Transportadora de Gas del Sur S.A. - Q1 2024
May 7, 2024
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 First Quarter 2024 Results Video Conference. TGS issued its earnings 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 remarks, we will host a Q&A session. All questions 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 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 here we have 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.
Alejandro Basso (CFO)
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 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, ENARGAS has not authorized the tariff adjustment applicable to May yet. Under this agreement, TGS committed to implement a 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 ENARGAS to define the new tariffs that will become effective in 2025. In terms of our midstream business in Vaca Muerta, we continue working on the additional two conditioning capacity expansions, which will increase the total capacity to 28 million 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 modules, 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 support the growth of our midstream business, it is expected this year to increase the transportation capacity of the first tranche of President Néstor Kirchner pipeline by 10 million cubic meters per day, almost doubling its current capacity to 21 million cubic meters per day through the commissioning of two 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 a compressor plant will be commissioned in the coming months that will increase its transportation capacity to 15 million cubic meters per day.
This 80-kilometer-long pipeline owned by ENARSA and operated by us connected our system with TGS, mainly allowing for the natural gas supply 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 four, I will briefly address some of the highlights for the first quarter results of 2024. Please keep in mind that all figures presented 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 in hyperinflationary economies. As seen in the slide, we reported the 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 in 2023.
This increase in net income is derived partially from higher EBITDA of ARS 11.3 billion, where non-regulated business EBITDA rose by ARS 31.2 billion, which was partially upset by a decline in natural gas transportation EBITDAs of ARS 19.9 billion. However, the main driver behind the net income increases stems from the positive variations of 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 five. 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 unfavorably with a an inflation rate of 288%.
As seen in the slide, the inflation loss effect on revenues amounted to ARS 25 billion, compared to ARS 8 billion registered given the positive effect of the 2023 tariff increase. In addition, operating expenses increased by ARS 4.5 billion, 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 six, 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 billion 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%, 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 of BTU to $2.2 per million of BTU, which made the variable cost reduced by ARS 10.7 billion. These two positive effects were partially compensated by a reduction of the same volume sold, dropping from 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 volume sales were 5,000 tons higher than in the 2023 first quarter, as well as domestic LPG volume sales increased slightly by around 3,000 tons, and both contributed to an increase in EBITDA of ARS 1.5 billion. Liquid sales prices varied slightly without generating significant variations in the liquid EBITDA. Turning to slide seven, EBITDA from midstream and other services rose 91% to ARS 28.8 billion, compared to ARS 15.1 billion.
Higher revenues were explained by the incremental volume of natural gas transported and conditioned in Vaca Muerta in the amount of 11 billion. Transported natural gas 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. The natural gas conditioning volume also increased from an average of 9 million cubic meters per day to 16 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 Néstor 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.
This effect was partially compensated by a higher operating expense of ARS 3.8 billion. On slide eight, as seen, the financial results registered a positive variation of ARS 34.2 billion. This variation was mainly explained by a lower foreign exchange rate loss of ARS 26.9 billion due to the fact that during the first quarter of 2024, the Argentine Central Bank decided to increase the US 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. This effect was partially upset by 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 nine, our cash position in real terms decreased in the first quarter of 2024 by ARS 184 billion to ARS 478 billion. The main reason is reflected in financial results and others, which are explained by 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 dollar, the cash position rose from $541 million to $559 million. EBITDA generation during the first quarter amounted to ARS 88 billion and was totally generated by the non-regulated business as the 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 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.
Carlos Almagro (Head of Investor Relations)
Thank you, Alejandro. The floor is now open for questions. If you have questions, please send them through our Zoom chat. We will read and answer the questions in the order in which they are received. Please make sure to state your name and company so we can introduce you to the audience.
Should any participant need assistance, send us a message in the chat box. Please, all while we poll the questions. Well, the first question is from Florencia Mayorga. Hello, Florencia, how are you? Her first question is, can you provide details on your exposure to CAMMESA?
Alejandro Basso (CFO)
Hi, Florencia, how are you doing? Well, our revenues from CAMMESA are ARS 700 million monthly. With the tariff increase this month, it should increase to eight times mostly, 7.75 times. They are owing us right now three months. And well, they have not made any proposal to us. So I think that maybe when they reach an agreement with the gas producers and the gas power generators, they will start paying us.
Carlos Almagro (Head of Investor Relations)
Perfect. Her second question is regarding the license renewal, if there is any update on this.
Alejandro Basso (CFO)
Well, we are working with the ENARGAS very closely. They have started working on the tariff renewal process. I can answer a future a next question regarding the timing. We think that maybe in the next two months, we are going to have some news with the first report of ENARGAS providing their favorable opinion on the renewal of our license.
Carlos Almagro (Head of Investor Relations)
Hello, Carlos Morales from Morgan Stanley, how are you? His question regarding is, can you comment a little bit about the funding strategy of the company in the short term?
Alejandro Basso (CFO)
Hi, Carlos, how are you doing? Regarding funding in the short term, we don't need any funds in the short term as we currently we're in a positive cash position and we are going to have the increase in the transportation revenues from this month. So in the short term, there's no problem for funding for us.
Carlos Almagro (Head of Investor Relations)
His second question is, when do we expect to make the final investment decision about the LNG project?
Alejandro Basso (CFO)
Regarding our LNG project, this project is currently in standby. We finalized all the studies last year. We put it in standby because there is a new approach for YPF and so we put our project in standby.
Carlos Almagro (Head of Investor Relations)
Next question is from Marina Mertens from Latin Security. Hello, how are you, Marina? The recent tariff hike includes monthly adjustments starting in May, and the government has not implemented the May adjustment. Her question is if it was postponed or suspended.
Alejandro Basso (CFO)
Well, hi, Marina. Regarding the tariff adjustment, we have not had any formal communication from 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.
Carlos Almagro (Head of Investor Relations)
Well, her second question is the complement is the expectation regarding tariff adjustment schedule for the rest of the year. The time being is we don't have information. In fact, we will receive what is expected is to have the monthly adjustment. Next question is from Juan Vázquez from Puente. How are you, Juan? His question is regarding our potential liability management of our 2025 bond.
Alejandro Basso (CFO)
Hi, Juan. How are you doing? Well, we are preparing ourselves to go to the market for potential liability for 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.
Carlos Almagro (Head of Investor Relations)
Another question from Carlos Morales from Morgan. When do we expect to make the final investment decision about the NGL project?
Alejandro Basso (CFO)
Our expectation is to have this final decision maybe in nine months, one year time from now.
Carlos Almagro (Head of Investor Relations)
Next question is a question from Ezequiel Fernández from Balanz. How are you, Ezequiel? His first question is regarding the weak ethane volumes. What happened with the Dow stake? Should we expect a pickup in the second quarter?
Alejandro Basso (CFO)
Well, as we said in the call, Dow had some operational problems. One at the end of last year due to a big storm that we had in Bahía Blanca. And the other one in their polyethylene production a couple of months ago. Right now, they have started to fully off-take their fully off-take the ethane. So you can expect better production, better revenues from us in this regard the next quarter. During April, they have still problems.
In May, they have started at full capacity again.
Carlos Almagro (Head of Investor Relations)
The next question from him is, well, we saw much better local NGL liquid prices. What were the main drivers behind this? And what is the government thinking about the butane pricing regulation, the plan of that?
Alejandro Basso (CFO)
Well, regarding the propane and butane, we have some increases in the butane. It's export parity, so it's not a change in the prices, just due to the international prices. And regarding butane pricing regulations, they have increased the regulated price and had told us they are going to change the regime in the near future, but nothing has happened as regards up to now.
Carlos Almagro (Head of Investor Relations)
The next question from him is that he saw accounts receivable jumping significantly quarter-over-quarter. What were the main drivers of the increase?
In fact, what increased in the receivables were the liquids, mainly PBB, Polysur, export trading companies, clients that we export liquids, among others. Also, the receivable with CAMMESA. But there are several factors, but nothing important. It's not a problem of delay. It's just only CAMMESA. We have problem with delay, okay? The next question, apart from the expansion in transport capacity and the decision that you already mentioned, any other project that could push CapEx higher in 2024?
Alejandro Basso (CFO)
Hi, Ezequiel, no, I didn't think so. Once we finish the Argentine capacity expansions, we don't have any project decided right now, big project. As I said a couple of minutes ago, the decision on the NGL's project is going to be for the end of the year, so not for 2024 CapEx.
Regarding the accounts receivable, you can also have some impact in the dollar effect, and the dollar increase higher than the inflation. So from the non-regulated business, you have an effect there also.
Carlos Almagro (Head of Investor Relations)
Next question is from Ignacio. It's not to ask him from Latin Securities. Excuse me. Yep. Sorry, Ignacio. Perdón, Bolsa. His first question or the first question regarding the tariff postponement was answered. His second question is about the gas transportation segment. What is the impact that the tariff increase will have on the operating income line? What can expect in terms of EBITDA within either guidance? In fact, the impact on the operating income is the increase of the revenue. Just this has a small impact on the operating income because of the turnover tax. His last question is about future investment. Some project depends on a final approval of the RIGI.
Will you give us, if possible, some color about the project? Well, Alejandro commented all the projects that we have on the evaluation. Of course, the RIHI will help us to make the project more attractive. Another question from Juan Vázquez regarding that we think with the last April adjustment, VITA, the regulated segment will become positive going forward. Of course, yes. With this, we see that with this increase, the VITA will turn to be positive.
Alejandro Basso (CFO)
Yes. Obviously, the VITA from the transportation business is going to be positive with a 675% increase. We are expecting a VITA of more than around $270 million for this year in transportation, but it will depend on the application of the monthly adjustment, obviously. But the VITA is going to be positive, obviously.
Carlos Almagro (Head of Investor Relations)
Next question is from Jorge Mauro from Fundamenta.
His question is regarding the update of the fractionation implementation data and if we need to roll over the 2025 bond for the project to go ahead or can we do it with the existing cash position?
Alejandro Basso (CFO)
An update on the project. I already said it that we are targeting our final investment decision for the end of the year or the beginning of the next one. It will be better for this project to have the lower 2025 bond, obviously.
Carlos Almagro (Head of Investor Relations)
Well, next question is from Mario Moyano. It was answered. Thank you for your regards. Tina Isidro from BBVA. As management, he's asking about a VITA for 2024. We don't give guidance for future results. Well, there are no more questions. This concludes the questions and answers section. Now we will turn to Alejandro for final remarks.
Alejandro Basso (CFO)
Thank you for participating in TGS First Quarter 2024 conference call. We look forward to speaking with you again when we release our second quarter 2024 results. If you have any questions in the meantime, please do not hesitate to contact our investor relations department. Have a good day.