TGS

Business Context and Reporting Period

Company: Transportadora de Gas del Sur S.A. (TGS)

Reporting Period: Second Quarter ended June 30, 2023 (2Q2023)

Filing Date: August 7, 2023

Business Overview: TGS is Argentina's leading natural gas transporter, moving approximately 60% of the country's gas consumption via over 5,700 miles of pipelines. The company also operates as a major natural gas processor and midstream provider in the Vaca Muerta formation. Financial results are presented in constant Argentine pesos (Ps.) under IFRS.

Key Financial Metrics

Per Share Data: Total comprehensive income was Ps. 80.38 per share (Ps. 37.61 per ADS) in 2Q2023, compared to Ps. 15.20 per share (Ps. 75.98 per ADS) in 2Q2022.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased by Ps. 3,751 million (6.2%) year-over-year. This was driven by lower revenues in the Natural Gas Transportation segment (down Ps. 4,207 million) and Liquids Production segment (down Ps. 1,212 million), partially offset by a Ps. 1,668 million increase in Other Services.
• Operating Profit Compression: Operating profit fell by Ps. 4,968 million. The Natural Gas Transportation segment saw a sharp drop from Ps. 3,803 million to Ps. 67 million due to tariff adjustments failing to offset inflation restatement effects (IAS 29). The Liquids segment profit decreased by Ps. 2,289 million due to lower revenues and higher natural gas consumption costs.
• Cost Increases: Operating costs rose by Ps. 1,291 million, primarily due to higher natural gas costs for liquids production (Ps. 939 million), repair and maintenance (Ps. 534 million), and export taxes (Ps. 294 million).
• Financial Results: Financial results improved by Ps. 6,873 million, driven by a Ps. 13,464 million gain on financial assets, partially offset by higher negative exchange differences.
• Debt Position: The company shifted from positive net debt of Ps. 18,341 million at year-end 2022 to negative net debt (net cash position) of Ps. 7,673 million as of June 30, 2023.

Outlook, Commentary, and Risks

• New Contracts: On June 5, 2023, TGS was awarded a five-year contract (with a 12-month extension option) by ENARSA to operate and maintain the President Néstor Kirchner Gas Pipeline (GPNK) Tratayén - Salliqueló section. The 573 km pipeline, inaugurated July 9, 2023, has an initial capacity of 11 MMm3/day.
• Operational Growth: Liquids production increased by 17,300 tons to 283,372 tons. Total volumes dispatched rose 24% (55,475 tons) year-over-year, driven by higher propane, butane, and ethane exports.
• Investment Activity: Investing cash outflows surged to Ps. 27,080 million, reflecting significant capital expenditures for Property, Plant, and Equipment (PPE) in the Vaca Muerta region.
• Risks and Uncertainties: The filing highlights risks related to inflation restatement (IAS 29), foreign exchange rate volatility, regulatory tariff adjustments, and potential caps on market prices. Forward-looking statements regarding future performance are subject to these uncertainties.

Key Facts for Investor Verification

• IAS 29 Impact: Verify the specific magnitude of the inflation restatement effect on revenues and costs, as it significantly reduced reported operating profit in the Transportation segment.
• Tariff Adjustments: Confirm the sustainability of the 95% tariff increase effective April 29, 2023, and its ability to cover future inflation and operational costs.
• Net Debt Composition: Review the reconciliation of the shift to negative net debt to understand the liquidity sources and the currency denomination of remaining debt obligations.
• Capital Expenditure Plan: Assess the timeline and funding sources for the Ps. 27,080 million invested in 2Q2023, particularly regarding Vaca Muerta infrastructure.
• Exchange Rate Sensitivity: Evaluate the exposure to Argentine peso devaluation given the mix of dollar-denominated revenues and peso-denominated costs.