by ENARGAS for the semi-annual tariff adjustment, disagreeing with the calculation.
- Legal Claims: The company maintains a precautionary measure preventing the government from claiming payments related to the "Charge for the period between November 2011 and March 2016."
Investor Verification Checklist
- IAS 29 Application: Verify the timeline and potential quantitative impact of applying IAS 29 (hyperinflation accounting) once the CNV mandates it, as current figures do not reflect inflation restatement.
- Debt Maturity & Covenants: Review the covenants associated with the 2018 Notes (US$ 500M), specifically the coverage ratio (2.0:1) and debt ratio (3.5:1) requirements.
- FX Sensitivity: Assess the exposure of the net liability position (US$ 236.7 million) to further peso devaluation, noting the sensitivity analysis indicates a 10% appreciation of the USD could result in a pre-tax loss of Ps. 966.5 million.
- Regulatory Tariff Adjustments: Monitor the outcome of TGS's disagreement with ENARGAS regarding the semi-annual tariff adjustment methodology and any future tariff resolutions.
- Capital Expenditure Execution: Track the progress and cost overruns of the Vaca Muerta gathering pipeline projects (North and South Tranches) and the conditioning plant.