Transportadora de Gas del Sur SA (TGS) 2022 Q1 法說會逐字稿

Good morning, everyone. I'm Carlos Almagro, Head of Investor Relations. I would like to welcome everyone for attending this year's first quarter 2022 results video conference. TGS issued its earnings report yesterday. If you did not receive a copy, please do not hesitate to contact us by e-mail. We will like to inform you that this event is being recorded. (Operator Instructions)

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 March 31, 2022, unless otherwise noted.

Joining us today from TGS in Buenos Aires is Alejandro Basso, Chief Financial Officer. And now I will turn the video conference over to Mr. Basso. Alejandro, please begin.

Thank you, Carlos. Good morning, everyone, and thank you for joining us today to discuss the 2022 first quarter earnings and highlights for Transportadora de Gas del Sur.

To begin the call today, I would like to share with you some of the recent relevant news that have taken place in our last quarterly earnings call in March. To begin, I will address our midstream business in Vaca Muerta. In March, we announced that the government of the Province of Neuquen, granted TGS an extension of the transportation concession to build and operate the North Tranche of the gathering pipeline. This extension consists of expanding the current 115 kilometers North Tranche pipeline by approximately 32 kilometers to allow for the transportation of up to 17 million of cubic meters per day, out of a specification natural gas from farther fields.

Works are scheduled to start next month and the pipeline extension will be fully operational starting in June 2023 with an investment of $48 million. This project is additionally to the 2 expansions that we are conducting at the conditioning plant in Tratayen, which consists in increasing its capacity by 7 million cubic meters per day this year and adding another 6.6 million of cubic meters per day in 2023, with a total investment of more than $110 million.

In addition, new agreements with gas producers were executed in the last 2 months. Thus 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.

Talking about the construction of the natural gas pipeline, the Argentine government has already executed the agreement with the pipe supplier, which was the only bidder in the auction of last February. It is expected that the government will call another bid this month to construct the pipeline. The Argentine government expects to begin the works in September of 2022, aiming to have the new pipeline completed and in operations by the winter of 2023, with an initial transportation capacity of 11 million of cubic meters per day. The construction of this pipeline will allow TGS to continue its expansion at the conditioning plant with additional capacity in 2024, whose works could start this year as well as execute other big projects that are currently under evaluation.

In terms of the subsidies to the natural gas prices and with the goal of reducing them, the Argentine government called 2 public hearings to be held today, May 10 and the second one on May 12, to push for the increase in natural gas price paid by the residential users by increasing final tariffs starting maybe June.

Finally, during this year's shareholders' meeting, which was held on April 5, it was decided to postpone the deadline to hold this year's treasury shares until November 2025. Currently this year's treasury shares represent 5.25% of the total capital stock.

Turning to Slide 4. I will now briefly address some of the highlights of our 2022 first quarter results. To remind you, all figures presented in this quarter and comparisons made with the previous quarters are expressed in constant pesos as of March 31, 2022, following the provisions established by the IFRS for the financial reporting in hyperinflationary economies.

As seen on the slide, we reported net income of ARS 8.2 billion during the first quarter of 2022 compared to ARS 6.1 billion reported in the same quarter of 2021. Total EBITDA decreased by ARS 830 million mainly resulted from the natural gas transportation EBITDA decrease of ARS 1.7 billion, which was partially offset by increase in the liquids EBITDA amounted to ARS 831 million. Meanwhile the other service EBITDA remained basically unchanged. It is important to stress that the main drivers of the ARS 2.1 million bottom line positive variation were related to the ARS 2.2 million in financial asset loss, registered in the financial results during the first quarter of 2021 and the ARS 1.2 million lower income tax registered in the first quarter of 2022.

Moving on to Slide 5. EBITDA for Natural Gas Transportation business decreased by almost ARS 1.7 billion and was mostly affected by the inflation rate of 55%, which negatively impacted in ARS 2.8 billion. This effect was partially offset by the 60% tariff increase, which impacted only 1 month of the quarter as it became effective in March, increasing our revenues by ARS 1 billion. Also EBITDA was affected by a lower interruptive transportation service, which generated lower revenues of ARS 340 million, which was more than offset by ARS 419 million lower operating expense, where ARS 220 million were related to lower property, plant and equipment maintenance expenses.

On Slide 6, you can see that EBITDA from the liquids business increased in the first quarter of 2022 from ARS 9 billion to ARS 9.9 billion. The main positive variation was associated with higher international prices, which increased between 40% and 60% compared to the liquid average prices recorded in the first quarter of 2021 and generated additional revenues amounted to almost ARS 4.6 billion. Furthermore, revenues increased ARS 2.2 billion as the export volume rose mainly for propane with an additional 25,000 metric tons, increasing for 51,000 to 76,000 metric tons. Ethane volume sales also rose by 20,000 metric tons and generated higher revenues of ARS 679 million.

It is worth noting that ARS 513 million revenue increase is also related to a higher ethane price. This ethane price increase was due to the natural gas price increases as established in the agreement signed with PBB Polisur. These positive effects were partially offset by a ARS 3 billion higher natural gas cost, which is mostly explained by the average price increase to $2.7 per million of BTU from $1.5 previously.

In addition, we recorded a ARS 2.2 billion negative variation related to the monetary effect as inflation soared by 55% compared to a 20% increase of the exchange rate, as well as ARS 720 million associated with higher natural gas consumption and higher export taxes of ARS 570 million.

Turning to Slide 7. EBITDA from other services remained stable with an increase of ARS 12 million. Higher revenues generated in more services spend at Vaca Muerta amounted to ARS 537 million, another services ARS 141 million were offset by higher operating costs of ARS 137 million and ARS 529 million monetary effect loss as the annual inflation rate was above the annual foreign exchange rate increase.

On Slide 8, we can see that the financial results recorded a positive valuation of ARS 1.9 billion. This variation was mainly explained by a financial asset loss of ARS 2.2 billion generated in the first quarter of 2021. In addition, we recorded a lower foreign exchange rate loss of ARS 1.4 billion, which was attributable to a lower dollar-denominated net liability balance, as well as lower Argentine peso depreciation.

Additionally, financial asset income increased by ARS 777 million, due mainly to higher financial investment denominated in pesos. These effects were partially compensated by a lower inflation exposure gain of ARS 2.3 billion.

Finally, turning to cash flow on Slide 9. Our cash position in real terms increased by ARS 8 billion in the first quarter of 2022 for ARS 47 billion to ARS 55 billion, equivalent to around $493 million. EBITDA generation in the first quarter amounted to ARS 15.2 billion, out of which 75% was generated by non-regulated businesses. CapEx amounted to ARS 3.5 billion, and our working capital increased by approximately ARS 600 million. We also bought back $7.3 million nominal value of our own debt for ARS 1.5 billion and paid income tax for around ARS 700 million. As you can see, our cash position remains robust with no debt amortization until 2025. In 2022, we expect to finance our ARS 160 million CapEx with our own cash generation.

This concludes our presentation. I will now turn the word to Carlos, who will open the floor for questions. Thank you.

Thank you, Alejandro. (Operator Instructions) Well, the first question is from Ezequiel Fernández from Balanz. He has 4 questions. The first one regarding if TGS has a relevant transportation contract maturing in the following 3 or 4 years? And if TGS has like a competition with the natural gas pipeline and trying to renew these volumes?

Hello, Ezequiel. Well, regarding these 4 questions, we don't have any significant maturity and we also we don't expect to have a problem with our firm term contracts in the medium term as the new pipeline capacity will - has been put in service. What we can see is that we can have some impact on our interruptible services, okay, which are currently around 15% of the total revenues coming from the transportation business, but some negative effect not significant.

The second one is regarding the -- in the first quarter, the regulated price, which is the price per ton and what can we expect for this year, the evolution of the price of these product?

Okay. In the first quarter, the regulated price per ton is around ARS 15,000. It has been recently increased by 20% to approximately ARS 18,000. And we have also sort of subsidy assistance of another 20%, which was put in place last year in August, and it is still in place until the end of this year. Obviously, this price is not enough to cover the gas costs, and we are constantly requiring the government to update this price. But as you know, this product, this butane is used -- is used mainly by poor people. So it's not an easy solution for us.

The third question is regarding the -- that if we will have a gas cut for Cerri, considering the winter and the lack of natural gas?

Okay. Well, currently, we are seeing this situation with more hopefully, we think that the government is going to be able to contract more ships for LNG. We have also closed an agreement with Bolivia recently. Nevertheless, we are expecting lower volumes than the previous year for this winter, mainly.

One of the last question is regarding the non-regulated business in Vaca Muerta is regarding the expansion of the pipeline that we mentioned in the call, there is some kind of contract related to this expansion for which areas of Vaca Muerta or operator is targeted?

Okay. The extension is fully prepaid by our clients, by Chevron and the capacity that they have contracted there is around -- it's 7 million cubic meters per day. Then we have a spare capacity in that part of the pipeline and also south from the existing pipeline. But well, we are trying to get additional contracts for this. But the extension is fully contracted, which is fully paid with prepayment.

Now the question is from Konstantinos from PUENTE. The question is regarding if we can have some insight of the contracted natural gas volume for the Sur facility, how much of it was renewed in April of the natural gas purchases?

Okay. Regarding natural gas, for Cerri, we have reached new agreements of more than 1 million of cubic meters per day. And our spot need is around -- are less than 1 million of cubic meters per day in the remaining months of the year up to April next year. So we consider that we are very well contracted regarding natural gas supply.

And second question is more general is regarding the this new expansion by the government, the impact that it could have in the TGS EBITDA?

Okay. Well, the operation of the new pipeline is going to be bid by IEASA. We are -- obviously, we target to be the operator of this new pipeline in the first place. And regarding the EBITDA that we are expecting from -- coming from this, well, we cannot speculate on that, but what we can say is that our business are going to benefit from it. The transportation business, with the operation contract, the liquids business because of the fact that additional gas is going to be in the systems and the midstream services, obviously, because of the fact that our pipeline in Vaca Muerta will have additional gas and our condition plan will have additional contracts that we have talked about and that we are expanding the plant and we have additional projects that we can develop with this new pipeline coming soon.

Now [Ignacio Sunichovski] from Invertir en Bolsa. He is asking about the proportion of the purchase of natural gas are made in the spot market, which is that this percentage under some contracted.

Yes, it's from 10% to 20% depending on the month and the availability of natural gas and on average, maybe 10%, 15%.

[Carlo Quenta] has 2 questions. One, regarding the NGL pricing and margin into the coming quarters, considering contracting natural gas price in Argentina. And if the company could use its cash flow? This is another question.

Well, obviously, in winter, we expect higher natural gas prices. But as I have said, as we have already contracted most of the gas that we are going to contract spot supplies, if the margin is positive for us. You know that the winter margins are lower than summer or spring margins, okay, in the liquids business. But what we can say is that the margins that you expect for the winters are positive margins also. As you know, that liquids prices are much higher than the previous year. This may somehow compensate the natural gas price increase.

The second question from Carlos. Is company will use its cash position to do the repurchases? Or is there any plan to prepay the outstanding 2025 bond?

No, no. Currently, we are repurchasing our debts, but in small positions. And obviously we analyze all our options for investing the money. But just small purchases or repurchases.

[Congho Semiunous] from BTG want to have some color regarding the possibility that the TSG regarding the construction of the gas pipeline in Vaca Muerta.

Well, this new pipe plant gives us several opportunities. One, to profit with our current pipeline in Vaca Muerta to be able to increase the capacity we have there, the spare capacity also to expand our conditioning plant. And also, we have other projects that the LNG modular project at Cerri with gas coming from this pipeline, which is going to be connected to our pipeline in the final tranches in Buenos Aires. So that is connected also to TGS' complex at Cerri, Bahia Blanca. And we have also a project to increase to convert our plant in Tratayen to a processing plant to a gas processing plant, and then transport these products LPGs and natural gasoline to Cerri and they are to construct the fractionation and storage and dispatch facilities to be able to export additional liquids. So we have these 2 big projects in addition to our current facilities in Vaca Muerta.

The second question from Semiunous is about the (inaudible) for TGS?

Well, you know that TGS - no, the ENARGAS is working currently in the integral tariff revision. Their goal is to have this revision finalized by the end of the year. What we cannot do is to speculate on Argentina current political situation, and we don't know will this tariff review is going to be put in place, these new tariffs is going to be put in place or the size of the increase, obviously. You know that we have a very important reduction in our tariffs in constant pesos with what you can see in our financials, okay? So the recovery of tariff should be significant in this tariff review.

Konstantinos is asking about the subsidies that we collect, if we're collecting this payment on time?

The assistance and the butane plant prices are 20% of the price.

The next question is regarding the -- if we are collecting on time, the butane subsidy and the propane?

Well, no, no, no, no. We are not collecting that on time. The government has, I guess, around 6 months of delay in the payments of the propane and 3 months in the case of the butane. But the propane for the networks, for the propane networks has a higher impact. It has a higher impact on us. I guess that currently the yield was around ARS 500 million.

Daniel Guardiola, BTG, is asking about what we are planning to do with excess of cash that the company has been generating in the past quarters?

Okay, Daniel. Well, the main use that we have in the medium term is for all these projects that are -- I was talking about. At the same time, we are trying to invest that in solid investments and safe investments.

[Max Teruwa] is asking about some guidance regarding the regarding the export forecast that we can have this year, some special?

Well, the export expectations is lower than the previous year because of the fact that the natural gas supplies is going to be less than 2021. But we don't expect that it's going to -- the exports are going to fall significantly. Maybe I don't know, maybe 10% lower than the previous year, and we are going to see higher production or sales of liquids in the domestic markets, mostly propane. But in this case, in the case of the propane, we don't have any impact in the prices because the price that we sell propane in the domestic prices in the domestic market is (inaudible).

[Luciano Bucha] from Santander Asset Management U.K. He said that TGS is buying public debt and private debt to maintain the excess cash. Any policy regarding credit quality or any coverage hedging to minimize an eventual credit event?

As I said, we are trying to invest on solid corporate assets. So we tried to cover and mainly in dollars also, and we are reducing our sovereign exposure.

[Marina Martins], (inaudible) Partners. He has 2 questions. One, regarding the internal tariff revision that we think that it will be postponed. This is the first question.

Okay. I have talked about the tariff revision. It may be postponed. In that case, the government should at least adjust our tariff by -- at least by inflation. They should be doing that if they postpone the tariff revision. Obviously, it's not easy to anticipate their move. Currently, they are working on the process.

Second question is about the gas shortage expected for this winter, if you can put to affect the volumes in the liquids segment?

Yes. As I said, it can affect the volumes on the liquids segment. We are -- our current expectation is around 5% or 10% lower than the previous year.

Daniel Guardiola has another question from BTG. Well, last quarter, we have seen a significant outperformance of the liquids business. If we can provide more detail behind the positive performance and this unit prices, volume, how sustainable are this result from the liquids segment?

Regarding prices, natural gas prices, I already said that prices are going up in Argentina. So in that case, we were seeing lower margins in our liquids segment. Nevertheless the margins are very, very good, and we expect them to keep on being quite acceptable for us. Regarding international prices, well, all consultants are saying that the liquids prices will remain higher in the next years, but it's just expectations.

You know that in the case of ethane, we have a natural hedge there in our price, which is 40% of the volume.

Well, this concludes the question-and-answer section. Then we will turn to Alejandro for final remarks.

Thank you for participating in TGS' first quarter 2022 conference call. We look forward to speaking with you again when we release our second quarter 2022 results. However, if you have any questions in the meantime, please do not hesitate to contact our Investor Relations department with any questions. Have a good day.