Transportadora de Gas del Sur S.A. - Q4 2023
March 6, 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 Fourth Quarter 2023 Results Video Conference. TGS issued its earnings report on March 4. 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 statements made during today's video conference do not account for future economic circumstances, industry conditions, company performance, and financial results. This statement is subject to a number of risks and uncertainties.
All figures included here were prepared in accordance with International Financial Reporting Standards, IFRS, and are stated in constant Argentine pesos as of December 31, 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, and thank you for joining us today to discuss the 2023 Fourth 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. In terms of our natural gas transportation business, as the new administration took office last December, the Executive Power issued Decree No. 55, through which an Integral Tariff Revision will be conducted and completed by the end of December 2024. In addition, the decree also established a transitional tariff adjustment. The percentages are in process of being defined by the government and are aimed to become effective in the coming days.
For such purposes, a public hearing was held on January 8, during which TGS requested a 567% tariff increase that considers what was defined in the 2017 ITR and the two transitional tariff increases in the past five years, one of 60% in March 2022 and the second one of 95% in April 2022. In terms of our midstream business in Vaca Muerta, we continued working on the additional two conditioning capacity expansions, which would increase the total capacity to 28 million cubic meters per day by next winter, following a CapEx deployment of $320 million. It's worth mentioning that these expansions imply the installation of two 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 Tratayén.
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, last December, TGS started the operation and maintenance of the Mercedes-Cardales pipeline, an 80-kilometer new pipeline in the north of the province of Buenos Aires, owned by ENARSA. This pipeline connects TGS's system with TGN's, mainly allowing for natural gas supply to power plants located in the north of Buenos Aires and south of the Santa Fe province. The current transportation capacity is 10 million cubic meters per day, which would increase to 15 million cubic meters per day this winter once the compressor plant that is currently under construction in Mercedes is commissioned.
Furthermore, it is of utmost importance the probable commissioning of the two compressor plants this year, which both are in the process of being built, one at the beginning and the other one at the end of the first tranche of Presidente Néstor Kirchner's pipeline. These two compressor plants will allow for additional transportation capacity by 10 million cubic meters per day, almost doubling its current capacity to 21 million cubic meters per day. The Northern Pipeline Reversal project has been delayed during the auction process, and as such, it is probable that it will be commissioned during the second semester of 2024, needless to say how important this project is for natural gas supplies to the northwest Argentina, considering that the Bolivian natural gas supply is in decline.
As per the 10-year license extension request, which aims to extend our license from 2027 to 2037, and following the recent discussions with the new national authorities, we believe that we will get the extension granted this year. Turning now to slide 4, I will briefly address some of the highlights for the fourth quarter results of 2023. Please keep in mind that all figures present in this quarter and comparisons made with the previous quarters are expressed in constant pesos as of December 31, 2023, following the provisions established by IFRS for financial reporting in hyperinflationary economies. As seen in the slide, we reported a net loss totaling ARS 23.5 billion during the fourth quarter of 2023, compared to a net income of ARS 16.7 billion reported for the same quarter of 2022.
Even when, as you can see in the slide, the total EBITDA fell by $6.6 billion, equivalent to a decline of 15%, the largest impact came from the negative financial results, which were partially offset by its income tax effect. This significant financial loss was due to the Argentine peso devaluation, where the US dollar exchange rate increased from ARS 350 to ARS 808 per US dollar, impacting negatively our US dollar-denominated net liability position. Moving on to slide five, EBITDA for the natural gas transportation business was negative at $1.8 billion in the fourth quarter of 2023. This large EBITDA deterioration is mostly related with the limited 95% tariff increase, which came into effect by the end of April 2023, and compares unfavorably with an annual inflation rate of over 200%.
As seen in the slide, the inflation loss effect on revenues amounted to ARS 15.1 billion, compared to ARS 7.6 billion registered given the positive effect of the 2023 tariff increase. In addition, operating expenses increased by ARS 4.9 billion, and PP&E maintenance also rose by almost ARS 800 million. Finally, revenues grew by ARS 917 million, led by additional transportation services provided during the fourth quarter of 2023, mostly interruptible transportation services. On slide six, you can see EBITDA from the liquids business decreased by 18% in the fourth quarter of 2023 to ARS 21.9 billion, compared to ARS 26.8 billion reported in the same quarter of 2022. The following negative factors impacted this business segment EBITDA. First, a lower international propane price of about 15%, resulting in lower revenues of ARS 4.7 billion.
Second, a lower export LPG volume of 57,000 tons, representing a 50% decline when compared to 114,000 tons, that implied lower EBITDA for another $4.7 billion. Third place, a lower volume of ethane amounting to 21,000 tons, an 18% decrease from 110,000 to 89,000 tons, resulting in lower revenues of $2.2 billion. And in the fourth place, a 15% lower price of ethane, reducing revenues by $2.1 billion. The monetary effect, together with the lower average cost of natural gas, which dropped from $3.1-$2.4 per million of BTU, partially compensated the negative impact by $4.5 billion and $3.7 billion, respectively. Turning to slide 7, EBITDA from midstream and other services rose more than 130% to $19 billion, compared to $8.1 billion. Higher revenues resulted from the incremental volume of natural gas transported and conditioned in Vaca Muerta, amounting to $11.6 billion.
Transported natural gas volume rose from an average of 14 million cubic meters per day in the fourth quarter of 2022 to 23 million cubic meters per day in the fourth quarter of 2023, while natural gas conditioning volume increased from an average of 8 million cubic meters per day to 15 million cubic meters per day. In addition, during the fourth quarter of 2023, $1.5 billion revenue was generated by services provided to ENARSA in relation to the operation and maintenance of the Néstor Kirchner's and the Mercedes-Cardales pipelines, the commissioning of this pipeline, as well as the construction of the compressor plant placed in Mercedes. These higher revenues were partially offset by the $2 billion monetary effect loss. On slide 8, as seen, the financial results registered a negative variation of $63.7 billion. This variation was mainly explained by a higher foreign exchange rate loss of $89.1 billion.
This huge loss is mostly attributable to the more than 50% Argentine peso devaluation following the new administration took office in December 2023. In addition, there was a negative inflation exposure resulting in a variation of ARS 43.6 billion. These effects were partially offset by a higher financial asset income totaling ARS 72.5 billion, mostly resulting from higher nominal yields of our peso-denominated financial investment generated by the Argentine peso devaluation, and to a lesser extent, a higher financial investment denominated in pesos. Finally, turning to the cash flow on slide 9, our cash position in real terms rose in the fourth quarter of 2023 by ARS 114 billion to ARS 437 billion, which is roughly the equivalent to $542 million.
As seen in the chart, this 35% increase is mostly attributable to the significant revaluation in real terms of our financial investment, generated mainly by the one-shot increase of the official foreign exchange rate of almost 120% in December, which was well above the 53% inflation rate registered in the quarter. EBITDA generation during the fourth quarter amounted to ARS 39.1 billion, totally generated by the non-regulated business, as the transportation business EBITDA was negative by ARS 1.8 billion, CapEx for the period amounting to ARS 43.8 billion.
And in the quarter, the bond coupon of ARS 7.5 billion was paid. We obtained short-term loans amounting to ARS 7.3 billion, while the working capital increased by ARS 277 million. Income tax advance payments totaled ARS 2.7 billion. As you can see, we maintained a comfortable level of cash position, which gave us 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.
Operator (participant)
Recording stopped.
Carlos Almagro (Head of Investor Relations)
Recording in progress. Thank you, Alejandro. The floor is now open for questions. If you have questions, please send them through our chat. We will read it and answer the question 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 hold while we poll for questions.
Speaker 3
Sorry, we have some problem with the connection. Excuse me, we have some problem with the connection. As I told you, the floor is now open for questions. If you have some, please send them through our Zoom chat. We will read and answer the question 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 hold while we poll for questions.
Alejandro Basso (CFO)
[Foreign Language]Hola. ¿Me escuchas?
Speaker 3
[Foreign Language]Sí.
Alejandro Basso (CFO)
Perfecto.
Speaker 3
The first question is from Carlos Morales, from Moneda Asset Management. One question is regarding the tariff increase in natural gas transportation. We have an estimate when this could be decided. This is the first question.
Alejandro Basso (CFO)
Okay. Hi, Carlos. Sorry for the delay. Regarding the tariff increase in natural gas transportation, currently, the ENARGAS and the Secretary of Energy authorities are making the calculations of the new scheme for natural gas and for transportation and distribution services. We expect that the increase is going to be a good increase for us, but we cannot anticipate any decision right now. We were told that the decision is going to be taken in the next days, so we are expecting it very anxiously.
Speaker 3
This is the second question. If we expect for this first quarter in 2024 the volumes exported, it will be lower than the first quarter of 2023.
Alejandro Basso (CFO)
Okay. Regarding export volumes, we are expecting similar levels than previous year. Nevertheless, it always depends on the cargoes and the timing for the cargoes, okay? But volumes for LPG are quite similar to previous year. What we do have or did have this quarter is lower volumes in ethane due to some operational problems that Dow had. Nevertheless, we have a take-or-pay contract, so we should be compensated for these lower volumes taken by Dow maybe in June this year.
Speaker 3
Here we have a question from Florencia Mayorga. What do you do, Florencia? Her first question is regarding our strategy with our bond that expires in 2025, and given that this 60/40 rule is no longer in place, which will be our strategy?
Alejandro Basso (CFO)
Hi, Florencia. How are you doing? Well, regarding the bond, we are working on the strategy. Our idea is to go ahead with the new issue and tender offer and refinance our bond that is due May 2025, okay? It will depend on the market and the market condition, obviously, the moment when we are going to take that decision.
Carlos Almagro (Head of Investor Relations)
Hello with Cristian Zenteno. We have some questions that were answered regarding the ethane, the export of LPG, the decline. Any news regarding the LNG project liquefaction terminal?
Alejandro Basso (CFO)
Sorry, I was muted. Hi. Can I repeat that? LNG terminal just finalized the analysis that we ran with the engineering companies, and right now, we are analyzing the next steps.
Carlos Almagro (Head of Investor Relations)
Okay. Next question from Cristian Zenteno. Regarding the delay of the Northern Gas Pipeline Reversal, if we expect some kind of shortage in the gas supplies at the Cerri Complex during winter?
Alejandro Basso (CFO)
Well, in fact, these volumes will not be provided by the gas producers to the northern part of Argentina, [they] should be replaced by additional LNG or additional liquids, fuel, okay? So if the government [is] disabled to replace these volumes with liquids and LNG, in that case, we will not have some cuts in Cerri. But it will depend on [it]. Right now, the cargoes that are being contracted by LNG are fewer than expected, so we may have some problems regarding the gas supply for Cerri.
Carlos Almagro (Head of Investor Relations)
Good morning, Lorena Reich. Well, here's the confusion. In fact, she's asking about the tariff increase. The transitional tariff increase will be in the coming days, but will be defined before December of 2024 is the Integral Tariff Revision, okay? But the transitional tariff increase will come in the coming days, okay? And then more questions regarding the tariff adjustment. Okay. Well, here from Pedro Mubarqui, from Latin Securities. His question is regarding the LNG plant project.
Alejandro Basso (CFO)
I am muted, Daniel. Hi, Pedro. How are you doing? Regarding the LPG plant project at Tratayén, we will start sooner with the study of the engineering cost and other costs to be able to take a decision to go ahead with it maybe at the second half of this year, the end of this year, okay? So the timeline for this project should be starting the project at the beginning of next year or the end of 2024. The LNG plant, it's the same. It's the same decision, the same work that you have to do.
Carlos Almagro (Head of Investor Relations)
Here is a question from Chelsea Cullum for you. Her question is regarding if we will receive after the first transitional tariff adjustment, we will receive monthly tariff increases with inflation thereafter.
Alejandro Basso (CFO)
Okay. Hi, Chelsea. The answer is yes. The ENARGAS is establishing a new methodology to adjust the tariff monthly after the one-shot initial tariff. So we are expecting to receive monthly inflation adjustment maybe since May, okay? In fact, regarding the electricity companies, they have already decided that with the formula.
Carlos Almagro (Head of Investor Relations)
We have another question from Jorge Mauro from Fundamenta Capital. How are you, Jorge? His question is regarding the O&M contract with ENARGAS. He wants to know about how much to expect for 2024 regarding revenues, and if the contract is in pesos or dollars.
Alejandro Basso (CFO)
Hi, Jorge. How are you doing? Revenues coming from that contract are around $3 million and a bit over $1 million. The contract is mostly in pesos.
Carlos Almagro (Head of Investor Relations)
Bueno.
Alejandro Basso (CFO)
Okay. Well, in fact, we have a cargo that was expected for the end of December that was deferred to January. And also, we have some lack of gas supply in Cerri this quarter due to different maintenance that the gas producers have to do in their systems, in their fields.
Carlos Almagro (Head of Investor Relations)
Next question is from David Pardo. If we expect to fund the CapEx program with operating gas flow, or is probable to issue that?
Alejandro Basso (CFO)
Hi, David. How are you doing? For 2024, we expect to fully fund our CapEx with our own generated operating cash flow. Next year, we will see, okay? Because if we put all these LPG projects overhead, we are going to need to issue a new debt offering for loans.
Carlos Almagro (Head of Investor Relations)
Another question from Chelsea Cullum. Why was the ethane price lower, thinking that it was fixed to the contract with PBB Polisur?
Alejandro Basso (CFO)
Okay, Chelsea. No, the reason for that is that the ethane price has a pass-through of the natural gas that we purchase. So as natural gas prices went down these last months, the price of the ethane is lower also. It's not a fixed price, okay? It's variable depending on the natural gas price.
Carlos Almagro (Head of Investor Relations)
One question from Ivan Cabezas from Compass Group for you. Regarding how much additional revenue would imply the commissioning of Mercedes and Cardales pipe for TGS?
Alejandro Basso (CFO)
Ivan, it's not a significant amount. I don't have the figures right now, but it's not a very significant amount. Maybe $1 million per year or something like that.
Carlos Almagro (Head of Investor Relations)
The other question, if the reversal of the TGS pipeline will imply some additional revenue for TGS?
Alejandro Basso (CFO)
Not in a direct way, but we will have additional revenues in our Vaca Muerta transport and conditioning services, okay? Because it's additional gas flowing through the systems, TGN, Néstor Kirchner, TGS's. In that case, part of that gas or most of that gas should be treated and transported at our gathering and conditioning facilities in Vaca Muerta.
Carlos Almagro (Head of Investor Relations)
Another question from Florencia Mayorga. When will ethane volumes be normalized?
Alejandro Basso (CFO)
In fact, the ethane volumes have been normalized since February the 20th, something like that.
Carlos Almagro (Head of Investor Relations)
Well, this concludes the question-and-answer section. Now, we will turn to Alejandro for final remarks.
Alejandro Basso (CFO)
Okay. Thank you for participating in TGS's fourth quarter 2023 conference call. We look forward to speaking with you again when we release our first quarter 2024 results. If you've got any further questions in the meantime, please do not hesitate to contact our investor relations department. Have a good day.