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 Fourth Quarter 2023 results video conference. TGS issued its earnings report on March 4. We would like to inform you that this event is being recorded and all participants will be in listen-only mode during the presentation. After the company's remarks, we will host a Q&A session. [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 Standard, IFRS and are stated in constant Argentine pesos as of December 31, 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's fourth quarter earnings and highlights for TGS. To begin the call today, I would like to share with you the most recent news about the company. In terms of our natural gas transportation business as the new administration took office last December, the Executive Power issued the Decree No. 55, through which a Integral Tariff Revision will be conducted and completed by the end of December 2024. In addition, the Decree also established a transitional tariff adjustment. The percentages are in process of being defined by the government and are aimed to become effective in the coming days. For such purpose, a public hearing was held on January 8, during which TGS requested a 567% tariff increase that considers what was defined in a 2017 ITR and the 2 transitional tariff increases in the past 5 years, one of 60% in March 2022 and the second one of 95% in April 2022. In terms of our midstream business in Vaca Muerta, we continued working on additional 2 conditioning capacity expansions which would increase the total capacity to 28 million cubic meters per day by next winter following a CapEx deployment of $320 million. It's worth mentioning that these expansions imply the installation of 2 new models, which can be converted to extract LPG. This is well aligned with our project, which is currently under evaluation to start providing natural gas processing services for the shale gas producers in [indiscernible] Next, in terms of the natural gas pipeline expansions, which are needed to increase shale gas production in Vaca Muerta and therefore, supports the growth of our midstream business. Last December, TGS started the operation and maintenance of the Mercedes-Cardales pipeline, a 80 kilometers new pipeline in the north of Province of Buenos Aires owned by ENARSA. This pipeline connects TGS's system with TGN's, mainly allowing for natural gas supply to power plants located in the north of Buenos Aires and South of the Santa Fe province. Current transportation capacity is 10 million cubic meters per day, which will increase to 15 million cubic meters per day this winter once the compressor plant that is currently under construction in Mercedes is commissioned. Furthermore, it is of utmost importance, the probable commissioning of the 2 compressor plants this year, which both are in the process of being built. One at the beginning and the other one at the end of the first tranche of President Nestor Kirchner natural gas pipeline. These 2 compressor plants will allow for additional transportation capacity by 10 million cubic meters per day, almost doubling its current capacity to 21 million of cubic meters per day. The North pipeline reversal project has been delayed during the auction -- during the auction process. And as such, it is probable that it will be commissioned during the second semester of 2024. Needless to say how important this project is for natural gas supplies to the northwest of Argentina considering that the volume of natural gas supply is in decline. As per the 10-year license extension request, which aims to extend our license from 2027 to 2037 and following the recent discussions with the new national authorities, we believe that we will get this extension granted this year. Turning now to Slide 4, I will briefly address some of the highlights for the fourth quarter results of 2023. Please keep in mind that all figures presented in this quarter are in comparisons mainly with the previous quarters are expressed in constant pesos as of December 31, 2023, following the provisions established by IFRS for financial reporting in hyperinflationary economies. As seen in the slide, we reported a net loss totaling ARS 23.5 billion during the fourth quarter of 2023, compared to a net income of ARS 16.7 billion reported for the same quarter of 2022. Even one, as you can see in the slide, the total EBITDA fell by ARS 6.6 billion, equivalent to a decline of 15%, the largest impact came from the negative financial results, which were partially offset by its income tax effect. This significant financial loss was due to the Argentine peso devaluation where the U.S. dollar exchange rate increased from ARS 350 to ARS 808 per U.S. dollar, impacting negatively our U.S. dollar-denominated net liability position. Moving on to Slide 5. EBITDA for the natural gas transportation business was negative at ARS 1.8 billion in the fourth quarter of 2023. This large EBITDA deterioration is mostly related with a limited 95% tariff increase, which came into effect by the end of April 2023, and compares unfavorably with an annual inflation rate of over 200%. As seen in the slide, the inflation loss effect on revenues amounted to ARS 15.1 billion compared to ARS 7.6 billion registered given the positive effect of the 2023 tariff increase. In addition, operating expenses increased by ARS 4.9 billion and PP&E maintenance also rose by almost ARS 800 million. Finally, revenues grew by ARS 917 million, led by additional transportation services provided during the fourth quarter of 2023, mostly interruptible transportation services. On Slide 6, you can see EBITDA from the liquids business decreased by 18% in the fourth quarter of 2023 to ARS 21.9 billion compared to ARS 26.8 billion reported in the same quarter of 2022. The following negative factors impacted this business segment EBITDA. First, low international propane price of about 15%, resulting in lower revenues of ARS 4.7 billion. Second, a lower export LPG volume of 57,000 tons, representing a 50% decline when compared with the 57,000 to 114,000 tons that implied lower EBITDA for another ARS 4.7 billion. Supplies, a lower volume of ethane amounting to 21,000 tons, a 19% decrease from 110,000 tons to 89,000 tons resulting on lower revenues of ARS 2.2 billion. And in the fourth place, a 15% lower price of ethane reducing revenues by ARS 2.1 billion. The monetary effect together with the lower average cost of natural gas, which dropped from $3.1 per million BTU to $2.4 per million BTU partially compensated the negative impact by ARS 4.5 billion and ARS 3.7 billion respectively. Turning to Slide 7. EBITDA from midstream and other services rose more than 130% to ARS 19 billion compared to ARS 8.1 billion. Higher revenues resulted from the incremental volume of natural gas transported and conditioned in Vaca Muerta amounted to ARS 11.6 billion. Transported natural gas volume rose from an average of 14 million cubic meters per day in the fourth quarter of '22 to 23 million cubic meters per day in '23's quarter, while natural gas conditioning volume increased from an average of 8 million cubic meters per day to 15 million cubic meters per day. In addition, during the fourth quarter of 2023, ARS 1.5 billion revenue was generated by services provided to ENARSA in relation to the operation and maintenance of the Nestor Kirchner and the Mercedes-Cardales pipelines. The commissioning of this pipeline as well as the construction of the compressor plant placed in Mercedes. These higher revenues were partially offset by the ARS 2 billion monetary effect loss. On Slide 8, as seen, the financial results registered a negative valuation of ARS 63.7 billion. This valuation was mainly explained by a higher foreign exchange rate loss of ARS 89.1 billion. This huge loss is mostly attributable to the more than 50% Argentine peso devaluation following the new administration took office in December 2023. In addition, there was a negative inflation exposure result valuation of ARS 43.6 billion. These effects were partially offset by a higher financial asset income totaling ARS 72.5 billion, mostly resulting from higher nominal yields of our peso-denominated financial investment generated by Argentine peso devaluation and to a lesser extent, a higher financial investment denominated in pesos. Finally, turning to the cash flow on Slide 9. Our cash position in real terms rose in the fourth quarter of 2023 by ARS 114 billion, to ARS 437 billion, which is roughly the equivalent to $542 million. As seen in the chart, this 35% increase is mostly attributable to the significant revaluation in real terms of our financial investment generated mainly by the 1 short increase of the official foreign exchange rate of almost 120% in December, which was well above the 53% inflation rate registered in the quarter. EBITDA generation during the fourth quarter amounted to ARS 39.1 billion, totally generated by the nonregulated business, natural gas transportation business EBITDA was negative by ARS 1.8 billion. CapEx for the period amounting to ARS 43.8 billion. And in the quarter, the bond coupon of ARS 7.5 billion was paid. We obtained short-term loans amounted to ARS 7.3 billion while the working capital increased by ARS 227 million (sic) [ ARS 237 million ] Income tax advance payments totaled $2.7 billion. As you can see, we maintain a comfortable level of cash position, which give us to continue investing in our business investment plan, mostly focused on 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]. Well, the first question is from [ Carlos Morales ] from Morgan Stanley [indiscernible]. One question is regarding the tariff increase, the natural gas transportation, how we estimate when this could be decided? This is first question.

Okay. Carlos, sorry for the delay. Well, regarding the tariff increase natural gas transportation, currently, the ENARGAS and the Secretary of Energy authorities are making the calculations of the new scheme for natural gas and for the transportation and distribution services. We expect that -- I'm pleased it's going to be a good increase for us, but we cannot anticipate any decision right now. The decision is -- we were told that the decision is going to be taken in the next days. So we are expecting it with very anxiously.

This is second question. In regard [indiscernible], if we expect for this first quarter in 2024, the volumes exported, it will be lower than the first quarter of 2023?

Okay. Regarding export volumes, we are expecting similar levels that of previous year. Nevertheless, it always depends on the cargoes and the timing for the cargoes, okay? But volumes for LPG are quite similar to previous year. We do -- what we -- we do have the -- we did have this quarter is lower volumes in ethane with some operational problems that we had. Nevertheless, we have a take-or-pay contract. So we should be compensated for these lower volumes taken by [ Dow ], maybe in June this year.

Here, we have a question from Florencia Mayorga. First question is regarding the -- our strategy with our bond expiring in 2025 and that given that this 60-40 rule is no longer in place, what will be our strategy?

Florencia. Well, regarding the bond, we are working on the strategy. Our idea is to go ahead with a new issue and tender offer and refinance our bond that is due May 2025, okay? It will depend on the market and the market condition of obviously, the moment when we go to take that decision.

[indiscernible]. We have some question that we are asked a lot regarding the same, the export of LPG decline? Any news regarding the Energy project, would it be a terminal?

Sorry, I was mute. [Technical Difficulty] Have just finalized the analysis that we ran with the engineering companies. And we are -- right now, we are analyzing the next steps.

Okay. Next question from [ Christian Feda ]. Regarding the delay of ENARSA pipe reversal if we expect some kind of shortage in the gas supplies and tariff complete during winter?

Well, in fact, these volumes will not be provided by the gas producers to the northern part of Argentina should be replaced by LNG, additional LNG or additional liquids fuel, okay? So if the government is able to replace these volumes with liquids and LNG. In that case, we will not have been some cuts in serving. It will depend on that. Right now, the cargoes that are being contracted by LNG are fewer than expected. So we may have some problems regarding the gas supply for serving.

[Technical Difficulty] about the tariff increase. The tariff increase -- transitional tariff increase will be in the coming days, what will be defined before December of 2024 is the integral tariff revision, okay? But the integral -- the transitional tariff increases will come in coming days. Question regarding the tariff adjustment. Well, here, from [ Fedro Mahar ] Latin Securities, his question is regarding the LNG plant project.

Regarding the LPG plant project at [indiscernible]. We will start sooner with the study of the engineering cost and other costs to be able to take a decision to go ahead with it maybe in the second half of this year, the end of this year, okay? So the timeline for this project should be starting the project at the beginning of next year or the end of this -- of 2024. The LNG plant is the same, it's such -- the same decision, the same [indiscernible].

And here is a question from Chelsea Colon. Her question is regarding -- if we will receive after the first transitionary adjustment, will we receive monthly tariff increases [Technical Difficulty] thereafter?

Okay. Chelsea, the answer is yes. The ENARGAS is establishing a new methodology to adjust the tariff monthly after the 1 short initial tariff. So we are expecting to receive monthly inflation adjustment maybe since May, okay? In fact, regarding the electricity companies, they have already decided that with the forward.

And the other question from [ Jorge ] from Fundamental Capital. How are you? Jorge. His question is regarding the volume on ENARSA. He want to know about the -- how much is expected for 2024 regarding revenues and if the contract is in pesos or dollars?

Jorge, revenues coming from that contract are at around $3 million and EBITDA $1 million. The contract is mostly in pesos.

[Technical Difficulty] regarding the export volume of [Technical Difficulty] were also very much lower [Technical Difficulty] in one year, in the fourth quarter.

Okay. Well, in fact, we have some -- a cargo that was expected for the end of December that was deferred to January. And also, we have some lack of gas supply necessarily in this quarter due to different maintenance that the gas producers have to -- had to do in their systems, in their fields.

Next question is from David Pardo. We expect to fund the capital program with operating cash flow or it's [indiscernible]?

David, for 2024, we expect to fully fund our CapEx with our own generation of operating cash flow. That's here, we will see, okay, because if we -- while this LPG projects go ahead, we are going to need to issue new [indiscernible] for loans.

We have a question from Chelsea Colon. When was the same price lower, thinking that it was [indiscernible] to the contract with [indiscernible]?

Okay, Chelsea. No. The reason for that is that the ethane price has passed through of the natural gas that we purchased. So as natural gas prices went down this last month, the price of ethane is lower also. It's not a fixed price, okay? It's variable depending on the natural gas price.

One question from [indiscernible] regarding how much additional revenue would imply the commissioning of Mercedes and Cardales pipe for TGS?

It's not a significant one. I don't have the figures right now, but it's not a very significant amount. Maybe $1 million per year or something like that.

And the other question is the reversal of TGN pipeline [Technical Difficulty] revenue for TGS?

Not in a direct way, but we will have additional revenues in our Vaca Muerta transport and conditioning services, okay, because it's traditional gas. It's flowing through the systems, TGN [indiscernible] TGS's. In that case, part of the gas. So most of that gas should be treated and transported at our gathering and conditioning facilities in Vaca Muerta.

[Technical Difficulty] is when ethane volumes will be normalized?

In fact, the ethane volumes had -- has been normalized since February 20, something like that. .

This concludes the question-and-answer session. Now we will turn to Alejandro for final remarks.

Okay. Thank you for participating TGS's Fourth Quarter 2023 Conference Call. We look forward to speaking with you again when we release our first quarter 2024 results. If you have any follow-up questions in the meantime, please do not hesitate to contact our Investor Relations department. Have a good day.