Business Context and Reporting Period
Transportadora de Gas del Sur S.A. (TGS), translated as Gas Transporter of the South Inc., filed its Form 20-F for the fiscal year ended December 31, 2019. The filing is an annual report, not a quarterly Q4 filing. TGS operates Argentina’s largest natural-gas transportation system, the Cerri natural-gas liquids complex, midstream services, and telecommunications through subsidiaries.
The financial statements cover 2019, with restated 2018 and 2017 comparatives. They are prepared under IFRS as issued by the IASB and restated into constant pesos under IAS 29 because Argentina is treated as hyperinflationary. Reported amounts are in thousands of Argentine pesos unless otherwise stated.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | Ps. 48,561.5 million | Ps. 52,399.4 million | Down 7.3% |
| Gross profit | Ps. 24,186.0 million | Ps. 27,496.5 million | Down 12.0% |
| Operating profit | Ps. 19,758.6 million | Ps. 21,932.0 million | Down 9.9% |
| Net income | Ps. 12,805.1 million | Ps. 17,561.3 million | Down 27.1% |
| Operating margin | 40.7% | 41.9% | Down approximately 120 bps |
| Net margin | 26.4% | 33.5% | Down approximately 710 bps |
| Cash flow from operations | Ps. 13,499.0 million | Ps. 19,685.3 million | Down 31.4% |
| Capital expenditures | Ps. 18,838.3 million additions to PPE | Ps. 10,624.3 million | Up 77.3% |
| Cash and cash equivalents | Ps. 9,765.2 million | Ps. 25,605.1 million | Down 61.9% |
| Total debt | Ps. 33,582.8 million; US$560.7 million | Ps. 31,684.9 million | Higher in pesos due primarily to currency effects |
The company reported earnings per share of Ps. 16.50 and earnings per ADS of Ps. 82.49. Each ADS represents five Class B shares. Total assets were Ps. 95,601.3 million and shareholders’ equity was Ps. 48,083.5 million at year-end.
- Natural-gas transportation revenue was Ps. 22,620.4 million, or 46.6% of total revenue, with segment operating profit of Ps. 12,044.8 million.
- Liquids production and commercialization revenue was Ps. 23,138.2 million, or 47.6% of total revenue, with segment operating profit of Ps. 6,945.3 million.
- Other services revenue was Ps. 2,526.6 million and operating profit was Ps. 680.4 million. Telecommunications revenue was Ps. 276.2 million and operating profit was Ps. 88.2 million.
- Natural-gas transportation deliveries averaged 2,362 MMcf per day, compared with 2,462 MMcf per day in 2018. Firm transportation represented 79% of average daily deliveries and had a weighted-average remaining contract life of approximately 11 years.
Cash Flow, Debt and Liquidity
- Operating cash flow of Ps. 13,499.0 million was insufficient to fund investing cash outflows of Ps. 16,643.9 million. Financing cash flow was negative Ps. 11,318.5 million.
- Cash declined by Ps. 14,463.5 million before foreign-exchange and monetary effects, ending at Ps. 9,765.2 million.
- Debt consisted primarily of US$500 million of 6.75% senior notes due May 2025, plus leasing liabilities and a US$17 million pre-export facility that was repaid in March 2020. All outstanding financial indebtedness at December 31, 2019 was denominated in U.S. dollars.
- Contractual obligations totaled Ps. 52,494.7 million, including Ps. 42,089.6 million of financial indebtedness, Ps. 7,359.0 million of natural-gas purchase obligations and Ps. 3,046.2 million of lease obligations.
- Management stated that available resources and operating cash flow were sufficient for current working capital and debt-service needs, but acknowledged reliance on operating cash flow because access to Argentine and international financing markets was limited.
Material Changes Versus the Prior Comparable Period
- Revenue decreased primarily because natural-gas transportation revenue declined 4.9% and liquids revenue declined 9.5%.
- Transportation tariffs increased nominally by 26.0% in 2019, below Argentina’s 53.8% inflation rate. The October 2019 tariff adjustment was deferred, and the Solidarity Law subsequently froze transportation tariffs for up to 180 days from December 23, 2019.
- Liquids revenue was affected by lower international reference prices and a 29% reduction in ethane sales after operational problems at PBB, the company’s sole ethane purchaser. Total liquids sales fell 1.6% to 1,146,825 short tons.
- Operating profit declined despite lower cost of sales, while income tax expense increased sharply to Ps. 4,024.2 million from Ps. 20.3 million. The 2019 tax charge included Ps. 1,998.5 million related to the tax inflation adjustment.
- Net financial expense improved to Ps. 2,897.4 million from Ps. 4,378.5 million, helped by a larger gain on the net monetary position and lower foreign-exchange losses, but this did not offset the operating and tax impacts.
- Capital spending increased materially due to the Five-Year Plan and completion of the approximately US$260 million Vaca Muerta gathering, transportation and conditioning project. The project began generating revenues during 2019.
- TGS paid approximately Ps. 9,760.9 million in cash dividends and distributed treasury shares with a reported market value of Ps. 3,228.0 million. It also spent Ps. 2,590.7 million repurchasing shares and ended 2019 with 9,886,755 treasury shares.
Guidance, Outlook, Commentary and Risks
The filing does not provide conventional quantitative earnings guidance. Management’s 2020 outlook is centered on preserving liquidity, reducing or deferring nonessential capital expenditures and operating expenses, maintaining pipeline safety and reliability, and relying primarily on operating cash flow.
- COVID-19, Argentine quarantine measures and the decline in international propane, butane and natural-gasoline prices were expected to pressure liquids revenue, collections, earnings and cash flow. Management said the full duration and impact could not be reasonably predicted.
- Management reported delays in collections from natural-gas distribution customers and stated that lower liquids prices and weaker demand could affect liquidity. It nevertheless believed the company could meet its 2020 financial commitments based on its financial position and planned measures.
- Tariff renegotiation under the Solidarity Law, the delayed semiannual adjustment and possible changes to the RTI are key uncertainties for the regulated transportation business. Inflation not matched by tariff increases could reduce real revenues and margins.
- Argentina’s hyperinflation, peso depreciation, exchange controls, sovereign-debt restructuring risk, limited capital-market access and political and regulatory intervention are material risks. The peso depreciated 58.9% against the U.S. dollar during 2019.
- TGS had a net U.S.-dollar liability position of approximately US$425.6 million at year-end. Management estimated that a hypothetical 10% unfavorable peso/U.S. dollar movement would reduce pretax income by approximately Ps. 2,564.9 million.
- Liquids profitability is exposed to commodity prices, natural-gas supply and cost, domestic LPG price controls, export taxes, government subsidies and the ability of PBB to purchase ethane.
- The company’s license is scheduled to expire in 2027, subject to a possible 10-year extension if technical and regulatory conditions are met. License revocation, mandatory investments, service interruptions and regulatory penalties could materially affect results.
- Material matters requiring monitoring include a Ps. 515.1 million provision for provincial turnover-tax claims, litigation over the natural-gas processing charge, a Ps. 433.3 million tax recovery claim before the Supreme Court, and other legal and regulatory proceedings.
- The auditors issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The critical audit matter was impairment testing of property, plant and equipment, which depended on assumptions regarding tariffs, liquids prices, natural-gas costs, Vaca Muerta development and macroeconomic variables. No impairment was recorded at December 31, 2019.
Most Important Facts for Investors to Verify
- Whether tariff renegotiation or future ENARGAS decisions restore adjustments sufficient to offset inflation and operating-cost increases.
- Post-year-end collection performance from gas distribution customers and the status of government compensation for deferred residential billings and LPG programs.
- Liquidity after COVID-related cash-flow pressure, capital-expenditure reductions, dividends, share repurchases and debt service.
- Exposure to the US$500 million 6.75% notes due 2025, including covenant compliance and refinancing or repayment capacity.
- Actual 2020 and subsequent prices and volumes for propane, butane, natural gasoline and ethane, including PBB’s operating and purchasing capacity.
- The recoverability of Ps. 74,552.7 million of PPE under revised tariff, commodity-price and Vaca Muerta assumptions.
- Developments in Argentine exchange controls, sovereign-debt negotiations, inflation and peso depreciation, including the ability to remit dividends and service dollar-denominated debt.
- Resolution of the disclosed tax, regulatory and legal proceedings, including the provincial turnover-tax provision and natural-gas processing-charge litigation.