Transportadora de Gas del Sur S.A. (TGSU2) Earnings Call Transcript & Summary

Good morning. Good morning, everyone. I'm Carlos Almagro, Head of Investor Relations. I would like to welcome everyone to tgs Fourth Quarter 2022 Result Video Conference. This issued its earning report yesterday. We would like to inform you that this event is being recorded [Operator Instructions] Before we begin the call today, I would like to remind you that forward-looking statements made during today's video conference do not account for future economic circumstances, industry conditions and company performance and financial results. These statements are subject to a number of risks and uncertainties. All figures included herein were prepared in accordance with International Financial Reporting Standards, IFRS, and are stated in constant Argentine pesos as of December 31, 2022, unless otherwise noted. Joining us today from this year in Buenos Aires is Alejandro Basso, Chief Financial Officer. And now I will turn the video conference to Mr. Basso. Alejandro, please begin.

Thank you, Carlos. Good morning, everyone, and thank you for joining us today to discuss the 2022 fourth quarter earnings and highlights for Transportadora de Gas del Sur. During the call today, I would like to share with you some news that have taken place since our last quarterly earnings call last November that are relevant to our operations. To begin and talking about our Natural Gas Transportation business. Last December, the Executive Power issued the Decree no. 815, through which the integral tariff revision was postponed, extending the period that should have finished by the end of December 2022 to December of this year. As a result, a new transitional tariff adjustment process was initiated and a public hearing followed on January 4, during which, tgs requested a tariff increase of 135%. The tariff increase that should be applied considered the only one 60% tariff adjustment received during the past almost 4 years was around 280%, if we consider the evolution of the wholesale price index between March 2019 and December 2022. It is expected that the tariff increase could be granted by ENARGAS this month with tgs' commitment to make mandatory CapEx for ARS 4.8 billion. Also important to mention the fact that tgs is not allowed to make any dividends payment until the integral tariff revision is completed. Now moving on to our midstream business in Vaca Muerta. We continued working on the 32-kilometer pipeline extension in the North Tranche that would connect Estatal field by July 2023, whose operator signed a long-term agreement with tgs to transport and condition its natural gas production. Also worth highlighting is that we have commissioned partially the 7 million cubic meters per day natural gas conditioning plant expansion at Tratayén, which will be totally in operation in the second quarter. This will allow us to reach a total conditioning capacity of 15 million cubic meters per day. In addition, we are currently investing in 2 modules: one of which will be commissioned by the end of 2023, while the second model will be commissioned in 2024. Both models will contribute to increased condition capacity to 28 million cubic meters per day. Regarding the construction of the first tranche of the Presidente Néstor Kirchner pipeline that will connect Tratayén with Salliqueló, its commissioning is expected for next winter with an initial capacity of 11 cubic meters per day -- 11 million cubic meters per day and 21 million cubic meters per day by the end of 2023 through the construction of 2 compressor plants to be located at both streams of this first tranche. Last December, the Argentine government made a new auction with the purpose of extending the terms of the natural gas purchase contracts executed under Gas Plan 4 from 2024 to 2028. This term extension was accepted by almost all of the natural gas producers. Furthermore, the government requested gas producers an additional volume of 11 million cubic meters per day to be transported through the new pipeline starting July 2023 to December 2028 with a resulted average price of $3.4 per million BTU; as well as 3 million cubic meters per day more starting January 2024 to December 2028; 7 million cubic meters per day for winter period from May to September, starting 2024 to 2028; an additional 7 million cubic meters per day for winter season between 2025 to 2028. In all the cases, the tender offers were oversubscribed. And as a result, the national government was able to secure natural gas volume supply needed for each period. The President Néstor Kirchner pipeline commissioning and the extension of terms and increasing volumes of the Plan Gas 4 will be essential to keep our continuous growth at the midstream business in Vaca Muerta, not only in terms of transportation and conditioning services but also in terms of challenging projects which are currently under evaluation. Turning now to Slide 4. I will briefly address some of our 2022 fourth quarter results highlights. Please keep in mind that all figures presented in this quarter and comparisons made with the previous quarters are expressed in constant pesos as of December 31, 2022, following the provisions established by IFRS for the financial reporting in hyperinflationary economies. As seen on the slide, we reported a net income of ARS 5.4 billion during the fourth quarter of 2022, which compares to ARS 13.2 billion reported during the same quarter of 2021. The decline in net income is mostly explained by the decrease in EBITDA for the Liquids segment, which decreased by ARS 7.7 billion as is mostly related to lower LPG reference international prices, which dropped by more than 30%. Moving on to Slide 5. EBITDA for Natural Gas Transportation business decreased by ARS 597 million and was mostly affected by the annual inflation rate of 95%, which negatively impacted revenues in ARS 5.2 billion. This effect was partially offset by the 60% tariff increase, which became effective last March, and contributed to increasing our revenues by ARS 3 billion. In addition, our property, plant and equipment maintenance expenses of ARS 933 million and lower other operating expenses of ARS 914 million helped to partially offset the negative inflation effect variation. On Slide 6, you can see that the EBITDA from the Liquids business decreased by almost 50% in the fourth quarter of 2022 to ARS 8.6 billion from ARS 16.3 billion reported in the same quarter of 2021. The main negative variation is related to a ARS 5.6 billion revenues decline due to lower reference international prices, LPG average price decreasing by more than 30%, while natural gasoline price dropped by more than 10%. In addition, the monetary effects negatively impacted the Liquids EBITDA in ARS 3.6 billion with inflation increases 95% in the last 12-month period compared to a 72% increase in the foreign exchange rate affecting this segment considering that most of the Liquids revenues at variable costs are adjusted by the dollar exchange rate. In addition, the average natural gas price rose from $2.5 to $3.1 per million BTU, resulting in a natural gas cost increase of ARS 1.7 billion. These negative effects were partially offset by higher ethane revenues amounting to ARS 2.7 billion, mostly attributable, as you can see on the slide, to a higher average price, which rose 40% in dollars. Furthermore, higher LPG volume exports, which increased by almost 19,000 tons, and resulted in higher operating margin of ARS 466 million. Turning to Slide 7. EBITDA from other services decreased 8% to ARS 2.6 billion from ARS 2.8 billion. Higher revenues generated by additional services blended Vaca Muerta amounted to ARS 1.3 billion, which were totally offset by the monetary effect loss as the annual inflation rate was above the annual foreign exchange rate increase. On Slide 8, we can see that financial results experienced a negative variation of ARS 2.2 billion. This variation was mainly explained by higher foreign exchange rate loss of 5.6 -- sorry, ARS 5.7 billion, which was attributable to a higher Argentine peso depreciation. In addition, there was a negative inflation exposure result variation of ARS 3.8 billion. These 2 negative effects were partially offset by higher financial asset income totaling ARS 6.7 billion, resulting from higher cash invested in financial investment denominated in pesos and higher yields. Finally, turning to cash flow on Slide 9. Our cash position in real terms remained stable at ARS 82.4 billion, which is roughly equivalent to $466 million. EBITDA generation in the fourth quarter amounted to ARS 14.7 billion, of which 76% was generated by the nonregulated business and additional 24% stems from the transportation business. CapEx amounted to ARS 9.1 billion, and our working capital increased by approximately ARS 2.6 billion. Payments of interest amounted to ARS 2.8 billion, and income tax advanced payments totaled ARS 5.7 billion. As you can see, we maintained a comfortable level of cash, which give us enough liquidity to continue investing in our Vaca Muerta midstream business. This concludes our presentation. I will now turn it over to Carlos, who will open the floor for questions. Thank you.

Thank you, Alejandro. The floor is now open for questions. [Operator Instructions] Konstantinos from Puente. Thank you for your question. Your first question is regarding the advance with the project in -- the processing project in Tratayén apart from the treatment and conditioning. Do we have any idea about the FID?

Okay. Konstantinos, thank you for your questions. Regarding our Tratayén project, we are advancing 2 different projects: one, a small one regarding the converting the conditioning plant, one of the models that we are building right now into a processing model and add small fractionation and storage facilities there. We are working in one of these projects. And the other one, we are -- for the big one, we are working on certain agreements with partners to go ahead with the big project. The project that meets the new models, they are in Tratayén and processing models and a pipeline to Bahía Blanca and then fractionation and storage and harbor in Bahía Blanca also.

Okay. So the second question is regarding the -- about -- if we have news about the floating regasification unit in Bahía Blanca and if it materially changed our perception to fit with us availability.

I cannot give a confirmation. But our -- the news that we heard is that the [indiscernible] ship is going to be -- was contracted -- was already contracted by ENARSA. And it's good news for us. It allows us to have additional natural gas for the winter.

Then [ Christian ] from Balanz. A question -- his first question regarding the jump in the CapEx in the fourth quarter compared with last year that there was 70%. And he wants to know which is the reason.

Christian, thank you for your questions. Regarding the CapEx jump in the fourth quarter, it's due to the projects that we -- I already mentioned in the call, the increase in the capacity of our Tratayén conditioning plant of 7 million cubic meters per day that -- it was put in service this month and in the -- partially and then total service for the -- in the next quarter.

Well, second question is about the LNG project. If -- how much [ capacity ] how much capacity are you thinking of? And which financial option are -- we are starting? Also, any updates on an eventual expansion for the Liquids business with potential investment in Vaca Muerta, Alejandro explained, and in plan.

Well, right now, regarding the LNG project, we are -- we have already contracted 3 different consultants -- engineering consultants to be able to assess the cost of the project with more certainty given current conditions. Our -- for the first model of 2 million tons per year, our estimations were around $2 [ billion ], but that's what we are going to assess with these new consultants. Regarding the Liquids business and the potential investment, what I already talked about, we are working with other partners to go ahead with this project. And so we think that by the end of the year, we are going to have more news on the -- on both projects.

His other question is regarding the Liquid business, performance in the fourth quarter, the international prices for propane, butane and gasoline. It took a hit during the final months of the year. How did tgs manage to realize a higher prices than benchmark prices? So I think that is really regarding the premium -- price premium that we collect.

Well, we think that prices are quite good right now in the fourth quarter. The difference with -- as Carlos said, the difference between the Mondavi prices and our prices are due to the premium that we can negotiate with our clients. And so these prices -- even the fact that these prices are lower than what we have seen in the -- 1 year ago, they are very good prices for us. And the reason for the higher prices are the premiums. Premiums may vary from $30 per ton up to $80 per ton, depending the market conditions. Okay?

Luciano, well, the same question that Alejandro answered regarding the LNG projects. Then Marina Martin from Latin Securities, she's asking about the status of the target adjustment requested by tgs. When we expect this -- when we expect a response? And what is the anticipated increase in tariffs that will be granted, [ ASR 500 million ]?

Okay. Right now, we are expecting the proposal for ENARGAS. What we have already talked with ENARGAS is about -- I can give no assurance of that, but it is about an increase close to 100%, 95%, something like that. We are expecting for a formal notice regarding that. After that, we have to approve that in our Board of Directors. And then the government has to go ahead with a decree approving those -- this increase -- this agreement?

The second question is regarding the new traditional adjustment after the elections, how we think it will be before the new integral tariff revision.

As I have said, the tariffs that are due to tgs right now is more than 200%, 280%. So if you consider that inflation in Argentina is going to be around 100% for this year or something like that, the adjustment will be close to that, no more -- it should be close to that -- to more than 200%. But obviously, that's what should be reasonable. But there are other reasons for the government to go ahead with this adjustment. So I don't know, maybe in 2 tranches or something like that. I don't think it's going to be a onetime adjustment. Maybe in 2 steps and then the full tariff revision in a year, something like that.

The third question is regarding the operation of the Néstor Kirchner pipeline, if there is any news regarding -- how we define the operator on the first tranche.

We don't have any formal news about that, but it should be decided in the near future as the pipeline is going to be put in service in next July or something like that. So maybe in a few days, we will have notice about that.

Well, last question is regarding the -- our 2 big projects, if we have any details. I think that we gave all the information that we have right now. I don't know if we have -- yes, we have another question from [ Stephanie Alerde ]. If the company has closed debt maturities, how do we plan to handle the maturity of the bond in 2025?

[ Stephanie ], well, our only maturities on bond -- significant maturities bond in 2025. We think that we are going to start the liability management process maybe next year, okay, after elections. That should be the more reasonable approach.

Another question from Luciano regarding the tariff increase, if it will be retroactive to February in 2023.

Luciano, I don't think so. Unfortunately, I don't think that the increase is going to be retroactive. Okay?

Well, I think there is no more questions. We will go with the final remarks. This concludes the question-and-answer section. Now I will turn to Alejandro for final remarks.

Sorry. Thank you all for participating in tgs Fourth Quarter 2022 Conference Call. We look forward to speaking with you again when we release our first quarter 2023 results. If you have any questions in the meantime, please do not hesitate to contact our Investor Relations department. Have a good day.