Business Context and Reporting Period
Company: Transportadora de Gas del Sur S.A. (TGS)
Filing Type: Form 6-K (Report of Foreign Issuer)
Date: November 7, 2019
Reporting Period: Third Quarter (3Q) and Nine Months (9M) ended September 30, 2019
TGS is Argentina's leading natural gas transporter, moving approximately 59% of the country's gas consumption through over 5,700 miles of pipelines. The company is also a major natural gas processor and is expanding midstream infrastructure in the Vaca Muerta basin. Financial results are presented in constant Argentine pesos (Ps.) in accordance with IFRS and IAS 29 (Hyperinflationary Economies).
Key Financial Metrics
Revenue and Profitability (3Q2019 vs. 3Q2018)
- Total Revenue: Ps. 9,148.3 million (Decrease of Ps. 3,304.4 million YoY).
- Operating Profit: Ps. 3,233.7 million (Decrease of Ps. 2,489.6 million YoY).
- Net Income: Ps. 41.0 million (Decrease from Ps. 551.2 million YoY).
- Earnings Per Share: Ps. 0.053 (Decrease from Ps. 0.701 YoY).
Revenue and Profitability (9M2019 vs. 9M2018)
- Total Revenue: Ps. 31,943.7 million (Decrease of Ps. 2,478.3 million YoY).
- Operating Costs: Increased by Ps. 221.8 million (1.4%) YoY.
- Financial Results: Positive variation of Ps. 4,300.2 million YoY, driven by gains on monetary position.
Balance Sheet and Cash Flow
- Net Financial Debt: Ps. 21,500.2 million as of September 30, 2019 (Increased from Ps. 5,429.7 million at year-end 2018). Debt is denominated in US dollars.
- Free Cash Flow (3Q2019): Loss of Ps. 967.2 million.
- Free Cash Flow (9M2019): Loss of Ps. 2,730.8 million.
- Capital Expenditures (3Q2019): Ps. 2,868.3 million total (Ps. 1,376.0 million for the Five-Year Investment Plan; Ps. 1,492.3 million for Vaca Muerta projects).
Material Changes vs. Prior Period
Revenue Decline Drivers: The decrease in revenue was primarily driven by the Natural Gas Liquids (Liquids) and Transportation segments.
- Liquids Segment: Revenue dropped Ps. 2,656.7 million due to IAS 29 inflation restatement (Ps. 2,104.3 million), lower international reference prices (Ps. 1,702.7 million), and reduced volumes (Ps. 1,070.2 million). Ethane sales were significantly impacted by an incident at the PBB Polisur plant in June 2019.
- Transportation Segment: Revenue decreased Ps. 551.8 million. While tariff increases (Resolutions 265 and 192) added Ps. 1,733.0 million in nominal value, these were not fully offset by the negative impact of IAS 29 restatement and a decline in interruptible services.
Cost and Expense Variations: Operating costs decreased by Ps. 919.4 million in 3Q2019, largely due to lower natural gas processing costs at the Cerri Complex. However, depreciation increased by Ps. 95.3 million.
Financial Results: Financial results improved significantly due to a "Gain on monetary position" of Ps. 1,866.8 million in 3Q2019, resulting from the high inflation rate and net monetary liability position.
Guidance, Outlook, and Risks
Regulatory and Operational Updates:
- Tariff Adjustment: Resolution No. 521/2019 postponed the semi-annual tariff adjustment for the Transportation segment, originally scheduled for October 1, 2019, to January 1, 2020.
- Vaca Muerta Expansion: The northern tranche of the Vaca Muerta Norte pipeline was commissioned on November 3, 2019. Bids for a new pipeline license were extended to March 31, 2020.
- Dividends: The Board approved a distribution of treasury shares (0.0385 per share) and a cash dividend equivalent to 7.5269% of the market value of the treasury shares.
Risks and Contingencies:
- Hyperinflation: Significant volatility in financial results due to IAS 29 restatement effects on revenue and costs.
- Regulatory Delays: Postponement of tariff adjustments impacts cash flow projections.
- Operational Incidents: The PBB plant incident in June 2019 disrupted ethane sales volumes.
- Arbitration: A positive variation in other operating results was noted due to the recognition of an adverse arbitration award from May 2018, partially offset by higher contingency provisions in 9M2019.
Investor Verification Checklist
- Verify the impact of the postponed tariff adjustment (Resolution 521/2019) on 2020 revenue projections.
- Confirm the status of the PBB Polisur plant and the timeline for resuming full ethane sales volumes.
- Review the reconciliation of Net Debt (Ps. 21,500.2 million) to understand the specific drivers of the increase from December 2018.
- Assess the sustainability of the "Gain on monetary position" as a driver of financial results given Argentina's inflationary environment.
- Validate the execution progress of the Vaca Muerta midstream projects against the Five-Year Investment Plan.