Business context and reporting period
Transportadora de Gas del Sur S.A. (tgs), translated as Gas Transporter of the South Inc., filed its annual Form 20-F for the fiscal year ended December 31, 2022. The company operates Argentina’s largest natural gas transportation system, the Cerri natural gas liquids complex, midstream services focused on Vaca Muerta, and telecommunications services through Telcosur.
The audited consolidated financial statements are prepared under IFRS and restated under IAS 29 for Argentina’s hyperinflationary economy. All peso amounts are stated in constant Argentine pesos as of December 31, 2022, unless otherwise noted. Comparative periods were restated on the same basis.
Financial and operating highlights
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | Ps.164,525 million | Ps.173,320 million | -5.1% |
| Gross profit | Ps.68,483 million | Ps.80,476 million | -14.9% |
| Operating profit | Ps.52,449 million | Ps.66,392 million | -21.0% |
| Total comprehensive income | Ps.32,318 million | Ps.40,772 million | -20.7% |
| Cash flow from operations | Ps.35,414 million | Ps.59,024 million | -40.0% |
| Capital expenditures | Ps.25,308 million | Ps.18,795 million | +34.7% |
Approximate consolidated margins were 41.6% gross, 31.9% operating and 19.6% comprehensive income. The decrease in operating earnings primarily reflected lower regulated transportation revenue and higher costs, including natural gas purchases, labor, depreciation, taxes and export-related costs. Net financial results were a loss of Ps.3,160 million, compared with a loss of Ps.850 million in 2021, driven principally by higher foreign-exchange losses, partly offset by gains on financial instruments.
At December 31, 2022, total assets were Ps.412,092 million, equity was Ps.267,224 million and total liabilities were Ps.144,868 million. Cash and cash equivalents were Ps.2,989 million, supplemented by Ps.39,290 million of current financial assets at fair value and Ps.40,162 million of non-current financial assets measured at amortized cost. The company reported working capital as sufficient for present requirements.
Total debt was Ps.94,614 million, equivalent to approximately US$534 million, and was entirely denominated in U.S. dollars. The company’s gearing ratio declined to 0.26 from 0.30. The principal obligation is US$500 million of 6.75% senior notes due May 2, 2025. The company also had approximately Ps.5,745 million of bank loans and Ps.4,262 million of lease liabilities.
Operating cash flow funded 2022 capital expenditures and other investment needs, but cash declined to Ps.2,989 million from Ps.8,627 million after investing outflows of Ps.40,216 million. Financing activities provided Ps.3,626 million, including new borrowings, while the company repurchased US$29.7 million face value of its notes for Ps.2,453 million.
Material changes versus the prior comparable period
- Natural gas transportation: Revenue declined 15.5% to Ps.40,643 million and operating profit fell 56.4% to Ps.5,021 million. The segment received only a 60% nominal tariff increase effective March 1, 2022, versus 94.8% inflation during the year. Firm transportation revenue declined to Ps.33,984 million from Ps.38,806 million.
- Liquids: Revenue declined 4.0% to Ps.104,215 million and operating profit fell 17.8% to Ps.38,901 million. Production increased 0.2% to approximately 1.123 million tons, while sales rose 0.9% to 1.129 million tons. Export revenue increased to Ps.46,314 million, or 44% of segment revenue, but higher natural gas input costs, subsidies and taxes compressed earnings.
- Other services: Revenue increased 16.2% to Ps.18,747 million and operating profit rose 14.3% to Ps.8,441 million, principally due to higher Vaca Muerta transportation and conditioning activity.
- Telecommunications: Revenue increased 3.0% to Ps.919 million, while operating profit declined 37.3% to Ps.86 million.
- Liquidity and taxes: Income tax payments increased materially to Ps.25,688 million from Ps.8,360 million. The company also paid Ps.3,368 million as an extraordinary income-tax advance.
Guidance, outlook, risks and unusual items
Management expects to continue negotiating tariff adjustments with ENARGAS and to pursue a fair and reasonable tariff under the RTI process. A proposed 2023 transition agreement approved by the board would provide a 95% increase in transportation tariffs and the Access and Use Charge, but it had not been ratified by the Executive Branch as of the filing date. The agreement would also permit dividends and certain shareholder debt prepayments with Ministry of Economy authorization.
Management expects elevated inflationary costs and continued volatility in international liquids prices during 2023. Higher maritime freight costs may reduce export margins. The company plans to continue developing Vaca Muerta and approved capital programs of US$132 million for 2023 and US$138 million for 2024, primarily for additional Tratayén conditioning capacity.
- Argentina recorded approximately 94.8% inflation and 72.5% peso depreciation in 2022. Exchange controls and a reported approximately 94% gap between official and alternative exchange rates may restrict access to foreign currency for debt service, imports and dividends.
- Tariff restrictions create a significant mismatch between peso-denominated regulated revenue and inflation-driven operating costs.
- U.S.-dollar debt, capital expenditures and natural gas purchases expose results and liquidity to further peso depreciation.
- Liquids earnings depend on international LPG and natural gasoline prices, gas availability and composition at the Cerri Complex, domestic price controls, government subsidies and export duties.
- The company had Ps.3,768 million in government receivables related to LPG programs, with collections subject to significant delays.
- Material contingencies include turnover-tax claims, the pending legal challenge concerning the natural gas processing charge, environmental matters and other litigation. The company provisioned Ps.1,657 million for turnover-tax claims and Ps.1.834 billion for legal and other claims.
- The company’s natural gas transportation PPE carrying value was Ps.189,315 million. Its impairment assessment depends heavily on assumptions regarding future tariffs, inflation, foreign exchange rates and discount rates; no additional impairment was recorded at year-end.
Important facts for investors to verify
- Whether the proposed 95% 2023 transitional tariff increase was ultimately ratified and implemented, and the timing and terms of the definitive RTI.
- Liquidity available for the US$500 million notes due in May 2025, including the company’s ability to access the official foreign exchange market or refinance.
- 2023–2024 Vaca Muerta capital spending, project completion dates, customer commitments and expected returns.
- Collection timing and recoverability of government LPG-program receivables.
- Exposure to further peso depreciation, inflation, exchange controls and changes in Argentine energy regulation.
- Progress and ultimate resolution of the natural gas processing charge litigation and turnover-tax proceedings.
- Whether future liquids prices, gas input costs and export freight costs support the segment’s historical margins.