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: Nine months ended September 30, 2021 (9M2021) and Third Quarter 2021 (3Q2021).
Accounting Basis: Condensed interim consolidated financial statements prepared in accordance with IAS 34 and restated for inflation in accordance with IAS 29 (Hyperinflationary Economies). The Consumer Price Index (CPI) variation for restatement was estimated at 36.96% for 9M2021.
Operations: TGS is primarily engaged in the transportation of natural gas and the production and commercialization of natural gas liquids. It operates a pipeline system connecting southern/western Argentina fields to distributors and industries, including the Greater Buenos Aires area.
Key Financial Metrics
Note: All figures are in millions of Argentine Pesos (Ps.) unless otherwise stated. Figures are restated to constant currency.
Results of Operations (9M2021 vs 9M2020)
| Metric | 9M2021 | 9M2020 | Variance |
|---|---|---|---|
| Total Revenues | 52,928 | 53,458 | (530) |
| Cost of Sales & Admin Expenses | Increased by 1,617 | - | Higher gas costs, maintenance, and depreciation |
| Net Financial Results | Positive variation of 9,479 | - | Lower FX losses and fair value losses |
| Income Tax Charge | Increased by 3,844 | - | Higher statutory tax rates (Law No. 27,630) |
| Comprehensive Income (3Q2021) | 4,415 | 593 | Significant increase |
Segment Performance (9M2021)
- Natural Gas Transportation: Ps. 17,163 million (30% of total revenue). Decreased by Ps. 7,944 million due to lack of tariff adjustment since April 2019.
- Liquids Production & Commercialization: Ps. 34,688 million (60% of total revenue). Increased by Ps. 7,944 million driven by higher international propane prices and local volumes, offset by lower export volumes.
- Other Services: Increased by Ps. 1,077 million due to higher midstream services in Vaca Muerta.
Liquidity and Cash Flow (9M2021)
- Net Decrease in Cash: Ps. 3,218 million.
- Operating Cash Flow: Decreased by Ps. 12,436 million due to higher tax payments and lower operating profit before depreciation.
- Investing Cash Flow: Decreased by Ps. 9,293 million (lower capital expenditures and financial asset acquisitions).
- Financing Cash Flow: Decreased by Ps. 6,002 million (lower debt cancellations and note repurchases compared to 2020).
Material Changes and Regulatory Environment
Tariff Dispute (Natural Gas Transportation): The primary driver of revenue decline in the transportation segment is the absence of tariff adjustments. The last increase was granted in April 2019. In June 2021, ENARGAS issued Resolution No. 149/2021 establishing a "Transitional Tariff Regime" which:
- Maintains tariffs unchanged since April 2019.
- Prohibits dividend distribution and early cancellation of shareholder debts.
- Delays potential tariff adjustments until April 1, 2022.
TGS rejected the proposed agreement and filed administrative claims in July 2021 challenging the legality of the regime and requesting the reinstatement of the Comprehensive Tariff Review (RTI).
Taxation Changes: Income tax charges increased significantly due to Law No. 27,630, which introduced a tiered tax rate system effective January 1, 2021 (25%, 30%, and 35% brackets based on accumulated net profit).
Financial Results: Net financial results improved by Ps. 9,479 million compared to 9M2020, primarily due to reduced net foreign exchange losses resulting from a lower net liability position and lower losses on financial assets measured at fair value.
Outlook, Risks, and Management Commentary
Outlook: Management emphasizes the consolidation of natural gas as an essential fuel and aims to position TGS as a leading integrated service provider, with a strategic focus on the Vaca Muerta region. The company plans to optimize the production mix in the Liquids segment to prioritize higher-margin products.
Financial Strategy: Due to the lack of access to financial markets and the current economic environment, TGS states it must rely solely on operating cash flows to meet working capital, debt service, and capital expenditure requirements for the foreseeable future. Budgetary adjustments have been made to preserve financial position.
Risks and Contingencies:
- Regulatory Risk: Ongoing dispute with ENARGAS regarding tariffs and the Transitional Regime. TGS is actively litigating to nullify the regime.
- Macroeconomic Risk: High inflation and volatility in the Argentine economy impact operating costs and financial results. The company applies IAS 29 for restatement.
- Liquidity Risk: Limited access to capital markets and increased cost of loans due to the economic context and COVID-19 impacts.
- Legal Claims: TGS is involved in legal actions regarding Decree No. 2067/08 (importation charges) and VAT/income tax recovery. Management believes it has solid arguments for favorable outcomes but definitive quantification is not possible.
Key Facts for Investor Verification
- Tariff Freeze Impact: Verify the duration and financial impact of the "Transitional Tariff Regime" (Resolution 149/2021) which prohibits tariff increases and dividend distributions.
- Legal Proceedings: Monitor the status of TGS's administrative claims against ENARGAS and the Executive Branch regarding the nullity of the Transitional Regime.
- Cash Flow Dependency: Confirm the company's ability to service debt and fund CapEx solely through operating cash flows given the stated lack of access to external financing.
- Inflation Restatement: Review the specific CPI indices used for restatement (36.96% for 9M2021) to understand the real value of reported figures.
- Tax Rate Exposure: Assess the impact of the new tiered income tax rates (up to 35%) on future profitability.