TGS

Business Context and Reporting Period

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

Reporting Period: Third Quarter ended September 30, 2021 (3Q2021)

Filing Date: November 8, 2021

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 is expanding midstream infrastructure in the Vaca Muerta formation. Financial results are presented in constant Argentine pesos (Ps.) in accordance with IFRS and IAS 29 (Hyperinflationary Economies).

Key Financial Metrics

Note: 3Q2020 Operating Profit calculated as 3Q2021 Operating Profit (5,147) + Decrease (3,127). Operating Cash Flow for 3Q2020 calculated as 3Q2021 (4,380) + Decrease (8,100).

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased by Ps. 1,625 million (8.3%) compared to 3Q2020. This was driven primarily by a Ps. 2,439 million drop in Natural Gas Transportation revenues due to a lack of tariff adjustments since April 2019.
• Operating Profit Decrease: Operating profit fell by Ps. 3,127 million. While revenues from Other Services and Liquids segments increased (Ps. 583 million and Ps. 231 million respectively), these gains were outweighed by higher operating costs (up Ps. 1,435 million) and the transportation revenue shortfall.
• Net Income Surge: Despite lower operating profit, Total Comprehensive Income increased significantly to Ps. 4,415 million (from Ps. 593 million). This was driven by a Ps. 7,001 million positive variation in financial results, largely due to gains on the fair value of financial assets and lower negative exchange differences.
• Debt Reduction: Net debt decreased to Ps. 17,917 million from Ps. 31,936 million (year-end 2020), reflecting a reduction in net financial liabilities.

Outlook, Risks, and Management Commentary

• Capital Expenditures: In September 2021, TGS completed the expansion of the Tratayén plant (approx. US$16 million investment) to increase gas gathering capacity in Vaca Muerta.
• Liquidity Position: Management estimates sufficient resources to meet working capital needs, finance capital expenditures, and service short-term debt without incurring additional debt.
• Debt Management: The company repurchased its own notes with a nominal value of US$1.5 million during September 2021.
• Risks and Contingencies:
  • Regulatory/Tariff Risk: The Natural Gas Transportation segment has not received a tariff adjustment since April 2019, negatively impacting revenue due to inflation restatement effects.
  • Operational Risk: COVID-19 measures (Presidential Decrees) continue to impact operations, though recent decrees have relaxed restrictions. The duration and severity of the health emergency remain uncertain.
  • Market Risk: Liquids production volumes decreased by 25% (88,339 short tons) compared to 3Q2020, partly due to a client's inability to take ethane product.

Key Facts for Investor Verification

• Tariff Adjustment Status: Verify the timeline and likelihood of future tariff adjustments for the Natural Gas Transportation segment, which has been frozen since April 2019.
• Hyperinflation Accounting: Confirm the impact of IAS 29 restatement on reported revenues and costs, as inflation significantly distorts nominal peso figures.
• Financial Result Volatility: Scrutinize the Ps. 7,001 million gain in financial results, which was driven by fair value changes in financial assets and exchange rate movements rather than core operations.
• Liquids Volume Decline: Investigate the reasons behind the 25% drop in dispatched liquids volumes and the specific client issues regarding ethane shipments.
• Debt Denomination: Note that total net financial debt is denominated in US dollars, exposing the company to currency devaluation risks despite the current reporting in constant pesos.