GAS TRANSPORTER OF THE SOUTH INC annual report, Q4 FY2020

Business context and reporting period

Transportadora de Gas del Sur S.A. (TGS), translated in the filing as Gas Transporter of the South Inc., filed its annual Form 20-F for the fiscal year ended December 31, 2020. TGS is Argentina’s largest natural-gas transporter, operating a 5,769-mile pipeline system, and also produces and markets natural-gas liquids, provides midstream services and operates telecommunications activities through subsidiaries. The filing was prepared under IFRS and presented in constant Argentine pesos as of December 31, 2020 under IAS 29 because Argentina is considered hyperinflationary. Comparative periods were restated; reported amounts below are generally in millions of pesos unless otherwise stated.

Financial performance and key metrics

Metric	2020	2019	Change
Revenue	55,871	66,112	-15.5%
Gross profit	28,306	32,927	-14.0%
Operating profit	20,641	26,899	-23.3%
Net financial result	(12,972)	(3,945)	Greater loss
Net income	3,286	17,433	-81.1%
Cash flow from operations	28,514	18,378	+55.2%
Cash flow from investing	(30,088)	(22,659)	Greater use
Cash flow from financing	(5,075)	(15,409)	Lower use
Cash and cash equivalents	4,653	13,294	-65.0%

Calculated margins were approximately 50.7% gross, 36.9% operating and 5.9% net in 2020, compared with approximately 49.8%, 40.7% and 26.4%, respectively, in 2019. The decline in profitability was driven mainly by lower revenue, the tariff freeze, adverse foreign-exchange and financial-instrument results, and a Ps.3,114 million impairment charge on regulated transportation assets.

Natural Gas Transportation: Revenue was Ps.23,502 million, down 23.7%. Operating profit was Ps.8,549 million, down 47.9%. Firm transportation revenue fell to Ps.19,086 million from Ps.25,215 million. Average daily gas injections declined 8% to 2,408 MMcf/d, and the annual load factor declined to 78% from 81%.
Liquids Production and Commercialization: Revenue was Ps.27,597 million, down 12.4%, but operating profit increased 10.8% to Ps.10,473 million. Sales volume rose approximately 10.1% to 1.263 million short tons, helped by the recovery of ethane sales to PBB. Export revenue was Ps.9,535 million, or 17.1% of consolidated revenue.
Other Services: Revenue increased 26.9% to Ps.4,365 million and operating profit increased 65.6% to Ps.1,533 million, primarily from Vaca Muerta transportation and conditioning services.
Telecommunications: Revenue increased 8.8% to Ps.409 million, while operating profit declined 29.2% to Ps.85 million.

Liquidity, debt and capital allocation

Operating cash flow of Ps.28,514 million covered capital expenditures, debt service and other cash requirements, but cash and equivalents declined to Ps.4,653 million after investing and financing outflows.
Capital expenditures were Ps.7,769 million in cash-flow terms, compared with Ps.21,690 million in 2019. The company reduced planned investment in response to COVID-19 while preserving safety and reliability work.
Total loans were Ps.43,869 million at year-end, equivalent to approximately U.S.$521 million at the year-end exchange rate. Approximately 100% of financial indebtedness was denominated in U.S. dollars and carried fixed rates.
The principal debt is U.S.$500 million of 6.75% senior notes due May 2025. TGS repurchased U.S.$17.6 million principal amount during 2020, generating a Ps.399 million gain.
Contractual obligations totaled approximately Ps.65,137 million, including Ps.54,855 million of financial indebtedness, Ps.6,694 million of natural-gas purchase obligations and Ps.3,587 million of lease obligations. Peso equivalents are sensitive to exchange-rate movements.
No cash dividends were paid in 2020. The company repurchased shares for Ps.3,715 million and held 41.7 million treasury shares, or approximately 5.25% of total shares.

Material changes versus the prior comparable period

Revenue decreased Ps.10,241 million, primarily because transportation revenue fell Ps.7,294 million and liquids revenue fell Ps.3,904 million.
Transportation tariffs were not increased during 2020 despite 36.1% inflation. The last tariff increase was effective April 2019, materially reducing regulated revenue in real terms.
Liquids export prices for propane, butane and natural gasoline declined approximately 15%, 16% and 31%, respectively, although prices recovered sharply in the second half of 2020. Lower natural-gas input costs and higher volumes supported segment operating profit.
Net financial loss increased to Ps.12,972 million from Ps.3,945 million. The company recorded approximately Ps.8,004 million of losses associated with trading financial instruments to place foreign currency abroad and reported a Ps.7,266 million fair-value loss on financial instruments through profit or loss.
The company recognized a Ps.3,114 million impairment charge on Natural Gas Transportation property, plant and equipment. Management’s base, optimistic and pessimistic scenarios were assigned probabilities of 70%, 10% and 20%, respectively; a fully pessimistic scenario could increase the impairment by approximately Ps.5,394 million before tax.
COVID-19 caused delays in customer collections, reduced gas demand and production, and sharply reduced liquids prices during the first half of 2020. Management reported that operations continued without material service interruption and that liquidity was sufficient for near-term commitments.

Guidance, outlook, risks and unusual items

Management did not provide conventional earnings guidance. Its 2021 outlook emphasizes tariff renegotiation, continued development of Vaca Muerta and financial discipline. Planned capital expenditures for 2021–2023 total approximately U.S.$224.7 million, including U.S.$153.2 million for transportation reliability and other work, U.S.$36.0 million for liquids activities, U.S.$21.7 million for the Vaca Muerta project and U.S.$13.8 million for other services.

Tariff uncertainty: The government initiated a new RTI process and maintained the transportation tariff freeze. TGS requested a 58.6% transitional increase effective April 1, 2021, but no new tariff had been issued as of the financial-statement issuance date.
Argentina exposure: Inflation, recession, peso depreciation, sovereign and IMF negotiations, exchange controls, political intervention and limited capital-market access may affect revenue, costs, debt service and dividends.
Currency risk: The peso depreciated approximately 40.5% against the U.S. dollar during 2020. Management estimated that a hypothetical 10% adverse peso movement would produce a pre-tax loss of approximately Ps.2,534 million, all else equal.
Regulated-license risk: The transportation license is scheduled to expire in 2027 and may be extended for ten years subject to technical and regulatory conditions. Revocation or unfavorable modification could materially affect the business.
Liquids and supply risk: Results depend on international LPG and natural-gasoline prices, gas availability and richness, domestic price controls, export taxes, government subsidies and PBB as the sole ethane purchaser.
Government receivables: The government owed TGS approximately Ps.303 million for LPG program subsidies at December 31, 2020. Collection timing remains uncertain.
Legal and regulatory contingencies: Provisions included approximately Ps.764 million for turnover-tax claims, Ps.22 million for environmental matters and Ps.74 million for other proceedings. The company is also pursuing claims concerning the natural-gas processing charge and tax recoveries.
Related parties: TGS paid Ps.1,430 million to Pampa Energía under the technical, financial and operational assistance agreement and had material commercial and lease transactions with related parties.
Audit: PwC and EY issued unqualified opinions on the financial statements and internal control over financial reporting. The critical audit matter was impairment testing for transportation and other-services assets.

Investor verification checklist

Verify the timing, size and enforceability of any transitional or permanent transportation-tariff increase following the RTI process.
Reconcile cash generation with capital expenditures, share repurchases, debt service and the substantial reduction in year-end cash.
Assess the U.S.-dollar debt maturity profile, exchange-control access and the ability to refinance or repay the 2025 notes.
Monitor liquids prices, natural-gas input costs, export taxes, domestic LPG program economics and the Ps.303 million government subsidy receivable.
Review the impairment sensitivity to tariff outcomes, discount rates and Vaca Muerta development assumptions.
Track customer receivable aging and collection performance after COVID-related payment delays.
Review legal provisions and unresolved proceedings, particularly turnover-tax claims and the natural-gas processing charge litigation.
Confirm dividend capacity in light of debt covenants, treasury-share restrictions, legal reserves and Argentine foreign-exchange controls.