Business Context and Reporting Period
Transportadora de Gas del Sur S.A. (TGS) filed its annual Form 20-F for the fiscal year ended December 31, 2021. The filing covers TGS and consolidated subsidiaries and is prepared under IFRS as issued by the IASB. Because Argentina is considered hyperinflationary, all financial information is presented in constant Argentine pesos as of December 31, 2021 under IAS 29; comparative periods were restated accordingly.
TGS is Argentina’s largest natural gas transporter, operating approximately 5,769 miles of pipeline and serving about 60% of transported Argentine natural gas. Its principal businesses are regulated natural gas transportation, Liquids Production and Commercialization, Other Services including Vaca Muerta midstream activities, and telecommunications.
Financial and Operating Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | Ps.88,976 million | Ps.84,333 million | +5.5% |
| Gross profit | Ps.41,314 million | Ps.42,725 million | -3.3% |
| Operating profit | Ps.34,083 million | Ps.31,156 million | +9.4% |
| Net and comprehensive income | Ps.20,931 million | Ps.4,960 million | +322% |
| Operating cash flow | Ps.30,301 million | Ps.43,039 million | -29.6% |
| Capital expenditures | Ps.9,649 million | Ps.11,728 million | -17.7% |
| Cash and cash equivalents | Ps.4,429 million | Ps.7,024 million | -36.9% |
| Total debt | Ps.52,579 million | Ps.66,217 million | -20.6% |
- Approximate consolidated margins were 46.4% gross, 38.3% operating and 23.5% net in 2021, compared with 50.7%, 36.9% and 5.9%, respectively, in 2020.
- Natural Gas Transportation revenue declined 33.3% to Ps.24,503 million and operating profit declined 61.2% to Ps.5,011 million. Tariffs remained unchanged from April 2019 despite 50.9% CPI inflation in 2021.
- Liquids revenue increased 33.8% to Ps.55,731 million and operating profit increased 53.8% to Ps.24,309 million, primarily due to higher international LPG and natural gasoline prices. Export revenue was Ps.22,952 million.
- Other Services revenue increased 25.8% to Ps.8,284 million and operating profit increased 63.9% to Ps.3,792 million, supported by higher Vaca Muerta transportation and conditioning activity.
- Telecommunications revenue declined 25.8% to Ps.458 million, while operating profit declined 45.0% to Ps.71 million.
- Natural gas transportation average daily deliveries increased to 68.3 MMcf/d from 64.2 MMcf/d, and the average load factor increased to 83% from 78%. Approximately 81% of transportation revenue came from firm contracts.
- Liquids sales volume decreased 2.3% to 1.119 million tons, while production decreased approximately 4% to 1.120 million tons. Export volumes declined 8.6% to 346,105 tons.
- Cash used in investing activities was Ps.30,284 million, including Ps.9,649 million of property, plant and equipment additions and Ps.20,817 million of financial asset purchases. Financing activities used Ps.960 million, primarily for debt repurchases.
- All financial indebtedness was denominated in U.S. dollars. The principal debt was U.S.$500 million of 6.75% senior notes due May 2025, plus lease liabilities. The filing reports a 2021 gearing ratio of 0.30 versus 0.40 in 2020.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by Liquids and Other Services, but consolidated gross profit declined because costs increased faster than revenue, including higher natural gas costs for the Cerri Complex, maintenance expenses and export taxes.
- Net income benefited from a substantially smaller net financial loss: Ps.436 million in 2021 versus Ps.19,580 million in 2020. The 2020 result included a significant loss from financial instruments used to obtain foreign currency and a Ps.4,700 million impairment charge on regulated transportation assets; neither item recurred at the same level in 2021.
- Income tax expense increased to Ps.12,737 million from Ps.6,648 million, reflecting the new progressive corporate tax regime and tax inflation adjustments.
- Operating cash flow fell despite higher earnings, primarily because of higher income tax payments and working-capital movements. Cash declined to Ps.4,429 million after investment and financing outflows.
- Debt declined by approximately Ps.13,638 million, partly reflecting the effect of inflation restatement and the repurchase of approximately U.S.$4.8 million of notes for Ps.960 million.
- The company had no additional impairment charge in 2021, but the regulated transportation cash-generating unit remained highly sensitive to future tariff assumptions, inflation, foreign exchange rates and discount rates.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management stated that operating cash generation, improved Liquids prices and recovering collections provided sufficient resources for near-term working capital and debt service. No formal earnings guidance was provided.
- A 60% transitional transportation tariff increase became effective March 1, 2022 under the 2022 Transition Agreement. The agreement also restricts dividend payments and requires suspension of certain tariff-related claims while the definitive tariff review continues.
- Management approved Vaca Muerta investments of approximately U.S.$22 million for modular conditioning plants and U.S.$82 million for a further conditioning plant, with start-up dates in 2022 and 2023. Approved capital expenditure programs for 2022 and 2023 were U.S.$79 million and U.S.$37 million, respectively.
- The President Néstor Kirchner Pipeline and related Transport.Ar program could expand Argentine gas transportation capacity and create opportunities, but could also reduce interruptible transportation volumes or gas available to the Cerri Complex if operated by competitors.
- Major risks include tariff freezes and regulatory intervention, Argentine inflation and peso depreciation, exchange controls, restricted access to foreign currency, government delays in paying LPG program compensation, commodity price volatility, gas supply constraints, debt covenant restrictions, litigation, labor actions, environmental obligations, cyberattacks and geopolitical disruption from the Russia-Ukraine conflict.
- As of December 31, 2021, the Argentine Government owed TGS approximately Ps.1,246 million for LPG-related compensation. The company also had a Ps.1,135 million provision for turnover-tax claims related to gas used as transportation fuel.
- TGS disclosed a pending legal dispute concerning the natural gas import charge under Decree 2,067/08. The potential liability could not be reliably quantified and no provision was recorded for the disputed period.
- A cybersecurity attack occurred during the first quarter of 2022; management reported no material adverse effect on administrative infrastructure or results, but future attacks remain a risk.
- The filing contains inconsistent disclosures regarding the percentage of 2021 revenues denominated in U.S. dollars, citing both 63% and 73% in different sections. This should be reconciled against the financial statement notes.
Most Important Facts for Investors to Verify
- Whether the 60% transitional tariff increase adequately offsets inflation and whether a durable final RTI agreement will be approved.
- The company’s ability to refinance or repay the U.S.$500 million notes due in May 2025 under Argentine exchange-control conditions.
- Actual 2022 cash generation after tariff changes, higher gas input costs, taxes, capital expenditures and working-capital requirements.
- Collection timing and recoverability of the Ps.1,246 million in government LPG compensation and other government-related receivables.
- Exposure to international Liquids prices and the sensitivity disclosed by TGS: a U.S.$50 per ton change in LPG and natural gasoline prices was estimated to affect 2021 Liquids comprehensive income by approximately Ps.2,248 million.
- Potential outcomes and financial exposure from the Decree 2,067/08 litigation, turnover-tax claims and other regulatory proceedings.
- Execution, funding and customer commitments for the Vaca Muerta expansion projects and the potential competitive impact of the NK Pipeline.
- The treatment of hyperinflation accounting, currency translation and the inconsistent revenue-currency percentages disclosed in the filing.