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, 2020
Business Overview: TGS is a leading natural gas transporter in Argentina and a producer/commercializer of natural gas liquids. 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.
Accounting Basis: Financial statements are prepared in accordance with IFRS (IAS 34) and restated for inflation (IAS 29) due to Argentina's hyperinflationary economy. The statements were subject to a limited review by Price Waterhouse & Co. S.R.L. and Pistrelli, Henry Martin and Asociados S.R.L.
Key Financial Metrics
Note: All figures are in millions of Argentine Pesos (Ps.) unless otherwise stated. Figures are restated for inflation.
- Total Revenues (9M2020): Decreased by Ps. 5,495 million compared to 9M2019.
- Segment Revenues (9M2020):
- Natural Gas Transportation: Ps. 16,541 million (43% of total; down Ps. 4,889 million YoY).
- Liquids Production and Commercialization: Ps. 18,678 million (49% of total; down Ps. 1,261 million YoY).
- Other Services: Increased by Ps. 655 million YoY.
- Cost of Sales & Expenses: Decreased by Ps. 3,037 million (12%) compared to 9M2019, driven by lower gas processing costs, taxes, and labor costs.
- Net Financial Results: Negative variation of Ps. 2,531 million compared to 9M2019.
- Cash Flow from Operating Activities: Increased by Ps. 10,009 million, driven by lower income tax payments and improved working capital.
- Cash Flow from Investing Activities: Net cash used decreased by Ps. 4,736 million due to lower capital expenditures following the completion of midstream works in Vaca Muerta.
- Cash Flow from Financing Activities: Net cash used decreased by Ps. 9,612 million, primarily due to the absence of dividend payments made in 9M2019.
- Debt: Loans are denominated in US dollars. The company repurchased 2018 Notes with a nominal value of US$ 17.584 million during the period.
- Liquidity: The company relies on operating cash flows to meet working capital, debt service, and capital expenditure requirements due to limited access to financial markets.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue dropped primarily due to the Liquids segment (falling global prices due to COVID-19 and OPEC+ disputes) and the Natural Gas Transportation segment (tariff rates failed to offset inflation).
- Volume Increases: Despite price drops, total liquids volumes dispatched increased by 19% (149,688 short tons) in 9M2020, driven by higher ethane deliveries and exports.
- Cost Reductions: Operating costs fell significantly due to lower export taxes (0% rate applied since May 2020), reduced maintenance, and lower labor costs.
- Exchange Rate Impact: The Argentine Peso depreciated 27% against the US dollar in 9M2020. While this negatively impacted inflation-adjusted revenues in the transportation segment, it provided a partial offset for dollar-denominated liquids revenues.
- Third Quarter Specifics: In 3Q2020, total income was Ps. 391 million compared to Ps. 58 million in 3Q2019. Liquids revenues increased by Ps. 2,313 million in the quarter due to volume growth, partially offset by price drops.
Outlook, Risks, and Management Commentary
- COVID-19 Impact: The pandemic caused economic contraction and mandatory isolation in Argentina. While TGS operations are considered essential, the company faces delays in collections for the Natural Gas Transportation segment due to government moratoriums on service outages for non-payment.
- Regulatory Environment:
- Tariffs: Natural gas transportation tariffs remain unadjusted for a period of 180 days (extended to December 2020) under the "Solidarity Law." Management is awaiting a new tariff review process (RTI).
- Liquids Pricing: Domestic LPG prices are frozen. Export taxes on oil and gas products are currently 0% due to low Brent crude prices.
- Financial Risks:
- Capital Markets: The company currently lacks access to international financial markets and must rely on internal cash generation.
- Exchange Controls: Strict foreign exchange restrictions (BCRA regulations) limit access to the official market for debt service and dividend payments. A significant gap exists between official and alternative exchange rates.
- Impairment: Management performed impairment tests on Property, Plant, and Equipment (PPE) as of March 31, 2020, and updated the assessment as of September 30, 2020. No new impairment indicators were identified.
- Strategy: Focus on optimizing the production mix for higher margins, reducing operating costs without affecting reliability, and maintaining dialogue with authorities regarding tariff adjustments.
Investor Verification Checklist
- Inflation Restatement: Verify the specific inflation index used (22.8% estimated vs. 22.3% official INDEC) and its impact on comparability with prior periods.
- Tariff Recovery: Monitor the outcome of the "Solidarity Law" tariff review process and the timeline for potential rate increases in the Natural Gas Transportation segment.
- Foreign Exchange Exposure: Assess the company's ability to service US dollar-denominated debt given the strict capital controls and the widening gap between official and parallel exchange rates.
- Liquids Pricing Volatility: Track global oil prices and OPEC+ production agreements, as these directly dictate the profitability of the Liquids segment.
- Collection Delays: Review the aging of trade receivables in the Natural Gas Transportation segment due to government-mandated suspension of disconnections for non-payment.
- Treasury Shares: Note the company holds 38.9 million treasury shares (4.89% of capital) and has active repurchase programs, which restricts distributable earnings.