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

Good morning, everyone. I'm Carlos Almagro, Head of Investor Relations, we would like to welcome everyone to TGS First Quarter 2024 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, 2024, unless otherwise noted. Joining us today from TGS, in Buenos Aires is, Alejandro Basso, Chief Financial Officer. Now I will turn the 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 2024 first 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. As per our natural gas transportation business, most of you know that we have a tariff transitory adjustment agreement with the ENARGAS, which established a 675% tariff increase effective as of April 3, 2024. Together with a monthly adjustment effective starting May which is tied to salary and inflation indexes evolution. However, the ENARGAS has not authorized the tariff adjustment applicable to May yet. Under this agreement, TGS committed to implement the maintenance CapEx amounting to ARS 27.7 billion in 2024. In addition, the integral tariff revision will also start soon and should be completed before the end of 2024. This will allow the ENARGAS to define the new tariffs that will become effective in 2025. In terms of our midstream business in Vaca Muerta, we continued working on the additional 2 conditioning capacity expansions, which will increase the total capacity to 28 million of cubic meters per day by the second semester of 2024, following a CapEx deployment of $320 million. It is worth mentioning that these expansions imply the installation of few 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 Tratayen. Next, in terms of the natural gas pipeline expansions, which are needed to increase shale gas production in Vaca Muerta and therefore, supported the growth of our midstream business. It is expected this year to increase the transportation capacity of the first tranche of President Nestro Kirchner pipeline and 10 million cubic meters per day, almost doubling its current capacity to 21 million cubic meters per day through the commissioning of 2 compressor plants. Also by the end of 2024, it is expected the North pipeline reversal to be operative for the Argentine Northwest natural gas supply, considering the Bolivian natural gas supply decline. Finally, transportation capacity is also expected to increase by 5 million cubic meters per day at the new Mercedes-Cardales pipeline as the compressor plant will be commissioned in the coming months that would increase its transportation capacity to 15 million of cubic meters per day. This 80-kilometer long pipeline owned by ENARSA and operated by us, connected our system with TCMs, mainly allowing for the natural gas supplied to power plants located in the north of Buenos Aires and South of the Santa Fe province. All of these pipeline expansions are being carried out by ENARSA, which is the energy state-owned company. Turning now to Slide 4. I will briefly address some of the highlights for the first quarter results of 2024. Please keep in mind that all figures presenting for this quarter and comparisons made with the previous quarter are expressed in constant pesos as of March 31, 2024, following the provisions established by IFRS for financial reporting and hyperinflationary economies. As seen in the slide, we reported a net income totaling ARS 15.9 billion during the first quarter of 2024 compared to a net income of ARS 20 billion reported in the same quarter 2023. This increase in net income is derived partially from higher EBITDA of ARS 11.3 billion, where our nonregulated business EBITDA rose by ARS 31.2 billion, which was partially offset by a decline in natural gas transportation EBITDA of ARS 19.9 billion. However the main driver behind the net income this stems from the positive variations on the financial results at ARS 34.2 billion. which was mainly generated by a much lower foreign exchange loss due to a lower depreciation of the Argentine peso. Moving on to Slide 5. EBITDA for the natural gas transportation business was negative at ARS 7.1 billion in the first quarter of 2024. This large EBITDA deterioration is mostly related with the limited 95% tariff increase, which came into effect at the end of April 2023 and compares on favorably with a loan inflation rate of 288%. As seen in the slide, the inflation loss effect on revenues amounted to ARS 25 million compared to ARS 8 million registered given the positive effect of the 2023 tariff increase. In addition, operating expenses increased by ARS 4.5 million, while PP&E maintenance also rose by ARS 859 million. Finally, revenues grew by ARS 847 million, led by additional transportation services provided during the first quarter of 2024. On Slide 6, you can see EBITDA from the liquids business increased to ARS 66.3 billion in the first quarter of 2024 compared to ARS 48.8 million reported in the same quarter of 2023. This 36% EBITDA increase is mostly explained by the annual average foreign exchange rate increase of approximately 333% (sic) [ 334% ], which was higher than the annual inflation rate of 288%. Considering that the EBITDA generation is mostly dollar-denominated, this effect generated a ARS 12.7 billion EBITDA increase. In addition, the average cost of natural gas dropped from $3 per million BTU due to $2.2 per million BTU, which made development costs reduced by ARS 10.7 billion. These 2 positive effects were partially compensated by a reduction of the ethane volumes sold dropping for 102,000 tons to 71,000 tons as a result of some operating problems of our client PBB Polisur, which caused a decrease in EBITDA of ARS 7.5 billion. Liquids export volumes sales were 5,000 tons higher than in 2023 first quarter as well as domestic LPG volumes sales increased slightly by around 3,000 tons and both contributed to an increasing EBITDA of ARS 1.5 billion. Liquid sales prices varied slightly without generating significant variations in the liquids EBITDA. Turning to Slide 7. EBITDA for midstream and other services rose 91% to ARS 28.9 billion compared to ARS 15.1 billion. Higher revenues were explained by incremental volume of natural gas transportation and conditions in Vaca Muerta in the amount of ARS 11 billion. Transported natural volume rose from an average of 15 million cubic meters per day in the first quarter of 2023 to 22 million cubic meters per day in the 2024 first quarter, and the natural gas condition volume also increased from an average of 9 million cubic meters per day to 15 million cubic meters per day. In addition, during the first quarter of 2024, ARS 1.6 billion revenues were generated by services provided to ENARSA related to the O&M of the Nestor Kirchner and the Mercedes-Cardales pipeline as well as the construction of the compressor plant placed in Mercedes. Furthermore, the monetary effect resulted in a gain of ARS 4.5 billion, given the high increase of the foreign exchange rate when compared to the annual inflation. These effects were partially compensated by a higher operating expense of ARS 3.8 million. On Slide 8, as seen, the financial results registered a positive variation of ARS 34.2 billion. This variation was mainly explained by lower foreign exchange rate loss of ARS 26.9 million due to the fact that during the first quarter of 2024, the Argentine Central Bank decided to increase the U.S. dollar exchange rate by 2% per month, 6% in the quarter compared to an 18% in the 2023 quarter. In addition, we had a higher financial asset income totaling ARS 15.7 billion, mostly resulting from a higher financial investment denominated in pesos. These effects were partially offset by the higher inflation exposure loss of ARS 3.7 billion and higher interest expense of ARS 3.6 billion. Finally, turning to the cash flow on Slide 9. Our cash position in real terms decreased in the first quarter of 2024, by ARS 194 billion to ARS 478 billion. The main reason is reflected in financial results and others, power, which are explained by a 52% quarterly inflation adjustment in our initial cash position as of December 31, 2023, compared to a 6% quarterly increase of the foreign exchange rate considering that most of our cash position is dollar-denominated. In terms of dollars, the cash position rose for $541 million to $559 million. EBITDA generation during the first quarter amounted to ARS 88 billion and was totally generated by the nonregulated business. Asset transportation business EBITDA was negative by ARS 7 billion as seen before. The CapEx for the period amounted to ARS 59 billion. In the quarter, we paid loan interest of ARS 1.3 billion, and we reduced our short-term loans balance by ARS 4.9 billion, while the working capital increased by ARS 43 billion. The income tax advance payments totaled ARS 2 billion. As you can see, we maintain a comfortable level of cash position, which gives us enough liquidity to continue investing in our business investments and 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. [Operator Instructions]. Well, the first question is from Florencia Mayorga -- first question is, can you provide details on your exposure to CAMMESA?

Well, we -- our revenues from CAMMESA are ARS 700 million monthly, with the tariff increase this month, it should increase to 8x, mostly 7.75x. They are owing us right now 3 months. Well, we have -- they have not any -- they have not made any proposal to us. So I think that maybe when we reach an agreement with the gas producers and the gas power generators, they will start paying us.

The second question is regarding the license renewal, if there is any update on this?

Well, we're working with the ENARGAS very closely, they have started working on the tariff renewal process. I can answer the future -- the next question regarding the timing. We think that maybe in the next 2 months, we are going to have some news with the first report of ENARGAS, providing, their -- a favorable opinion on the renewal on license.

Carlos Moraes from Stanley. His question regarding is -- can you comment a little bit about the funding strategy of the company in the short term?

Carlos, regarding funding in the short term. We don't need any funds in the short term as we -- currently, we have a positive cash position, and we are going to have the increase in transportation revenues from this month. So in the short term, there is no point for funding.

His second question is, when do we expect to make the final investment decision about the energy project?

Regarding our energy project, this project is currently in standby. We finalized all the studies last year. We put it in a standby because there is a new approach for the APF and so we are -- we put our project in standby.

Next question is from Marina from Latin security. The recent tariff highly inclusive marginal adjustment starting in May and the government have not implementing the main adjustment. Her question is if it was postponed or suspended?

Marina. Regarding the tariff adjustment, we have not had any formal communication from the ENARGAS. Regarding this, we know that they have, I think, postponed the increase. Right now, we are waiting for their proposals, how they are going to implement this monthly adjustment in the future. But we don't have any formal communication right now.

The second question is a compliment -- is expectation regarding tariff adjustment scheduled for the rest of the year. The time being is -- we don't have an information, in fact, we will receive -- what we expected is to have the monthly adjustments. Next question is from [indiscernible]. His question is regarding the -- our potential liability management of our 2025 bond.

We are preparing ourselves to go to the market for potential liability management. We are waiting for the right time to do it. The license renewal is an important issue for us regarding that. So we are waiting maybe in the next month, you may have some news.