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: Second Quarter and First Half ended June 30, 2018
Business Overview: TGS is Argentina's leading natural gas transporter with a firm contracted capacity of approximately 2.9 Bcf/d and a major processor of natural gas liquids. The company operates under a regulated tariff framework recently finalized via Decree No. 250/2018, concluding a 17-year renegotiation process.
Key Financial Metrics
First Half 2018 vs. First Half 2017
- Net Revenues: Ps. 11,744.8 million (Increase of Ps. 6,268.8 million or 114.5% YoY).
- Operating Profit: Ps. 5,724.9 million (Increase of Ps. 3,467.9 million YoY).
- Net Comprehensive Income: Ps. 2,834.9 million (Increase of Ps. 1,534.5 million YoY).
- Earnings Per Share (EPS): Ps. 3.573 (vs. Ps. 1.637 in 2017).
- Operating Costs: Increased by Ps. 1,886.8 million (65.6% YoY), driven by depreciation and higher input costs.
- Financial Results: Negative impact of Ps. 1,435.2 million, primarily due to Argentine peso depreciation against the US dollar.
Second Quarter 2018 vs. Second Quarter 2017
- Net Revenues: Ps. 6,797.4 million (Increase of Ps. 3,876.6 million YoY).
- Net Comprehensive Income: Ps. 1,099.9 million (Increase of Ps. 464.3 million YoY).
- Earnings Per Share (EPS): Ps. 1.388 (vs. Ps. 0.800 in 2017).
Liquidity and Capital Resources
- Cash Flow from Operations: Increased by Ps. 758.5 million compared to the prior period.
- Financing Activities: Net cash flow increased by Ps. 5,322.1 million following the issuance of US$ 500 million in Class 2 Notes (2025 maturity) at a 6.75% fixed rate.
- Debt Management: Proceeds were used to repurchase Class 1 Notes (US$ 86.5 million) and redeem Class 1 Notes (US$ 120.7 million).
- Share Repurchases: Ps. 521.0 million allocated to the share repurchase program in H1 2018.
Material Changes and Drivers
- Tariff Adjustments: Revenue growth in the Natural Gas Transportation segment (47% of total revenue) was driven by weighted average tariff increases from Resolutions 4362/2017 (58%), 120/2017 (78%), and 310/2018 (50%).
- Liquids Segment: Revenues (48% of total) grew due to exchange rate depreciation on USD-denominated sales (Ps. 1,077.1 million impact) and higher international reference prices. Volumes shipped rose 12.0% (57,517 tons), largely due to increased ethane deliveries to Polisur.
- Cost Increases: Operating costs rose significantly due to higher natural gas prices for the Cerri Complex (Ps. 1,074.3 million), increased third-party services, and higher labor and tax costs.
- Arbitration Settlement: Other operating results decreased by Ps. 561.7 million due to a Ps. 553.4 million payment resolving an arbitration claim by Pan American Energy.
- Foreign Exchange: Significant negative financial impact (Ps. 1,776.1 million in H1) due to the devaluation of the Argentine peso against the US dollar on net liabilities.
Outlook, Risks, and Management Commentary
- Strategic Milestone: The completion of the Integral Tariff Review (RTI) and the withdrawal of all claims against the Argentine Government (including the ICSID Claim) marks a fundamental milestone, allowing for the execution of a Five-Year Plan (April 2017–March 2022).
- Investment Plan: The Five-Year Plan involves approximately Ps. 6,787 million (in Dec 2016 values) in works to ensure quality, safe, and reliable service.
- Capital Allocation: Remaining proceeds from the 2018 Notes issuance will finance construction projects for gas pipelines and a treatment plant in Vaca Muerta.
- Risks: The filing includes standard forward-looking statement disclaimers regarding risks such as exchange rate volatility, regulatory changes, and the ability to achieve projected results.
Investor Verification Checklist
- Tariff Sustainability: Verify the long-term stability of the new tariff framework established by Decree 250/2018 and Resolution 310/2018.
- FX Exposure: Assess the company's hedging strategies and sensitivity to further Argentine peso devaluation given the significant USD-denominated debt and revenue mix.
- Capital Expenditure Execution: Monitor the progress and cost overruns of the Five-Year Plan, particularly the Vaca Muerta projects.
- Liquids Volume Trends: Confirm the sustainability of the 12% volume increase in the Liquids segment and the specific demand drivers from customers like Polisur.
- Debt Service: Review the impact of the new 6.75% interest rate on the US$ 500 million 2025 Notes relative to operating cash flows.