TGS

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: Six months ended June 30, 2022 (1S2022) and Second Quarter 2022 (2Q2022)
Accounting Basis: IFRS (IAS 34) with restatement for hyperinflation (IAS 29) in Argentine Pesos (Ps.).
Operations: TGS operates in Argentina, primarily engaged in natural gas transportation and the production/commercialization of natural gas liquids (ethane, propane, butane, natural gasoline). The company is controlled by CIESA (51%), jointly owned by Pampa Energía and the Sielecki family group.

Key Financial Metrics

Revenue (Six Months Ended June 30, 2022): Ps. 55,148 million (Increase of Ps. 1,927 million vs. 1S2021).
Comprehensive Income (Six Months): Ps. 5,311 million (2Q2022) vs. Ps. 5,570 million (2Q2021).
Net Financial Results (Six Months): Positive variation of Ps. 578 million vs. 1S2021.
Cash Flow: Net change in cash and cash equivalents was negative Ps. 47 million for 1S2022 (vs. positive Ps. 4,608 million in 1S2021).
Debt: Loans are denominated in US dollars. A US$24 million loan was taken by subsidiary Telcosur in March 2022. The company repurchased 2018 Notes with a nominal value of US$7.262 million during the period.
Liquidity: The company states it currently lacks access to financial markets and relies on operating cash flows for working capital, debt service, and capital expenditures.

Material Changes vs. Prior Period

• Revenue Mix Shift: Natural Gas Transportation revenues decreased by Ps. 2,571 million (to Ps. 15,489 million) due to a lack of tariff adjustments (only a nominal 60% increase received in March 2022) and inflation erosion. Conversely, Liquids Production and Commercialization revenues increased by Ps. 3,456 million (to Ps. 39,659 million), driven by higher international reference prices for ethane and natural gasoline, despite a 2% decrease in total dispatched volumes.
• Cost Structure: Cost of sales and administrative expenses increased by Ps. 3,750 million, driven by higher natural gas processing costs, export taxes, labor costs, and depreciation.
• Quarterly Performance (2Q2022): Total revenues decreased by Ps. 1,289 million compared to 2Q2021. Liquids revenues dropped Ps. 2,040 million due to lower volumes of propane, butane, and ethane (partially due to local demand requirements and client maintenance issues), offset by higher natural gasoline exports.
• Financial Results: Net financial results improved in the six-month view but deteriorated in the second quarter (negative variation of Ps. 1,644 million) due to lower gains on net monetary position and higher exchange rate losses.

Guidance, Outlook, and Risks

Outlook and Strategy:

• Tariff Review: Management is engaged in talks with national authorities regarding the new Comprehensive Tariff Review (RTI) process to address the lack of tariff adjustments in the transportation segment.
• Liquids Strategy: Focus on optimizing the production mix to prioritize higher-margin products and maximizing access to the Transportation System (RTP) at reasonable costs.
• Capital Allocation: Budgetary adjustments have been made to preserve financial position. The company expects to rely solely on operating cash flows for foreseeable capital needs due to lack of market access.
• Investment: A new 32.1 km pipeline in Vaca Muerta (Los Toldos to El Trapial) is under construction, expected to be completed by June 2023, with an investment of approximately US$48 million.

• Macroeconomic Volatility: Argentina faces high inflation (64% year-on-year as of June 2022) and currency devaluation, impacting real revenues and financial results.
• Exchange Controls: Restrictions on access to the foreign exchange market (MULC) limit the ability to acquire foreign currency for financial obligations and imports.
• Regulatory Risk: Delays in tariff increases and the outcome of the RTI process are critical for the profitability of the transportation segment.
• Operational Risk: Dependence on the Cerri Complex for liquids production; volumes are sensitive to local demand mandates and client facility maintenance.

Investor Verification Checklist

• Tariff Adjustment Status: Verify the progress and expected outcome of the Comprehensive Tariff Review (RTI) with ENARGAS to assess future transportation revenue recovery.
• Foreign Currency Access: Monitor BCRA regulations regarding access to the foreign exchange market (MULC) to evaluate the company's ability to service its US dollar-denominated debt.
• Liquids Volume Trends: Track the volume of propane and butane exports versus local demand requirements, as this significantly impacts the high-margin liquids segment.
• Inflation Restatement Impact: Review the specific inflation indices used for IAS 29 restatement to understand the real purchasing power of reported peso figures.
• Debt Maturity Profile: Confirm the repayment schedule for the US$24 million Telcosur loan and the remaining 2018 Notes, given the stated lack of access to refinancing markets.