Transportadora de Gas del Sur S.A. - Q3 2023

Transcript

Carlos Almagro (Head of Investor Relations)

Hello. Good morning, everyone. I'm Carlos, the Head of Investor Relations. I would like to welcome everyone to TGS third quarter 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 remark, 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 or 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 stated in constant Argentine pesos as of September 30, 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, please begin.

Alejandro Basso (CFO)

Thank you, Carlos. Good morning, everyone, and thank you for joining us today to discuss the 2023's third quarter earnings and highlights for TGS. To begin the call today, I would like to share with you recent news about the company. In terms of our upstream business in Vaca Muerta, last July, we commissioned the 32-kilometer extension of the North Tranche pipeline with a CapEx of $49 million. With this extension, our 60 million cubic meters per day capacity gathering pipeline in Vaca Muerta reached a length of 182 kilometers. This allow us to currently provide out of specification natural gas, transportation, and conditioning services in our recently expansion, 15 million cubic meters per day plant to several natural gas producers.

Furthermore, we continue working on additional two conditioning capacity expansions, which will increase the total capacity to 28 million cubic meters per day by 2024, with a CapEx of approximately $300 million. It is worth mentioning that these expansions will consist on the installation of two new modules, which can be converted to extract LPG. This is in line with our intention to start providing processing services for the gas producers in Tratayén. The Argentine government, through ENARSA, is currently revising the offers for the reversal of the TGN North Pipeline, which consists of the construction of 122 kilometers pipeline to connect the two main TGN's pipelines, two loops of 62 kilometers in the TGN North Pipeline, and the reversal of the natural gas flow of four compressor plants.

The Argentine government expects to commission this work before next winter, given that Bolivia will stop supplying natural gas volumes starting August 2024. This incremental demand, added to the new one to be generated by transportation capacity expansion of the first tranche of Presidente Néstor Kirchner pipeline. After the commission of the two compressor plants, expected in the coming months, as well as the construction of the second tranche of the Presidente Néstor Kirchner pipeline, expected by the end of 2024, will give us plenty opportunities to continue growing our upstream services in Vaca Muerta. On September 8, in compliance with the terms stipulated by Natural Gas Law, TGS requested ENARGAS to extend its license, which expires in 2027, by another 20 years to 2037. ENARGAS is working on a report that will include the evaluation of the company's background.

A public hearing will be held, and additional steps will be taken to formalize the process. We expect to obtain the renewal in 2024. Coming now to slide 4, I will briefly address some of the highlights for the 2023 third quarter results. 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 September 30, 2023, following the provisions established by the IFRS for financial reporting in hyperinflationary economies. As seen in the slide, we reported net income totaling ARS 4.9 billion during the third quarter of 2023, which was below the ARS 11.4 billion reported for the same quarter of 2022.

The decline in the net income is mostly attributable to the ARS 5.7 billion negative variation of the financial results and the ARS 4 billion decrease in the liquids EBITDA, which was partially offset by the continuous quarterly EBITDA growth recorded in other services, totaling ARS 3.4 billion this quarter. Moving on to slide 5. EBITDA for natural gas transportation business decreased slightly by ARS 1 million, but was affected by the negative inflation effect on revenues at ARS 10.1 billion. However, this impact was offset by a ARS 7.3 billion higher revenue, attributable to the 95% transitional tariff increase that became effective at the end of April, along with ARS 1.9 billion in lower PP&E maintenance expenses and a 719 million decline in other operating expenses.

On Slide 6, you can see EBITDA from the liquids business decreasing by 31% in the third quarter of 2023 to ARS 9 billion, compared to ARS 13 billion reported in the same quarter of 2022. The main effect was related to lower revenues in the amount of ARS 10.1 billion, related to the 30% decline in average reference international prices of the LPG. In addition, volumes of propane exports fell from 43,000 tons, metric tons, to 14,000 metric tons, resulting in a ARS 3.8 billion decline in revenues, and higher natural gas volume purchased in the third quarter of 2023 resulted in higher cost of sales of ARS 2.5 billion. That permitted a higher production of 20,000 metric tons.

These negative effects were partially offset by higher revenues of ARS 9.6 billion, derived from a higher ethane volume sold, increasing from 43,000 metric tons to 19,000 metric tons. To a lesser extent, the monetary effects, lower average cost of natural gas, which dropped from $4.7 per million BTU to $4.4 per million BTU, and lower export taxes positively impacted the liquids EBITDA by ARS 1.6 billion, ARS 1.1 billion, and ARS 766 million, respectively. Turning to Slide five... Seven, sorry. EBITDA from other services increased 46% to ARS 10.8 billion from ARS 7.4 billion. Higher revenues generated by incremental volume of natural gas transported and conditioned in Vaca Muerta amounted to ARS 5.9 billion.

Transported natural gas volume rose from an average of 15 million cubic meters per day in the second quarter of 2022 to 23 million, uh, million cubic meters per day in 2023's quarter, while natural gas conditioning volume increased from an average of 10 million cubic meters per day to 15 million cubic meters per day. In addition, during the third quarter of 2023, ARS 1.1 billion revenue was generated by services provided to ENARSA in relation to the Néstor Kirchner pipeline commissioning, the construction of Mercedes-Cardales pipeline, and the compression plant placed in Mercedes. These, uh, higher revenues were partially offset by ARS 1.4 billion monetary effect loss, especially considering that the annual inflation rate was above the annual foreign exchange rate increase. And in addition, operating expenses increased by ARS 2.3 billion.

On Slide 8, we can see that financial results recorded a negative variation of ARS 5.7 billion. This variation was mainly explained by a higher foreign exchange rate loss of ARS 14.1 billion. This was mostly attributable to a higher depreciation of Argentine pesos, and in addition, there was a negative inflation exposure result variation of ARS 5.7 billion. These effects were partially offset by a high financial asset income totaling ARS 15.2 billion, mostly resulting from high financial investment denominated in pesos, and to a lesser extent, higher yields of our peso-denominated financial investments. Finally, turning to the cash flow on slide 9, our cash position in peso terms increased slightly to ARS 210.3 billion, which is roughly equivalent to $600 million.

EBITDA generation in the third quarter amounted to ARS 27.1 billion, of which 73% was generated by the non-regulated businesses, while the additional 27% came from the transportation business. CapEx for the period amounted to ARS 19.8 billion. We obtained loans for ARS 11.6 billion, and our working capital increased by ARS 11.2 billion. Income tax advance payments totaled ARS 5.6 billion. Finally, financial income contributed to the cash increase in approximately ARS 13 billion. As you can see, we maintain a comfortable level of cash position, which give us enough liquidity continuity to continue investing in our business investment plan, mostly in 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. Now the floor is now open for question. You have question, please send us through the our Zoom chat. We will read and answer the question in 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 hold while we call for questions. Thank you. Well, Juan Vázquez from the Puente. Hi, how are you? The first question is regarding the propane volume that were exported that fell in so many tons. What is the reason?

Alejandro Basso (CFO)

Okay. Hi, Juan. It's as you are saying, it's seasonality, the reason for the decrease in the exporting volumes. Last year, we had a special well, so we could be able to export more than this year. Hopefully, we are waiting to compensate that in the fourth quarter.

Carlos Almagro (Head of Investor Relations)

The next question is regarding the CapEx. What we expect for 2023 and 2024?

Alejandro Basso (CFO)

Okay. For 2023, we are expecting $200 million, and for 2024, a total of $210 million approximately, out of which $140 million should be the finalization of the expansions that we are performing at Vaca Muerta in production.

Carlos Almagro (Head of Investor Relations)

The third question, well, the third question is, to remind, is asking if the contracts in Vaca Muerta for the maintenance services are gonna link? Yes, they are gonna link, all the, both the transportation and the conditioning. The fourth question, why it would take additional debt considering the solid cash that we have?

Alejandro Basso (CFO)

Well, this additional debt is for to be able to pay for the import goods and services. You know that currently we have no access to the official exchange market, so we have to take offshore financing for the services and in the case of the goods, these loans should be paid next year with access to the official market at that moment.

Carlos Almagro (Head of Investor Relations)

The question are from Marina Martes from Latin Securities. Hi, how are you, Marina? Her first question is regarding any progress about the request to extend the license for another 10 years.

Alejandro Basso (CFO)

Well, Hi, Marina. How are you doing? Well, our expectation for the extension is that it should be given to us next year, obviously, for our business plan, for our strategic planning, it's a very important step, given the fact that we have to refinance the bond, probably next year, the bond that is due May 2025, and also for our business expansion. So, okay.

Carlos Almagro (Head of Investor Relations)

Another question regarding this extension: if there is any potential implication for the company, the operation, and strategic planning regarding this 10-year extension?

Alejandro Basso (CFO)

Well, I already answered that. It's very important for us, for all our projects in the non-regulated business also, given its relation with the regulated business. Okay.

Carlos Almagro (Head of Investor Relations)

The next question is regarding the status of the both project, LNG and NGL projects.

Alejandro Basso (CFO)

Well, these projects are currently under study. We are receiving part of the consultant works. We are expecting to receive more of the remaining consultant works for the remainder of this year. We expect to be able to decide our decision to go ahead with the project next year in the second semester or the half next year.

Carlos Almagro (Head of Investor Relations)

Hello, Cristian Fera from Balanz. His first question is regarding that there is a very good performance on the midstream services, and we can expect for this segment to continue growing and what we expect for 2024.

Alejandro Basso (CFO)

Hi, Christian. How are you doing? Yes, as we really said, we are expecting to increase volumes from 15 million cubic meters per day to 28 million cubic meters per day, both in the transportation side and in the conditioning side of the business. These two expansions are expected to be put into service in one in May and the other one maybe in July or August. So the increase in our revenues in this business should be accounted for in half of the next year. Okay?

Carlos Almagro (Head of Investor Relations)

Another question from Juan Vázquez. He's talking about the destination of the big cash that we have. You know, what probably the destiny for this big level of cash.

Alejandro Basso (CFO)

For the LNG project? Yeah. The LNG load, which one? Okay, fine. Okay. Okay, yes, I, I would say that we are, we are going to use our, our cash and, and fund generation the following years in the project that we have, okay? In the NGL, so LPG project and LNG project. That's our main source right now. Obviously, we may use something for the liability management with our bond. Okay.

Carlos Almagro (Head of Investor Relations)

Hello, Carlos Morales. His question is regarding the next tariff increase. If we have some news in natural gas transportation.

Alejandro Basso (CFO)

Okay. Right now, we are in talks with ENARGAS to have a transition and adjustment, and also, we have already started the tariff revision process. I cannot give any perspective for the next tariff increase or next tariff transition adjustment, and how long it will take to go ahead with the tariff revision. We expect that it should be run in a short term, but maybe six months or more than that will be necessary.

Carlos Almagro (Head of Investor Relations)

Another question from Juan, if he's concerned about if the license extension will not be renewed.

Alejandro Basso (CFO)

No, I would say that the license extension should not be denied by ENARGAS as we comply with all our obligations all these years, so it should be renewed. Okay.

Carlos Almagro (Head of Investor Relations)

Florencia Mayorga from Life is asking about detail in the FX restrictions that we are facing.

Alejandro Basso (CFO)

Well, you know, Florencia, how we're doing the restrictions that everybody is having right now. We are not given access to the official exchange rate, just for the interest payments. So this was a very good news, but not for buying for purchasing services or goods. So that's the reason that we are mostly taking loans for that. We expect that all these restrictions should be ending in the next month.

Carlos Almagro (Head of Investor Relations)

Okay. Another question from Florencia regarding the midstream EBITDA, the high level that it will expect, that it will convert it into a large... the largest EBITDA contributor in the company.

Alejandro Basso (CFO)

That could happen maybe in 2025, 2026. It will depends on the renegotiation, on the transportation business also, because the transportation business, the EBITDA for this year, is expecting around $60 million, and it should be around $300 million. If we have a right tariff revision. So everything will depend on that. Okay? But maybe in 2026, the midstream services could be the higher contributor to our net income, hopefully.

Carlos Almagro (Head of Investor Relations)

The next question from Florencia, if there is any conversation with advisors of two presidential candidates regarding the tariff revision or tariff hikes?

Alejandro Basso (CFO)

Well, we have some conversations regarding the current administration, is what I already said. We are expecting a transitional agreement and the tariff revision. And regarding the other candidate, they are talking about a very, I would say, liberal regulated scheme and go ahead with the tariff revision also.

Carlos Almagro (Head of Investor Relations)

Hi, Luciano Busso from Mires. He's asking about the working capital increase. Well, I will answer this question that there are some several issues there, that we have some trade receivable increases, because for exchange, and also in the midstream services, because we provide more services. And this is the main important factors. And also, we have ARS 1 billion trade receivables regarding within ENARSA, because of the stock in our pipeline services, that we collect for the time being, we collect everything. Well, Ivan Tabaza, his question is, if we will have any benefit from the reversal of the TGN pipeline?

Alejandro Basso (CFO)

Yes, we have a direct benefit regarding our business in Vaca Muerta, because higher quantity of gas is going to come through our system in Vaca Muerta, our gathering pipeline and our conditioning plant.

Carlos Almagro (Head of Investor Relations)

His next question from Ivan is about the revenues and EBITDA that we should expect in annual, annual terms after the recent expansion of the gas conditioning plant.

Alejandro Basso (CFO)

I don't have the figures right now. Maybe, I don't know, $150 million of annual revenues, full year effect.

Carlos Almagro (Head of Investor Relations)

Well, we don't have any more questions. Well, this conclude the question and answer section. Now we turn to Alejandro for final remarks.

Alejandro Basso (CFO)

Well, thank you all for participating in this year's third quarter 2023 conference call. We look forward to speaking with you again when we release our fourth quarter 2023 results. If you have any questions in the meantime, please do not hesitate to contact our investor relations department. Have a good day.