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, 2019
Accounting Basis: IFRS (IAS 34) with restatement for hyperinflation (IAS 29) effective July 1, 2018.
Business Overview: TGS operates natural gas transportation pipelines and produces/commercializes natural gas liquids (ethane, propane, butane) in Argentina. It also provides midstream services and telecommunications.
Key Financial Metrics
Revenue and Profitability:
- Total Revenues (9M2019): Decreased by Ps. 2,478.3 million compared to 9M2018.
- Net Income (9M2019): Ps. 41.0 million (vs. Ps. 551.2 million in 3Q2018; 9M2018 net income not explicitly stated as a single figure in the summary text, but 3Q2018 was Ps. 551.2 million).
- Income Tax Expense: Loss of Ps. 2,741.4 million (improvement from Ps. 3,109.3 million loss in 9M2018).
- Natural Gas Transportation: Ps. 15,602.5 million (48.8% of total revenue). Decreased Ps. 385.2 million due to lower interruptible deliveries, partially offset by tariff increases.
- Liquids Production & Commercialization: Ps. 14,516.8 million (45.4% of total revenue). Decreased Ps. 1,870.7 million due to lower international reference prices and reduced ethane volumes following an incident at PBB Polisur facilities.
- Other Services: Decreased Ps. 222.4 million due to lower construction and maintenance services.
- Net Cash Variation: Negative Ps. 20,648.8 million.
- Operating Cash Flow: Provided Ps. 7,867.4 million.
- Investing Cash Flow: Used Ps. 18,335.3 million (primarily capital expenditures for the Five-Year Investment Plan and Vaca Muerta projects).
- Financing Cash Flow: Used Ps. 10,180.9 million (dividend payments and treasury share buybacks).
- Net Financial Results: Positive variation of Ps. 4,300.2 million vs. 9M2018, driven by gains on monetary position and lower negative exchange rate differences.
- Exchange Rate: Ps. 57.59 per USD as of September 30, 2019 (52.8% increase vs. year-end 2018).
- Loans: All loans are denominated in US dollars. The 2018 Notes were expanded from USD 700 million to USD 1,200 million in August 2019.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues fell primarily due to the Liquids segment (lower ethane volumes and prices) and Natural Gas Transportation (lower interruptible volumes).
- Cost Structure: Cost of sales and administrative expenses increased by Ps. 459.7 million (2.5%) due to higher export taxes, maintenance costs, and labor costs, partially offset by lower natural gas processing costs.
- Financial Gains: Significant improvement in net financial results due to the gain on monetary position resulting from the net liability position in foreign currency and lower devaluation rates in 9M2019 compared to 9M2018.
- Regulatory Impact: Implementation of IFRS 16 (Leases) effective January 1, 2019, though no significant adjustments were made to accumulated results.
Guidance, Outlook, and Risks
Outlook and Strategy:
- Investment Plan: Management is focused on complying with the Five-Year Investment Plan to support Argentina's energy development.
- Liquids Segment: Strategy aims to optimize the production mix to prioritize higher-margin products and channels.
- Capital Structure: Plans to access financing to fund the investment plan while maintaining an optimal capital structure.
- Tariff Deferrals: Resolution No. 336/2019 ordered a 22% deferral of residential gas invoice payments (July–Oct 2019), to be recovered in installments starting December 2019. Compensation for financial costs is pending regulation.
- Tariff Adjustments: The semi-annual tariff adjustment scheduled for October 1, 2019, was postponed to January 1, 2020 (Resolution No. 521/2019).
- Legal Claims: Ongoing litigation regarding the unconstitutionality of certain ENARGAS resolutions; a first-instance judgment favored TGS, but the government has appealed.
- Operational Incident: An incident at PBB Polisur facilities in June 2019 significantly reduced ethane deliveries, impacting the Liquids segment.
- Arbitration: A positive variation in other operating results (Ps. 879.0 million) was influenced by the recognition of an adverse arbitration award from May 2018.
- Treasury Shares: The company executed a share buyback program and subsequently decided to distribute the treasury shares to shareholders (subsequent event).
Investor Verification Checklist
- Regulatory Compensation: Verify the status and calculation methodology of the government subsidy for the 22% payment deferral on residential gas invoices.
- Tariff Adjustments: Monitor the implementation of the postponed tariff adjustment effective January 1, 2020, and its impact on future revenue.
- Debt Expansion: Confirm the terms and market pricing of the expanded 2018 Notes (USD 1.2 billion).
- Liquids Recovery: Assess the recovery trajectory of ethane volumes following the PBB Polisur incident and the impact of international commodity prices.
- Inflation Restatement: Review the specific impact of IAS 29 hyperinflation restatement on comparative financial figures and asset valuations.
- Legal Proceedings: Track the appeal status of the Federal Contentious-Administrative Court judgment regarding ENARGAS resolutions.