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

Good morning, everyone. I'm Carlos Almagro, Head of Investor Relations. I would like to welcome everyone to tgs First Quarter 2023 Results Video Conference. tgs issued its earnings 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 March 31, 2023, unless otherwise noted. Joining us today from tgs, in Buenos Aires, Alejandro Basso, Chief Financial Officer. And now I will turn the conference, over to Mr. Basso. Alejandro, you may begin.

Thank you, Carlos. Good morning, everyone, and thank you for joining us today to discuss the 2023 first 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 in March as they are relevant to our operations. To start, I'm talking about our Natural Gas Transportation business. As we mentioned in our last call, the [ integration ] which should have ended in December 2022 was postponed by the Argentine government, and the transitional tariff increase that we had expected to receive in March was finally granted by the ENARGAS and resulted in a 95% increase which became effective from April 29. Now moving on to our midstream business at Vaca Muerta, with the CapEx amounted to $47 million. We continued to work on the 32-kilometers pipeline extension in the north tranche, which will allow us to connect [indiscernible] field by July 2023, whose operator signed a long-term agreement with tgs to transport and condition its natural gas production. It is worth highlighting that we have just commissioned the $32 million expansion of the conditioning plant, which will permit us to condition up to 15 million of cubic meters per day. On top, we continue working on the additional 2 expansions which will increase the conditioning capacity to 28 million of cubic meters per day by 2024 with a CapEx of $270 million. It is worth mentioning these expansions will consist the installation of 2 new modules which could be converted to extract LPG, considering our intention to start providing processing services for the gas producers in [indiscernible]. Our midstream investment plan in Vaca Muerta, together with the construction of the [indiscernible] pipeline and the extension of terms and increasing volumes of the [ planned gas form will ] be essential for our continuous growth at the midstream business in Vaca Muerta as well as for other challenging projects which are currently under evaluation. Turning now to Slide 4. I will briefly address some of our 2023 first quarter results highlights. Please keep in mind that all figures presented for this quarter and comparisons made with the previous quarters are expressed in constant pesos as of March 31, 2023, following the provisions established by the IFRS for the financial reporting in hyperinflationary economies. As seen on the slide, we reported net income totaling ARS 5.7 billion during the first quarter of 2023, which compares to ARS 16.7 billion reported from the same quarter of 2022. The decline in net income was mostly explained by lower EBITDA at the Liquids and the Natural Gas Transportation business segments, which decreased by ARS 7.5 billion and ARS 4.4 billion, respectively, mostly impacted by the lower reference international prices of LPG and the natural gasoline as well as the lack of transportation tariff adjustment. Moving on to Slide 5. EBITDA for the Natural Gas Transportation business decreased by ARS 4.4 billion and was mostly affected by the [indiscernible] inflation rate of 104%, which negatively impacted our revenues in ARS 6 billion. However, this effect was partially offset by 60% tariff increase, which became effective last year in March and contributed to increasing our revenues by ARS 2.4 billion. In addition, higher property, plant and equipment maintenance expenses of ARS 405 million and higher other operating expenses of ARS 466 million explained, to a lower extent, the EBITDA reduction. On Slide 6, you can see that EBITDA from the liquids business decreased by almost 37% in the first quarter of 2023 to ARS 12.6 billion from ARS 20.1 billion reported in the same quarter of 2022. The main negative variation was related to lower revenues in the amount of ARS 7.8 billion due to the decline in reference international prices, with LPG average price decreasing by more than 30% while natural gasoline price dropped by almost 20%. In addition, the monetary effects negatively impacted the liquids EBITDA in ARS 1.1 billion as inflation increased by 104% in the last 12 months compared to 81% increase in the foreign exchange rate. Such conditions negatively affected this segment considering that most of the liquids revenues and variable costs are dollar-denominated. In addition, the average natural gas price rose from $2.7 to $3 per million BTU, resulting in a natural gas cost increase of ARS 1 billion. The negative effects were partially offset by higher ethane revenues amounting to ARS 1.6 billion, which are attributable to the higher average price as it rose by almost 30%. Furthermore, tax on exports decreased by ARS 636 million due to the fact mentioned before of having lower international prices. Total liquids sales volume for the first quarter of 2023 declined by almost 3% or 9,000 tons when we compare with the first quarter of 2022 of 323,000 tons versus 314,000 tons recorded this quarter mostly in the domestic market. However, the effect on revenues was positive due to a positive effect of the average price [indiscernible] sales. Total production volume increased by 6% or 18,000 tons, rising from 293,000 to 311,000 tons. The first quarter production was the highest in the last 10 years. Turning to Slide 7. EBITDA from services increased 18% to ARS 3.9 billion from ARS 3.3 billion. Higher revenues generated incremental volume of natural gas transported and conditioned in Vaca Muerta amounted to ARS 1.7 billion. Transported natural gas volume increased from an average of 7 million of cubic meters per day in the first quarter of 2022 to 13 million cubic meters per day in 2023 quarter. Meanwhile, natural gas conditioning volume increased from 6 million of cubic meters per day to 9 million of cubic meters per day. We expect the natural gas volume to be transported and conditioned in Vaca Muerta will continue increasing during 2023 and 2024. However, we incurred in higher operating expenses for ARS 669 million. And given that the annual inflationary rate was above the annual foreign exchange rate increase, the monetary effect resulted in a loss of ARS 493 million. On Slide 8, we can see that financial results recorded a negative variation of ARS 1.9 billion. This variation was mainly explained by a negative inflation exposure result variation of ARS 4.8 billion. In addition, there was a higher foreign exchange rate loss of ARS 4.6 billion which was attributable to higher depreciation of the Argentine peso. These 2 negative effects were partially offset by a higher financial asset income totaling ARS 6.1 billion, resulting from higher yields of our peso-denominated financial investment. Finally, turning to cash flow on Slide 9. Our cash position in real terms increased by 12% to ARS 112.1 billion which is roughly equivalent to $537 million. EBITDA generation in the first quarter amounted to ARS 19.8 billion, of which 83% was generated by the nonregulated business, while the additional 17% came from the transportation business. CapEx amounted to ARS 9.4 billion, and our working capital decreased by approximately ARS 3.8 billion. Income tax advanced payments totaling ARS 1.4 billion. As you can see, we maintain a comfortable level of cash position, which gives 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] Please hold while we poll for questions. The first question is from [indiscernible]. He asked for some kind of insight [indiscernible] this year.

Okay. Regarding our expansion plans, as we said in the call, we are investing $270 million for expanding our conditioning plant in 13.2 cubic meters per day. This expansion has already started a couple of months ago, and we are expecting to finish them in 2024, before the winter of 2024. Our cash -- I would say that our cash generation of this year is allocated -- our cash generation expectations for this year are going to be allocated to these projects. Our -- as mentioned that we are -- we don't need to use our cash position this year. Obviously, it may happen in for 2024, '25 for the projects that we are [indiscernible] come true.

[indiscernible] Florencia talking about the [indiscernible] pipeline status, how is the construction going?

Okay. Florencia, we are expecting [indiscernible] pipeline to start operations next July. And the additional hike in tariffs are not expected for this year. We should like to have an addition, but no, they are not expected.

Another question from Florencia is about the CapEx [indiscernible] during the first quarter.

It was around $30 million. And the other question you have, we were expecting to pay dividends? No, it's not the case. We are not allowed to pay dividends under the transition agreement, which have just signed with the government, with ENARGAS. We could require permission from them, but it's not our decision, given all the projects that we have in progress.

Christian [indiscernible]. First question is regard if we have received any enhancement in the price of the propane during the first quarter of 2023.

Christian, well, the propane domestic prices are adjusted monthly by the Secretary of Energy considering the export parity. So every month, we receive an adjustment in the pesos per ton price in this -- in the propane. Okay?