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: Six months ended June 30, 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 (gas conditioning, compression) and telecommunications services through its subsidiary, Telcosur S.A.
Key Financial Metrics
Performance (Six Months Ended June 30, 2017 vs. 2016):
- Total Comprehensive Income: Ps. 1,300.4 million (2017) vs. Ps. 317.4 million (2016). An increase of Ps. 983.0 million.
- Operating Income: Ps. 2,257.0 million (2017) vs. Ps. 1,037.3 million (2016). An increase of Ps. 1,219.7 million.
- Net Revenues:
- Liquids Production & Commercialization: Ps. 3,174.8 million (54.2% increase). Driven by higher international reference prices and a 9.8% increase in volumes shipped.
- Natural Gas Transportation: Increased by Ps. 904.2 million. Driven by tariff increases (Resolution 3724 and 4362).
- Other Services: Increased by Ps. 134.5 million.
- Costs & Expenses: Cost of sales, administrative, and selling expenses increased by Ps. 996.7 million (44.2% increase) due to higher natural gas processing costs, labor, maintenance, and taxes.
- Net Financial Results: Improved by Ps. 299.3 million, primarily due to lower exchange losses (Argentine peso depreciation was 4.7% in H1 2017 vs. 15.3% in H1 2016).
- Income Tax: Reported a tax loss of Ps. 704.3 million (2017) vs. Ps. 170.0 million (2016).
Liquidity and Cash Flow:
- Cash and Cash Equivalents: Net positive variation was Ps. 196.6 million higher than the prior year period.
- Operating Cash Flow: Increased by Ps. 498.0 million, driven by improved operating income.
- Investing Cash Flow: Net cash used increased by Ps. 842.0 million due to higher capital expenditures for property, plant, and equipment.
- Financing Cash Flow: Net cash used decreased by Ps. 540.6 million due to lower debt amortization and dividend payments.
Material Changes vs. Prior Period
- Tariff Adjustments: Significant revenue growth in the Natural Gas Transportation segment resulted from the full application of Resolution 3724 (200.1% tariff increase effective April 2016) and Resolution 4362 (average 58% increase effective April 2017).
- Commodity Prices: Liquids segment revenue surged due to higher international reference prices for propane, butane, and natural gasoline.
- Exchange Rate Impact: Reduced financial losses compared to the prior year due to a more stable Argentine peso (4.7% depreciation vs. 15.3% in the prior year).
- Investment Activity: Accelerated capital spending to meet the requirements of the new Five-Year Investment Plan.
Guidance, Outlook, and Risks
Regulatory Framework and Outlook:
- Integral Renegotiation Agreement: The company signed a 2017 Transitional Agreement and a new version of the Integral Renegotiation Agreement. These are pending final approval by the National Congress and ratification by the Executive Branch.
- Tariff Implementation: The full tariff increase from the Integral Tariff Review (RTI) process (214% for transportation, 37% for CAU) will be implemented in stages: 30% (April 2017), 40% (December 2017), and 30% (April 2018).
- Five-Year Investment Plan: Approved for the period April 1, 2017, to March 31, 2022, totaling Ps. 6,786.5 million. This is approximately 4 times the investment level of the previous 5 years.
- Dividend Restrictions: The company is temporarily prohibited from distributing dividends until the definitive tariff tables are in force and investment plan compliance is accredited.
Risks and Contingencies:
- Government Compensation Delays: Significant delays exist in collecting compensation from the National Government for domestic supply programs (Plan Hogar and Propane Networks). As of June 30, 2017, the government owed Ps. 141.2 million.
- Legal Claims:
- Arbitration: Pan American Energy filed a claim for US$ 306.3 million (nominal damages plus interest). TGS disputes the claim.
- Tax Disputes: Ongoing litigation regarding turnover tax on natural gas used as fuel. Provisions of Ps. 159.9 million were recorded as of June 30, 2017.
- ENARGAS Resolutions: A provisional measure prevents the government from claiming payments related to specific resolutions until September 2017.
- Contract Renewals: The ethane sales contract with Polisur expired in May 2017; negotiations for a final agreement are ongoing.
Investor Verification Checklist
- Verify the status of the 2017 Integral Renegotiation Agreement and its ratification by the Argentine National Congress and Executive Branch.
- Monitor the collection of outstanding government compensation for domestic supply programs (currently Ps. 141.2 million owed).
- Track the progress of the Five-Year Investment Plan (Ps. 6,786.5 million) and its impact on future capital expenditures and cash flow.
- Review the outcome of the US$ 306.3 million arbitration claim filed by Pan American Energy.
- Confirm the finalization of the ethane sales agreement with Polisur following the May 2017 expiration.
- Assess the impact of the dividend restriction on shareholder returns until regulatory approvals are finalized.