Transportadora de Gas del Sur S.A. - Q2 2022

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 second quarter 2022 results video conference. TGS 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 herein were prepared in accordance with International Financial Reporting Standards, IFRS, and are stated in constant Argentine pesos as of June 30th, 2022, 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 2022's second quarter earnings and highlights for Transportadora de Gas del Sur. To begin the call today, I would like to share with you some news that has taken place since our last quarterly earnings call in May that is relevant to our operations. Talking about the construction of the new Néstor Kirchner pipeline, with an expected initial transportation capacity of 11 million cu m per day, and after executing the agreement with the pipe supplier, the Argentine government, through ENARSA, called the bid in July for the civil works to construct the Néstor Kirchner pipeline, a loop toward pipeline in the province of Buenos Aires, the pipeline station from Mercedes to Cardales, and a compression plant at the beginning of this latter pipeline.

All of this work has been awarded and are expected to begin construction in September. It is worth highlighting that the construction of Néstor Kirchner pipeline and the other pipeline expansions are necessary for us to continue growing our business in Vaca Muerta through the transportation and conditioning of the non-conventional natural gas production, as well as new associated business, like liquid production in Tratayén and natural gas liquefaction in Bahía Blanca. Moving on to talk about the expansion CapEx at our conditioning plant in Tratayén, we are working to increase its capacity from the current 8 million cu ft per day-15 million cu ft per day by the end of 2022, then to 21 million cu ft per day in 2023, and to 28 million cu ft per day in 2024. We will be investing around ARS 250 million in these expansions.

In addition, we are evaluating making additional investments in this plant to start extracting LPG in 2024. As a result, TGS continues to consolidate its midstream business in Vaca Muerta by providing efficient solutions to natural gas producers as the company invests in large infrastructure projects. Turning now to slide four, I will briefly address some of the highlights of our 2022 second quarter results. Please keep in mind that all figures presented in this quarter are comparisons made with the previous quarters, are expressed in constant pesos as of June 30th, 2022, following the provisions established by IFRS for financial reporting in hyperinflationary economies. As seen on the slide, we report a net income of ARS 5.3 billion during the second quarter of 2022, compared to ARS 5.6 billion reported during the same quarter of 2021.

The net income reduction is mostly explained by the liquids EBITDA, which declined ARS 1.2 billion, while natural gas transportation EBITDA decreased ARS 260 million, and a negative variation of financial results by ARS 1.6 billion. The 714 million increase in other service EBITDA and a lower income tax of ARS 2.2 billion almost offset the aforementioned negative variations. Moving on to slide five, EBITDA for natural gas transportation business decreased by ARS 260 million and was mostly affected by the annual inflation rate of 64%, which negatively impacted by ARS 3 billion. This effect was partially offset by a 60% tariff increase, which became effective in last March, increasing our revenues by ARS 2.8 billion.

On slide 6, you can see that the EBITDA from the liquids business decreased in the second quarter of 2022, declining from ARS 7.2 billion-ARS 6 billion. The main negative variation was associated with higher average natural gas prices resulted from the Plan Gas 4. The average price increase went from $2.9-$4.2 per million BTU, thus increasing natural gas costs by ARS 3.3 billion. In addition, we had a ARS 2.3 billion negative variation related to the monetary effects. As inflation soared by 64% compared to a 26% increase of the exchange rate. An additional factor affecting the liquids EBITDA was the drop in export volumes as LPG exports fell from 41,000 tons-3,000 tons, lowering revenues by ARS 2.3 billion.

This was partially offset by higher exports of natural gasoline, which increased revenues by ARS 537 million. These negative effects were partially offset by higher international prices, which benefited propane sales in the domestic market and natural gasoline exports that, in total, increased revenues by ARS 2.9 billion. In addition, revenues generated by the ethane sales increased ARS 565 million, while higher price was partially offset by lower volume. Furthermore, costs decreased by ARS 1.8 billion during the second quarter of 2022, as natural gas purchases were lower in terms of volume. Turning to slide five, EBITDA from other services increased 42% to ARS 2.4 billion from ARS 1.7 billion.

Higher revenues generated by more services rendered at Vaca Muerta amounted to ARS 1.2 billion, and other services totaled ARS 198 million, which were partially offset by ARS 687 million monetary effect loss, as the annual inflation rate was above the annual foreign exchange rate increase. On slide eight, we can see that financial results recorded a negative variation of ARS 1.6 billion. This variation was mainly explained by a lower inflation exposure gain of ARS 2.4 billion and a ARS 1.9 billion higher foreign exchange rate loss, which was attributable to a higher Argentine peso depreciation. These negative effects were partially offset by higher financial asset income of ARS 2.1 billion, due mainly to higher financial investment denominated in pesos.

Finally, turning to cash flow on slide nine, our cash position in real terms decreased by ARS 11 billion in the second quarter of 2022, declining from ARS 64 billion to ARS 53 billion, which is equivalent to approximately $424 million. EBITDA generation in the second quarter amounted to ARS 12.7 billion, out of which 67% was generated by the non-regulated business. CapEx amounted to ARS 3.2 billion, and our working capital increased by approximately ARS 4.3 billion. We paid interest for ARS 2 billion and paid income tax for around ARS 10.8 billion. As you can see, we keep a robust liquidity, which give us financial cushion to finance our future expansion CapEx. This concludes our presentation, and 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. 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. Also, 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 poll for questions. Thank you. Well, thank you, Christian Ferrer from Balanz, for your questions. He makes three, four questions. One is regarding the liquid business.

His question is if we expect to increase our liquids export to recover in the third and fourth quarter.

Alejandro Basso (CFO)

Okay. Hi, Christian. How are you doing? Regarding the exports in the second quarter, you know that, as winter was approaching and there were some doubts about the provision of the supply of natural gas, we decided to increase our stocks to the maximum level. That was the reason for the export of this quarter to go down. Nevertheless, we are expecting some exports in the third quarter, in spite of the fact that it's a winter quarter. As the gas supplies was normalized, we think that we are exporting, in fact, in July and August, some tons. Obviously for the fourth quarter, we expect our level of CapEx to go to normal levels.

Carlos Almagro (Head of Investor Relations)

The second question is regarding if we can give him some color on the Integral Tariff Review, how is the stage of this process?

Alejandro Basso (CFO)

Okay, Christian. Yes, we have already started some talks with the ENARGAS to have some tariff release at the end of this year or at the beginning of the next one. Nevertheless, I can give no assurance that that's going to happen. Considering the high inflation that we have down here in Argentina, it should happen. The ENARGAS is worried about that as all they are. They're working on some tariff relief.

Carlos Almagro (Head of Investor Relations)

The third question is regarding our participation in the bid launched by the government for the Néstor Kirchner pipeline construction, where we participate in this bid.

Alejandro Basso (CFO)

Okay, we just participated, made a bid, for what is called Renglón 5 or line five, which was the Mercedes plant construction. We were not allowed to further participate in the economic decision because of the fact that we, as we know, we are not constructors. We have not the presence, the initial background, the required economic background as contractors to be awarded a bid. It was not a time of price. In fact, our offer was not open.

Carlos Almagro (Head of Investor Relations)

His next question is regarding the construction or the extension of the Vaca Muerta Northern Pipeline that we announced last quarter in Vaca Muerta. No? If we still expect that it will cost about $50 million or there was a change in that figure, when we expect that this expansion pipeline will be operative.

Alejandro Basso (CFO)

Okay. Regarding the extension of the Vaca Muerta Northern Pipeline, we are close to start receiving the pipe supply, so construction should start in the next month, I would say. Regarding the costs of the CapEx, the $50 million CapEx that we had budgeted, it's hard to say in Argentina. If inflation keeps going over the dollar, the peso devaluation, the cost can be higher than $50 million. We cannot speculate about that.

Carlos Almagro (Head of Investor Relations)

The next question is from Bruno Montanari. Hi, Bruno, from Morgan Stanley. A question regarding the income tax payment is about ARS 11 billion. Is it related with the 2021 fiscal year or it should include advanced tax payment?

Alejandro Basso (CFO)

Oh, hi, Bruno. Well, both. You know that in May we paid for the definitive payment from the 2021 income tax provision. In June, we had an advance of 25% based on the 2021 figures for the 2022 fiscal year.

Carlos Almagro (Head of Investor Relations)

Alejandro commented about the integral revision before. We are waiting for other questions. We will wait one minute. If there is, please type in the Q&A chat box. Rodrigo Nistor from AR Partners. Hello, Rodrigo. He's asking about the inflation, the high rate of that, the expectation is that it will exceed 90%. If we expect that we will have a tariff adjustment this year or in 2023.

Alejandro Basso (CFO)

Okay. Hi, Rodrigo. Well, I am with you that inflation will likely see 90%, and we are requiring ENARGAS to adjust our tariff, considering this new level of inflation, this higher level of inflation. As I said, I cannot give any assurance about the final number, but we are requesting that inflation adjustment should be something leveled with inflation. Regarding the change in the cabinet, we cannot. It's just a speculation. It's good for us that Federico Bernal is going to be the Secretary of Energy because he knows us and so it could. It's a good thing for us. We don't know what the final outcome of the tariff negotiation could be.

Carlos Almagro (Head of Investor Relations)

Another question from Christian. The specific question with the integral tariff review is about the performance of the University of Buenos Aires in this process.

Alejandro Basso (CFO)

Okay. The university has already audited our fixed asset rate base figures, and they should calculate a new index for inflation adjustment of these assets, but they have not finished finalizing this last part of their work. Regarding the audit, everything was okay.

Carlos Almagro (Head of Investor Relations)

We will wait for if there is another question. Please write it in the Q&A chat box, please. We have a question from Diego Portella. Hi, Diego. How are you? His question is regarding our license will expires in 2027, and the contract that we signed with Pampa, that we announced yesterday, that will expire in 2033, regarding services to be rendered in Vaca Muerta with an investment of $138 million, as we announced yesterday. The question is if we are making an assumption, an extension, or if the license was extended.

Alejandro Basso (CFO)

Okay. Well, as you say, our transportation license expires in 2027. We expect that we will be granted the 10-year extension as we have a very good record for ENARGAS. This extension should not be denied unreasonably. When the license finally expires, we should be turning back to the Argentine government the essential assets which don't include the Vaca Muerta and our midstream assets. That is the reason that we are signing contracts for a longer extension than the license. Regarding the essential assets, we should be receiving a payment if the license is finalized, a payment for the non-amortized fixed assets. Okay. PP&E.

Carlos Almagro (Head of Investor Relations)

Another question is from Matt Moczulski from O3. Hi, Matt. How are you? He wants to have some color about expected cash taxes going forward for the next quarters.

Alejandro Basso (CFO)

As I previously said, Matt, how are you doing? In May and June, we paid these significant amounts of the final payment for the 2022 and the first advance for 25% advance. Now, the next payments from July to March are 8.3% of the 2021 income tax provision. So you could see a reduction in that. Okay.

Carlos Almagro (Head of Investor Relations)

Another question is regarding the working capital outflow increase in second quarter?

Alejandro Basso (CFO)

Well, the increase is based on the higher income tax and the higher income that we have in 2021 as compared with 2020. You are seeing an increase in payments, in tax payments, this year as compared with the previous year.

Carlos Almagro (Head of Investor Relations)

Apart from that, the payment advance to suppliers and

Alejandro Basso (CFO)

Regarding the working capital, yes, we have advanced payment to suppliers and...

Carlos Almagro (Head of Investor Relations)

Liquids. Liquids in the storage.

Alejandro Basso (CFO)

Mm-hmm.

Carlos Almagro (Head of Investor Relations)

If you have more questions, please type in the Q&A session. We don't have more. We will wait for one more minute. Well, having no more questions, we conclude the question-and-answer section. Now, I will turn to Alejandro for final remarks.

Alejandro Basso (CFO)

Okay. Thank you for participating in this year's second quarter 2022 conference call. We look forward to speaking with you again when we release our third quarter 2022 results. If you have any questions in the meantime, please do not hesitate to contact our investor relations department, and have a good day.