Transportadora de Gas del Sur S.A. - Q2 2023

Transcript

Carlos Almagro (Head of Investor Relations)

Well, good morning, everyone. I'm Carlos Almagro, Head of Investor Relations. I would like to welcome everyone to TGS Q2 2023 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's 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 statement made during the 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 of, 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, 2023, 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, thank you for joining us today to discuss the 2023 2Q earnings and highlights for TGS. To begin the call today, I would like to share with you some news that are relevant to our operations. In terms of our midstream business in Vaca Muerta, after increasing the conditioning capacity of our plant in Tratayén to 15 million cubic per day, with a $32 million CapEx that we mentioned during our last call. This month, we are commissioning the 32 kilometer extension of the North Branch Pipeline. This expansion will allow us to provide transportation and conditioning services to gas producers who operate farther northern fields, by investing a total CapEx of $49 million.

It is worth highlighting that in June, ENARSA awarded TGS the operation and maintenance of the Presidente Néstor Kirchner pipeline for a period of five years, which is renewable for an additional one year. After putting the pipeline into condition, the pipeline started the natural gas transportation with an initial capacity of 11 million cubic per day. Which is expected to increase to 21 million cubic per day before the year end, following the coming commissioning of the two compressor plants, which are being built in Tratayén and Salliqueló.

With the objective of transporting natural gas from Vaca Muerta to the northwest Argentina, following the dramatic reduction of natural gas imports from Bolivia, ENARSA, the state-owned company, will call soon for a bidding process, with the goal of building a 120 kilometers new pipeline to connect the two main TGN's pipelines, and reversing the natural gas flow of the TGN North Pipeline. The estimated CapEx for the projects, which totals over $700 million, will be mostly financed by the CAF Development Bank. In addition, it is expected that next month, ENARSA will call for a new bidding process for the construction of the second tranche of the Presidente Néstor Kirchner pipelines, which will connect Salliqueló to the TGN North Pipeline in San Jerónimo, in the south of Santa Fe province.

Turning now to slide four, I will briefly address some of our 2023 second quarter 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 June 30, 2023. Following the provisions established by the IFRS for financial reporting in hyperinflationary economies. As seen on the slide, we reported net income totaling $12.1 billion during the Q2 of 2023, which was slightly higher than the $11.4 billion reported for the same quarter of 2022. The decline in the EBITDA of the liquids and the natural gas transportation business segments amounted to $4 billion and $2.2 billion, respectively, was more than offset by the $6.9 billion positive variation of the financial results. Moving on to slide five.

EBITDA for natural gas transportation business decreased by ARS 4 billion, was mostly affected by the annual inflation rate of 115%, which negatively impacted our revenues in ARS 9.2 billion. However, this effect was partially offset by 95% tariff increase, which became effective at the end of last April, and contributed to additional revenues of ARS 4.8 billion. In addition, operating expenses decreased by ARS 160 million. On slide six, you can see that EBITDA from the liquids business decreased by almost 17% in the Q2 of 2023, to ARS 10.8 billion, compared to ARS 13 billion reported in same quarter of 2022.

The main negative variation was related to lower revenues in amount of $5.6 billion, due to the decline in reference international prices, with LPG average price decreasing by more than 40%, while natural gas oil price dropped by around 30%. In addition, the monetary effects negatively impacted the liquids EBITDA in $2.1 billion, with inflation increasing 115% in the last twelve months, compared to a 96% increase in the foreign exchange rate. Both external conditions negatively affected this segment, especially when considering that most of the liquids revenues from Maria and Mineral costs are dollar denominated. These two negative effects were partially compensated by higher volumes sales, which increased by 15,000 tons, from 272,000 tons to 287,000 tons, and resulted in higher EBITDA of $3.9 billion.

Propane exports and ethane sales increased by 37,000 tons and 23,000 tons, respectively. In addition, the ethane contract generated one time higher revenue for ARS 1.2 billion, and a higher price of ethane increased revenues, increased revenues by ARS 333 million. Total production volume increased by 6% or 17,000 tons, rising from 266 to 283,000 tons. Production in the Q2 was the highest of the last five years. Turning to slide seven, EBITDA from other services increased 21% to ARS 6.3 billion from ARS 5.2 billion. Higher revenues generated an incremental volume natural gas transported and conditioned in Vaca Muerta amounted to ARS 3.6 billion.

Transported natural gas volume increased from an average of 13 million cubic meters per day in the second quarter of 2022, to 21 million cubic meters per day in 2023 quarter. Meanwhile, natural gas conditioned volume increased from an average of 9 million cubic meters per day to 13 million cubic meters per day. This higher revenue was partially offset by ARS 1.8 billion monetary effect loss, especially considering that the annual inflation rate was above the annual foreign exchange rate increase. In addition, operating expenses increased by ARS 581 million. On slide eight, we can see that financial results recorded a positive variation of ARS 6.9 billion.

This variation was mainly explained by a higher financial asset income totaling ARS 13.5 billion, mostly resulting from higher yields of our peso-denominated financial investment, and to a lesser extent, a higher financial investment denominated in Pesos. This positive effect was partially offset by a higher foreign exchange rate loss of ARS 1.3 billion, which was mostly attributable to a higher depreciation of the Argentine peso. In addition, there was a negative inflation exposure result variation of ARS 1.5 billion. Finally, turning to the cash flow on slide 9, our cash position in real terms increased slightly to ARS 144.8 billion, which is roughly equivalent to $565 million.

EBITDA generated in the Q2 amounted to ARS 22.2 billion, of which 77% was generated by the non-regulated business, while an additional 23% came from the transportation business. CapEx in the period amounted to ARS 18.8 billion. We paid interest of ARS 4 billion, and our working capital decreased by ARS 1.9 billion. Income tax advance, advance payments totaled ARS 434 million. Finally, financial income contributed to the cash increase in approximately ARS 5 billion. As you can see, we maintain a comfortable level of cash position, which give us enough liquidity to continue investing in our business investment plan, mostly in Vaca Muerta upstream 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. Also, please make sure that your name and company are, are displayed so we can introduce you to the audience. Please lower your hands once your question is answered. Should any participants need assistance, send us a message in the chat box. Please hold while we call for questions.Well, Juan Vazquez, Juan Vazquez made some questions from Puente. Good morning. He's asking about the reason why the EBITDA per ton of NGL dropped.

He wondered if the reason was, as you explained in the question, that it was just only, mainly because of the, the fall of the international prices. Okay? In the case of the price of the natural gas, decreased in this quarter compared to last year. His second question is, is regarding the CapEx estimated for the expansion in Tratayén replacement plan, which will permit us to increase the capacity to almost 30 million cubic meters per day. Which are these are, these amounts?

Alejandro Basso (CFO)

Okay. Okay, total investment in the current expansion that we are carrying on in Cartagena is around $280 million, $275 million total. Of which we are expecting to spend $220 this year, and the remainder next year. Obviously, given current conditions, there may be some carryover to next year from this year. Okay?

Carlos Almagro (Head of Investor Relations)

Hi, Christian, from Balanz. The first question is regarding the Néstor Kirchner pipeline operation and maintenance agreements. He's asking about the estimation of the annual EBITDA.

Alejandro Basso (CFO)

Okay, Christian, how are you doing? We are estimating around $2 million-$3 million of EBITDA from this project. It's not a, a very big amount of EBITDA, regarding just, it's just O&M, okay? But it's important for us to, to, to have this, this contract.

Carlos Almagro (Head of Investor Relations)

His second question is regarding the jump of the local price of the liquids, that it doesn't follow the fall, the decline of the price of international prices, if the government authorize any price adjustments?

Alejandro Basso (CFO)

Okay, domestic prices in the case of propane are tied to the international prices. You can find some asynchronicity of maybe one month, but it sets for parity. Regarding the butane, the price is regulated prices, which is below the cost of natural gas. We have some loss there, which is more than compensated for the from the margins that we are taking diesel price.

Carlos Almagro (Head of Investor Relations)

If his third question is regarding the peak of natural gas, which was processed in Cerri, considering the seasonality, what was the reason that we have that such a higher inflow of gas?

Alejandro Basso (CFO)

mer than expected weather, warmer than average temperature we had this last quarter in Argentina. In July, we keep on having some higher temperature as compared with the average. So that's the main reason. Obviously, since August, we have the Gasoducto Presidente Néstor Kirchner pipeline in place, so we are still expecting to have important flows to sell. That's why that's close to sell.

Carlos Almagro (Head of Investor Relations)

His, his question regarding the process of the HGL, the business in, in Cartagena.

Alejandro Basso (CFO)

Okay. We are, we are working hard analyzing the different alternatives. For instance, we are analyzing if the expansion that is economically avail reasonable for this expansion of HGLs to include ethane. We, we are working with our partners in that in that direction. Also analyzing the cost of. We are calling for a bid for to have a budgetary proposals for the equipments and studying the different engineering for the projects, okay? At the same time, we, we have, we, we need a law, a law similar to the LNG law to ahead with the project, okay? With the same benefits or quite similar benefits.

Carlos Almagro (Head of Investor Relations)

He, and his, his question is regarding the LNG project and the status with Palm Land.

Alejandro Basso (CFO)

Okay, we are in the LNG process. We are waiting for the awards that are conducting three different engineering companies, we have three different alternatives, and of going ahead with the project. With that, we are going to, to have also the cost of the project, or estimated cost of the project and different alternatives. I think that they are going to, to finalize in the next two or three months. At the same time, we have reached an agreement with the port of Bahía Blanca for the space that we need there for the plant and for the port also.

Carlos Almagro (Head of Investor Relations)

Juan, Juan Matthews has another question regarding if we, we will take some debt to face this CapEx you mentioned about the $270 million, expanding the conditioning capacity, capacity of the transportation plant.

Alejandro Basso (CFO)

No, Juan, we, we are going ahead with this expansion, the current expansion of the plant without any additional debt. What you may find, find some additional debt in, in our balance sheet in the next months, but due to the need of finance some imports because of the problem that we have here with the dollars, okay? We are being obliged by the government to obtain additional financing for our, for some imports of equipment for this project, and also for spare parts for this year.

Carlos Almagro (Head of Investor Relations)

Hello, Florencia, from Life. She's asking the same question as Juan regarding the if we expect any tariff adjustment this year in the short term, this year.

Alejandro Basso (CFO)

Hi, Florencia, how are you doing? No, no, we are not expecting any additional increase in tariffs this year. Despite the fact that we are requesting these tariff increases, even I could say political conditions here, it's very, it's going to be very, very tough to obtain any adjustment.

Carlos Almagro (Head of Investor Relations)

Her second question is regarding the candidates, the national candidates. Is how they, how we see that they consider the our business, you know, regulated and non-regulated business, as they are strategic or not?

Alejandro Basso (CFO)

In that regard, I would say that all, all, all parties here, now have realized and have realized that Vaca Muerta and our assets are strategic for the development of the country. I, I think that the, the, the, the answer is yes. We think that the, the, the, the opportunity to work ahead with the liability management is going to be the next year, maybe mid of next year or something like that. Obviously, we, we, we expect that macroeconomic conditions will be much better at that moment.

Carlos Almagro (Head of Investor Relations)

Hello, Marina, from Moody's Local for you. It's a question first in, regarding the, the upcoming tariff review, if we anticipate a notably big improvement in 2024, or is, or if for 2025?

Alejandro Basso (CFO)

It's difficult to say. It will depend if there is a change in administration. Maybe a new administration will start with a transitional tariff adjustment, I would say, consider inflation and something more. Inflation is going to be very high, in my opinion, this year, so it's going to be difficult to have the increases much higher than inflation. It should be the case, because we are quite below inflation in the past, four years. I would say, Marina, that the more realistic is to expect for a higher increase in 2025, with the full tariff review finalized by the end of 2024 or something like that.

Carlos Almagro (Head of Investor Relations)

The question, well, all, all other questions were answered from Bruno Montanari, Lucas from PPI. Then I have a question from Musano from Jefferies Chap-Cap. What is inaudible? Well, in the press release, it's explained that it's about $530 million, and it's all dollar-denominated. Okay? Let me see. No, excuse me. Florencia made another question regarding the effects, restriction, how we play these problems.

Alejandro Basso (CFO)

Florencia, as every company in Argentina, we are facing restrictions for importing equipment and services from, from abroad. From time to time, we receive an approval of these imports, but we have to, as I say, as I said before, we, we currently we have to finance the, the, this, these imports, with I would say, a one-year loan or 180 days loan, loans. Okay? Currently, total loans from, from imports are at amounted to $19, $18, $19 million, but it, it's going to increase in the next months, obviously. I think that we have imports and services for more than an additional $50 million, the, the remainder of the year, something like this.