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

Good morning, everyone. I'm Carlos, Head of Investor Relations. I would like to welcome everyone to tgs Third Quarter 2023 Results video conference. tgs issued its earnings report yesterday. We would like to inform you that this event is being reported. [Operator Instructions] Before we begin the call today, I would like to remind you that forward-looking statements made during today 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 Standard, IFRS and are stated in constant Argentine pesos as of September 30, 2023 unless otherwise noted. Joining us today from tgs, in Buenos Aires, is Alejandro Basso, Chief Financial Officer. And now I will turn video conference over to Mr. Basso Alejandro, please begin.

Thank you, Carlos. Good morning, everyone, and thank you for joining us today to discuss the 2023 third quarter earnings and highlights for tgs. To begin the call today, I would like to share with you recent news about the company. In terms of our midstream business in Vaca Muerta, last July, we commissioned the 32-kilometer extension of the North Tranche pipeline with a CapEx of $49 million. With this extension, our 60 million cubic meters per day capacity gathering pipeline in Vaca Muerta reached a length of 182 kilometers. This allow us to currently provide out of specification natural gas, transportation and conditioning services in our recently expansion 15 million cubic meters per day plant to several natural gas producers. Furthermore, we continue working on additional 2 conditioning capacity expansions, which will increase the total capacity to 28 million cubic meters per day by, 2024, with a CapEx of approximately $300 million. It is worth mentioning that these expansions will consist on the installation of 2 new models, which can be converted to extract LPG. This is in line with our intention to start providing processing services for the gas producers in Tratayen. The Argentine government through ENARSA is currently revising the offers for the reversal of the Techint North pipeline, which consists of the construction of 122 kilometers pipeline to connect the 2 main Techint pipelines, 2 loops of 32 kilometers in the Techint North pipeline and the reversal of the natural gas flow of 4 compressor plants. The Argentine government expects to commission this work before next winter given that [ Golia ] will stop playing for natural gas volumes starting August 2024. This incremental demand added to the new one to be generated by transportation capacity expansion of the First Tranche of President Néstor Kirchner pipeline after the commissioning of the 2 compressor plants expected in the coming months as well as the construction of the second Tranche of the President Néstor Kirchner pipeline expected by the end of 2024, will give us plenty of opportunities to continue growing our midstream services in Vaca Muerta. On September 8, in compliance with the terms stipulated by natural gas law, Techint has requested Enaragas to extend its license, which expires in 2027 by another 20 years to 2037. Energas is working on a report that will include the evaluation of the company's background. A public hearing will be held and additional steps will be taken to formalize the process. We expect to obtain the renewal in 2024. Turning now to Slide 4. I will briefly address some of the highlights for the 2023 third quarter results. 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 September 30, 2023 following the provisions established by Rafales for financial reporting in hyperinflationary economies. As seen in the slide, we reported net income totaling ARS 4.9 billion during the third quarter which was below the ARS 11.4 billion reported for the same quarter of 2022. The decline in the net income is mostly attributable to the ARS 5.7 billion negative variation of the financial results, a ARS 4 billion decrease in the liquids EBITDA which was partially offset by the continuous quarterly EBITDA growth recorded in other services totaling ARS 3.4 billion this quarter. Moving on to Slide 5. EBITDA for natural gas transportation business decreased slightly by ARS 1 million, but was affected by the negative inflation effect on revenues at ARS 10.1 billion. However, this impact was offset by a ARS 7.3 billion higher revenue attributable to the 95% transitional tariff increase that became effective at the end of April along with ARS 1.9 billion in lower PP&E maintenance expenses and a [ ARS 719 million ] decline in other operating expenses. On Slide 6, you can see EBITDA from the liquids business decreasing by 31% in the third quarter of 2023 to ARS 9 billion compared to ARS 13 billion reported in the same quarter of 2022. The main effect was related to lower revenues in the amount of ARS 10.1 billion related to the 30% decline in average reference international prices of the LPG. In addition, volumes of propane exports fell from 43,000 tons -- metric tons to 14,000 metric tons, resulting in a ARS 3.8 billion decline in revenues and higher natural gas volume purchased in the third quarter of 2023 resulted in higher cost of sales of ARS 2.5 billion that permitted a higher production of 27,000 metrics tons. These negative effects were partially offset by higher revenues of ARS 9.6 billion derived from a higher ethane volumes sold, increasing from 43,000 metric tons to 19,000 metric tons. To a lesser extent, the monetary effects, lower average cost of natural gas, which dropped from $4.7 per million EBITDA to $4.4 per million EBITDA and lower export taxes positively impacted the liquids EBITDA by ARS 1.6 billion, ARS 1.1766 billion, respectively. Turning to Slide 5 -- 7, sorry. EBITDA from other services increased 46% to ARS 10.8 billion from ARS 7.4 billion. Higher revenues generated by incremental volume, natural gas and exported conditions, Vaca Muerta amounted to ARS 5.9 billion. Transport and natural gas volume rose from an average of 15 million cubic meters per day in the third quarter of 2022 to 23 million cubic meters per day in 2023 quarter, while natural gas conditioning volume increased from an average of 10 million of cubic meters per day to 15 million cubic meters per day. In addition, during the third quarter ARS 1.1 billion revenue was generated by services provided to a Enarsa in relation to the Néstor Kirchner pipeline commissioning, the construction of Mercedes-Cardales pipeline and the compression plant placed in Mercedes. These higher revenues were partially offset by ARS 1.4 billion monetary effect loss, especially considering that the annual inflation rate was above the annual foreign exchange rate increase. And in addition, operating expenses increased by ARS 2.3 billion. On Slide 8, we can see that financial results recorded a negative variation of ARS 5.7 billion. This variation was mainly explained by a higher foreign exchange rate loss of ARS 14.1 billion. This was mostly attributable to a higher depreciation of Argentine pesos. And in addition, there was a negative inflation exposure result variation of ARS 5.7 billion. These effects were partially offset by a financial asset income totaling ARS 15.2 billion, mostly resulting from high financial investment denominating pesos and to a lesser extend higher yields of our peso-denominated financial investments. Finally, turning to the cash flow on Slide 9. Our cash position in [ fuel ] terms increased slightly to ARS 210.3 billion, which is roughly equivalent to $600 million. EBITDA generation in the third quarter amounting to ARS 27.1 billion, of which 73% was generated by the nonregulated businesses while additionally 27% came from the transportation business. CapEx for the period amounted to ARS 19.8 billion. We obtained loans for ARS 11.6 billion, and our working capital increased by ARS 11.2 billion. Income tax advance payments totaled ARS 5.6 billion. Finally, financial income contributed to the cash increase in approximately ARS 13 billion. As you can see, we maintained a comfortable level of cash position, which gives us enough liquidity continuity -- to continue investing in our business investment plan, mostly in 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. Now the floor is now open for questions. [Operator Instructions] The first question is regarding the propane volume that were exported at [ 12 ] in so many times. What is the reason?

Okay. As you are saying, it's seasonality. The reason for the decrease in the exporting volumes. Last year, we have a special [indiscernible] so we can -- we could be able to export more than this year. Hopefully, we are waiting to compensate that in the fourth quarter.

The next question is regarding the CapEx, what we expect for 2023 and 2024.

Okay. For 2023, we are expecting ARS 200 million and for 2024 a total of ARS 210 million approximately out of which ARS 140 million should be the finalization of the expansions that we are performing at Vaca Muerta and Tratayen.

The third question [indiscernible] is to remind exactly if the contract in Vaca Muerta for the midstream services [indiscernible] they are both transportation and the conditioning. The fourth question, why it would take additional debt considering the solid cash that we have?

Well, this additional debt is for -- to be able to pay for the import goods and services. You know that currently, we have no access to the official exchange market. So we have to take offshore financing for the services. And in the case of the goods, these loans should be paid next year with access to the official market at that moment.

The question from Marina Martes, [indiscernible] Marina. Her first question is regarding any progress about the request to extend the license for another 10 years.

Marina, well, our expectation for extension is that it should be given to us next year. Obviously, for our business plan for our strategic planning, it's a very important step, given the fact that we have to refinance the [indiscernible] probably next year, the one that is due in May 2025 and also for our business expansion.

Another question regarding the extensions. If there is any potential implication for the company in the operation and strategic planning regarding this 10-year extension.

I already answered that. It's very important for us for our projects in the nonregulated business also given its relation with the regulated business. Okay.

The next question is regarding the status of the both project LNG [indiscernible] project.

Well, these projects are currently under study. We are receiving part of the consultant works. We are expecting to receive more of the remaining consultant works for the remainder of this year. We expect to be able to decide our decision to go ahead with the project next year and the second semester or the half [indiscernible]

Well, Christian [indiscernible] from Balance. His first question is regarding the -- that there is a very good performance on the Vaca Muerta [indiscernible] services and we can expect for this segment to continue growing and what we expect for 2024.

Christian, yes, as we already said, we are expecting to increase volumes from 15 cubic meters per day to 28 million cubic meters per day. both in the transportation side and in the conditioning side of the business. These 2 expansions are expected to be put in services in, one in May, another one maybe in July or August. So the increase in our revenues in this business to be accounted for in half of the next year, okay.

Another question from Juan Vasquez. He is talking about the destination of the cash that we have would not only the destiny for this level of cash.

For the LNG portion. Yes. LNG -- low, which one -- okay fine. Okay. Yes, I would say that we are going to use our cash and fund generation in the following years in the project that we have, okay? in the NGL so LPG projects and LNG project. That's our main result right now. Obviously, we may use something in the -- for the liability management with our [indiscernible]

Carlos Morales questions regarding the next study increase, you will have some news natural gas transportation.

Okay. Right now, we are in talks with ENARGAS to have a transitional adjustment and also, we have already started the tariff revision process. I cannot give any perspective for the net tariff increase and we start transitional adjustment and how long it will take to go ahead with the tariff revision. We expect that it should be run in a short term, but maybe 6 months or more than that will be necessary.

Another question from Juan, is concerned about the license tension will not be renewed.

No. I would say that the license extension should not be the night by our regard if they -- as we comply with all our obligations, all these years. So it should be renewed. Okay.

Florencia Mayorga with MetLife. She's talking about detail in the FX restrictions that we are facing.

Well, Florencia, the restrictions that everyone is having right now. We have not -- we are not being given -- we have not given access to the official exchange rate just for the interest payments. So this was a very good news, but not for buying for purchasing services or goods. So that's the reason that we are mostly taking loans for that. We expect that all these restrictions should be ending in the next month. Okay.

Another question from Florencina regarding the midstream EBITDA level that we expect that it will convert it into the largest EBITDA contributor in the company.

That would happen maybe in 2025, 2026, it will depend on the renegotiation of the transportation business also because the transportation business EBITDA for this year is expecting around $60 million, and it should be around $300 million. You we have a right tariff provision. So everything will depend on that. Okay, but maybe 2026, the midstream services would be the higher contributor to our net income hopefully.

Next question from Florencina. Is there is any compensation with advice of 2% initial candidate regarding the [indiscernible] revision of tariff highs.

Well, we have some conversations regarding the current administration is what I already said, we are expecting a transitional agreed new agreement and the tariff revision. And regarding the other candidate, they are talking about a very, I would say, very deregulated team and go ahead with the tariff provision also.

[ Luciana ] he's talking about the working capital increase. Well, I will answer this question that there are some several issues there that will have some trade receivable increases, because for exchange and also in the midstream services because we provide more services and this is the main important factors. And also, we have a ARS 1 billion trade receivables, they have been with ENARSA of the taking our pipeline services that we collect or [indiscernible] we collect everything. Evan Cavazza, his question is if we will have any benefit from the reversal of the TCM pipeline.

Yes, we have a direct benefit regarding our business in Vaca Muerta because higher quantity of glass is going to come through our system in Vaca Muerta pipeline and our conditioning plant.

This next question from Ivan is about the revenues and EBITDA that we should expect an annual change after the recent expansion of the [indiscernible] conditioning plant.

Well, I don't have the figures right now, maybe I don't know $150 million of annual revenues, full year effective.

We don't have any more questions. Well, this concludes the question and answer section. Now we'll turn to Alejandro for his final remarks.

Well, thank you all for participating in this year's third quarter 2023 conference call. We look forward to speaking with you again when we release our fourth 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.