Transportadora de Gas del Sur S.A. - Q1 2023

Transcript

Carlos Almagro (Head of Investor Relations)

Good morning, everyone. I'm Carlos Almagro, Head of Investor Relations. I would like to welcome everyone to TGS Q1 2023 Results Video Conference. TGS issues its earning report yesterday. 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 remark, we will host a Q&A session. All question will need to be submitted in writing through the Q&A chat box. Before we begin the call today, I would like to remind you that forward-looking statement 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 March 31st, 2023, unless otherwise noted. Joining us today from TGS in Buenos Aires, Alejandro Basso, Chief Financial Officer. Now I will turn the conference over to Mr. Basso.

Alejandro Basso (CFO)

Thank you, Carlos. Good morning, everyone, thank you for joining us today to discuss the 2023's Q1 earnings and highlights for Transportadora de Gas del Sur. To begin 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, the transitional tariff increase that we had expected to receive in March was finally granted by Enargas and resulted in a 95% increase, which became effective from April 29th. Moving on to our midstream business at Vaca Muerta.

With the CapEx amounted to $47 million, we continue to work on the 32 km pipeline extension in the north tranche, which will allow us to connect El Trapial field by July 2023, whose operators sign 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 cu m per day. On top, we continue working on the additional two expansions, which will increase the conditioning capacity to 28 million of cu m per day by 2024, with a CapEx of $270 million.

It is worth mentioning that these expansions will consist on installation of two new modules, which could be converted to extract LPG, considering our intention to start providing processing services for the gas producers in Tratayén. Our midstream investment plan in Vaca Muerta, together with the construction of the Presidente Néstor Kirchner pipeline and the extension of terms and increasing volumes of the Plan Gas.Ar 4, 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 four, I will briefly address some of our 2023 Q1 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 31st, 2023, following the provisions established by the IFRS for financial reporting in hyperinflationary economies. As seen on the slide, we reported net income totaling ARS 5.7 billion during the Q1 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 annual inflation rate of 104%, which negatively impacted our revenues in ARS 6 billion. 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. 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 the EBITDA from the liquids business decreased by almost 37% in the Q1 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 $1 billion. The negative effects were partially offset by higher ethane revenues amounting to $1.6 billion, which are attributable to the higher average price as it rose by almost 30%. Furthermore, tax on exports decreased by $636 million due to the fact mentioned before of having lower international prices. Total liquid sales volume for the Q1 of 2023 declined by almost 3% or 9,000 tons when we compare with the Q1 of 2022 of 323,000 tons versus 314,000 tons recorded this quarter, mostly in the domestic market.

The effect on revenues was positive due to a positive effect of the average price mix sales. Total production volume increased by 6% or 18,000 tons, rising from 293,000 to 311,000 tons. The Q1 production was the highest in the last 10 years. Turning to slide 7, EBITDA from other services increased 18% to $3.9 billion from $3.3 billion. Higher revenues generated incremental volume of natural gas transported and conditioned in Vaca Muerta amounted to $1.7 billion. Transported natural gas volume increased from an average of 7 million of cubic meters per day in the Q1 of 2022 to 13 million of cubic meters per day in 2023's quarter.

Meanwhile, natural gas conditioning volume increased from 6 million of cu M per day to 9 million of cu m per day. We expect the natural gas volume to be transported and conditioned in Vaca Muerta will continue increasing during 2023 and 2024. We incurred in higher operating expenses for ARS 668 million, and given that the annual inflation rate was above the annual foreign exchange rate increase, the money 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. There was a higher foreign exchange rate loss of ARS 4.6 billion, which was attributable to higher depreciation of the Argentine peso.

These two 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. Turning to cash flow on slide nine, 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 Q1 amounted to ARS 19.8 billion, of which 83% was generated by the non-regulated 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.

Carlos Almagro (Head of Investor Relations)

Thank you, Alejandro. The floor is now open for questions. If you have a question, please send it through the Zoom chat. We will read and answer the questions in the order in which they are received. Please make sure that your name and company are displayed so we can introduce you to the audience. Please lower your hands once your question is answered. Should any participant need assistance, send us a message in the chat box. Please hold while we call for questions. Well, here we are. The first question is from [Juan Sanchez from 4_50]. He asks for some insight in expansion plans in Mexico. If the cash position will be allocated to these projects this year.

Alejandro Basso (CFO)

Okay. Hi, Juan. How are you doing? Regarding our expansion plans, as we said in the call, we are investing $270 million for expanding our conditioning plant in 13.2 cu m per day. This expansion's already started a couple of months ago, and we are expecting to finish them in 2024, before the winter of 2024. I would say that our cash generation expectations for this year are going to be allocated to these projects. Our estimation is that we don't need to use our cash position this year. Obviously it may happen for 2024, 2025 if all the projects that we are analyzing come through.

Carlos Almagro (Head of Investor Relations)

[Florencia Manzorga from Vertele]. Florencia is asking about the electric cable. Kind of a pipeline, the status of how is the construction doing?

Alejandro Basso (CFO)

Okay. Hi, Florencia. We are expecting the electric pipeline to start operations, next July. Additional hike in tariffs, are not expected for this year. We should like to have an addition, but no, they're not expected.

Carlos Almagro (Head of Investor Relations)

Another question from Florencia is about the CapEx in between, next, during the Q1.

Alejandro Basso (CFO)

It was around $30 million. The other question you have, we're expecting to pay dividends? No, it's not the case. We are not allowed to pay dividends under the transitional agreement which I've 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.

Carlos Almagro (Head of Investor Relations)

Hi, Cristian Fera from Balanz before you. Different questions is regard of if we have received any advancement in the price of the propane during the Q1 of 2023.

Alejandro Basso (CFO)

Hi, Cristian. Well, the propane domestic prices are adjusted monthly by the Secretary of Energy, considering the export parity. Every month we receive an adjustment in the pesos per ton price in the propane. Okay?

Carlos Almagro (Head of Investor Relations)

The next question from Cristian about the LNG project and the other project of the gas pipeline. What is the status of both projects?

Alejandro Basso (CFO)

Okay. Well, given the market conditions, we decided to go ahead with some additional studies for both projects. For LNG, we have already contracted three engineering and consulting firms, and they are working on the calculations of the cost of the LNG project in different kind of alternatives. For the liquid separation plan also, we are already going ahead with this project, analyzing the costs and certain other conditions.

Carlos Almagro (Head of Investor Relations)

Hi, Paula. Paula [Ladreca]. Talking about the cash flows statement, the account.

Alejandro Basso (CFO)

Yes.

Carlos Almagro (Head of Investor Relations)

About the contract liability, cash inflow. Just thinking about what is it about?

Alejandro Basso (CFO)

Hi, Paula. Well, this account, pasivo de contrato, contract liabilities, as you name them, are advances that we are, we have received from clients. The increase in this quarter is due to the advances that we received from the client for whom we are building the extension in El Trapial, that I mentioned in the call.

Carlos Almagro (Head of Investor Relations)

Valeria Snero. Hi, how are you? He's talking about the impact of the rain that is an increase in the transportation EBITDA 2003.

Alejandro Basso (CFO)

Hi, Valeria. Well, we are expecting a decrease in our transportation EBITDA for 2023, as we have received a 95% increase, and our expectations for inflation are much higher than that, maybe around 120%. Also, this increase came two months later than the previous one. This delay also impacted the EBITDA. We may have a reduction of around $30 million in our EBITDA for 2020, transportation, I think.

Carlos Almagro (Head of Investor Relations)

Hi, Luciano [Bushro]. How are you? He's talking about that, we announced that, we will extend the global program in the CNV. If there are any decisions made regarding new investment in gas processing and separation or in LNG? Alejandro explained. I don't know if you want to add something more else or. In fact, this, increasing the amount of the program is just to be prepared to just to finance the investment. We go on. Cristian Fera is asking, in fact, what he was asking was about the price of the butane. If there was an adjustment in first quarter.

Alejandro Basso (CFO)

Okay, Cristian. Yes. It was adjusted in the first quarter. I don't remember the total increase in pesos. It was around 35% or something. There was two hikes this year. Unfortunately, I think that all the increases that we're going to have in the year will be below inflation. As you know, the butane amounts to a very small quantity of our income in the liquids business.

Carlos Almagro (Head of Investor Relations)

We don't have more questions. It's just to add, I forgot Paula [Ladreca], from so. Let's see. This concludes the question and answer section. Now I will just let to Alejandro for final remarks.

Alejandro Basso (CFO)

Okay. Thank you, Carlos. Well, thank you all for participating in TGS Q1 2023 Conference Call. We look forward to speaking with you again when we release our Q2 2023 Results. If you have any questions in the meantime, please do not hesitate to contact our investor relations department. Have a good day.