Transportadora de Gas del Sur SA (TGS) 2021 Q3 法說會逐字稿

Good morning, everyone, and thank you for waiting. I'm Carlos Almagro from IR, and we will like to welcome everybody to TGS Third Quarter 2021 Result Earning Conference. TGS issued its (inaudible) earning report yesterday. If you did not receive a copy via email, please do not hesitate to contact us.

We inform you that this event is being recorded. (Operator Instructions) After the company's remarks, we will pause for Q&A session. Starting this quarter, we'll be using Zoom for the webcast platform. As a result, all questions will need to be submitted in writing through Zoom chat box.

Before we begin the call today, I would like to remind you that forward-looking statements made during today's virtual 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 September 30, 2021, unless otherwise noted.

Joining us today from TGS in Buenos Aires is Alejandro Basso, Chief Financial Officer; and Leandro Perez Castaño, Finance Manager.

And now I will turn the conference over to Mr. Basso. Alejandro, please begin.

Thank you, Carlos. Good morning, everyone, and thank you for joining us today on this new conference to discuss the 2021's third quarter earnings and highlights for Transportadora de Gas del Sur.

To begin the call today, I would like to share with you some (inaudible) news that occurred since our last quarterly earnings call in August. Firstly, as a result of increasing natural gas production in Vaca Muerta, driven by higher prices of natural gas due to the gas plant on trade government at the end of 2020, we made $16 million CapEx in our natural gas conditioning plant placed in Tratayén. This investment allowed us to more than double its natural gas liquids triple capacity from 600 cubics per day to 1,400 cubics per day, thus providing us to increase our capacity condition higher volume natural gas of 7.8 million cubics per day from 5.4 million cubics per day. In addition, we signed new agreements with gas producers, allowing us to transform and condition higher volumes of natural gas at Vaca Muerta. We are very excited to have reached such a milestone in our midstream business, and we hope to continue expanding our infrastructure and closing new agreements with gas producers.

Secondly, in terms of natural gas on potential tariffs, ENARGAS started working with us this year in order to find a potential transitional tariff increase to be rapid at the beginning of 2022 in compliance with what ENARGAS established last May.

I should remind you that this year, we're not obliged to make any one of the investment, but at the same time, the company cannot make any new payment until Integral Tariff Revision is complete.

Thirdly, as a result of (inaudible) transportation contracts with a capacity of 5 million cubics per day that we aspire in 2022 and 2023, we launched an open season last September. And after receiving tenders from the clients, we were able to assign almost 100% of the capacity in new firm capacity contracts with an average term of 20 years.

Finally, it is worth mentioning that in September, October, we put back our own 2025 bond with a face value of $2.8 million. As a result, we currently hold $22.4 million of our bonds in treasury.

Turning to Slide 4. I will now briefly address some of the highlights in our 2021's third quarter results. To remind you, all figures presented in this quarter and comparisons made in the previous quarters are expressed in constant pesos as of September 30, 2021, following the provisions established by the IFRS for financial reporting in hyperinflationary economies.

As seen on the slide, we reported a net income of ARS 4.4 billion during the third quarter of 2021 compared to almost ARS 600 million reported in the same quarter of 2020. Total EBITDA decreased by ARS 3.1 billion, mostly due to the (inaudible) ARS 2.6 billion decline of natural gas transportation EBITDA and is almost totally related to the lack of tariff adjustment. In addition, the Liquids business EBITDA also fell by around ARS 900 million. It is worth mentioning that Liquids business EBITDA (inaudible) during last year's third quarter was particularly [calm] as natural gas cost was very low, and we were able to export about 65,000 metric tons of LPG when we usually export much lower volume in the third quarter premium (inaudible) it is winter season (inaudible) production slower (inaudible) natural gas residential consumption.

However, financial results created a positive variation of ARS 7 billion, which more than offset the total EBITDA decline venture before. This positive variation is mostly explained by financial asset loss generated in the third quarter of 2020, and a lower foreign exchange rate loss as a relation in 2021's quarter was much lower.

Moving on to Slide 5. EBITDA to natural gas transportation business increased by almost ARS 2.6 billion. Once again, as this has happened since 2019 when we received the last tariff increase, the decline is only explained by the lack of the tariff adjustment by operating (inaudible). Therefore, our operating margins have been deteriorating quarter after quarter. However, most of our transportation revenues having generated ARS 18 million contract with an average life about 10 years, allowing us to generate a stable flow (inaudible). A positive variation was the ARS 131 million revenue increase due to the high natural gas volume transported and are in charge of transportation volumes.

On Slide 6, you can see that EBITDA for the Liquids business declined in the third quarter of 2021 from ARS 4 billion to ARS 3.1 billion. As we mentioned before, the EBITDA generated in the third quarter of 2020 was high due to the low cost of natural gas and the high level of (inaudible) export volume.

In the case of natural gas cost, in fact, it's mainly due to the increase from $2.2 to $4 per million BTU, declining EBITDA ARS 3.3 billion. In addition, lower volume of liquids sold generated a negative variation of ARS 2.1 million, of which ARS 1.2 million corresponding to lower volume exported (inaudible), down from 66,000 tons to only 8,000 metric tons. And we also recorded a decline of almost ARS 900 million due to a lower sales of ethane, which fell from 101,000 to 80,000 metric tons.

Another negative factor was the ARS 1 million loss generated by the monetary effect of the annual inflation of [30%] and the foreign exchange rate annual increase of [about 3%]. Higher international prices positively impacted our revenues by ARS 2.8 billion as well as higher ethane prices increased sales by ARS 1.1 billion. This ethane price adjustment was related to increase of natural gas cost as it is established in the agreement signed with PBB Polisur. Due to the lower volume of liquids sold in the third quarter of 2021, we purchased a lower volume of natural gas, which reduced variable costs by ARS 1.8 billion.

Turning to Slide 7. EBITDA from the Other Services increased by 37% mainly due to higher revenues of ARS 600 million generated by midstream services. Most of these higher midstream sales were generated by the services (inaudible) at Vaca Muerta as a result of low volume of (inaudible) we transported in our (inaudible) and conditions in our plant located in (inaudible).

In addition, we generated higher revenues of ARS 86 million due to some construction services. The annual inflation rate of [82%] was higher than the annual foreign exchange rate increase of 33%. Its revenues were negatively impacted by ARS 322 million.

On Slide 8, we can see that the financial results reported a positive variation of ARS 7 million. This variation was mainly explained by the financial asset loss of ARS 4.6 billion generated in the third quarter of 2020. In addition, we recorded a lower foreign exchange rate loss of ARS 2.7 billion, which was attributable to a lower increase of exchange rate, ARS 3 in third quarter 2021 versus almost ARS 6 in the same quarter of 2020, as well as a lower dollar-denominated net liability balance.

In addition, financial asset income increased by ARS 355 million due to higher revenues -- sorry, increased by ARS 355 million due to higher financial investment that are related in pesos and higher yields. These effects were partially compensated by a lower inflation exposure again of ARS 700 million.

Finally, turning to cash flow on Slide 9. Our cash position in real terms remained stable at the level of around ARS 33 billion, equivalent to more than $330 million. EBITDA generation in the third quarter amounted to ARS 7.3 billion, out of which 64% was generated by the non (inaudible) efficiencies.

CapEx amounted to ARS 2.2 billion, and our working capital increased by the same amount. We also bought back $1.5 million of nominal value of our own debt and paid income tax of ARS 710 million. As you can see, our cash position remains robust. No debt amortization until 2025. We expect to continue generating positive free cash flow in the short term despite the continuous deterioration of (inaudible) operating margin.

That concludes our presentation, and we now turn over to Carlos who will open the floor for questions. Thank you.

Thank you, Alejandro. (Operator Instructions)

[Constantino] (inaudible). Thank you for your question. He's asking about the level of natural gasoline that we see a high price. And his question, if this price will sustain in the fourth quarter and first quarter of 2022.

Okay. [Constantino], how are you? Thank you for joining us. Okay. Regarding international prices for the next 2 quarters, our expectations are that they will remain high, will remain at a high level. It's very hard to predict that the prices (inaudible) the futures, and the market are saying that to us.

Okay. Second question is, will you share your view on the potential impact on expanding international travel line system on the (inaudible) facility.

Well, you know that this expansion is under analysis by the national government. They have (inaudible) the couple of steps in these weeks, but this expansion is very -- the country needs expansion for that to be able to evacuate all the gas that we have in Vaca Muerta. Maybe next year, without expansion, the capacity of our (inaudible) and (inaudible) pipelines will be at a limit.

Regarding the impact of the new pipeline on Cerri, it should be a positive impact. At the same time, there are different facilities under a study at Neuquén. So it may -- it's probable that the liquids coming from the new gas at Neuquén need to be processed at the (inaudible). Also, (inaudible) has a project in that respect.

Last question is on the (inaudible) impact on operations. Do we expect Cerri to capture more upside from the lower operation on the mega facility? I mean the season with high international prices.

We have this positive effect in October was just a 15-day platform that we have all reached gas -- switch of gas (inaudible).

(inaudible) question. (inaudible) question (inaudible) Vaca Muerta transportation service excluded from (inaudible) set by government.

Okay. Yes, the answer is yes, the transportation tariffs at the Vaca Muerta pipeline are not regulated, okay? Are established by us in 3 negotiations with the gas producers. What we cannot do is to discriminate, to judge different tariffs for different -- for the same distance (inaudible).

Next question is from Bruno Montanari from Morgan. Will you provide more color on the transitional tariff scheme? And if the company expects this to allow -- allow it to fully recover margins. Or will normalize transportation margin require further tariff (inaudible) ahead.

Bruno, well, that's more difficult to predict, okay? The -- regarding the conversations that we have within our gas, they just told us that they want to move the tariffs, to raise the tariffs in the first quarter of 2022. And that work on (inaudible) just started working on the tariff review. They have contracts (inaudible) consultants to work on the rent base and the cost of capital and the allowance for fuel gas. But I cannot say that we will have a normalized transportation margins in the near future, maybe in 2023, but it's difficult to predict. And as you know, inflation is very high in Argentina right now, 50%. Maybe our transitional increase in tariff, if it happens, will be double at that. But it's hard to predict.

Okay. The next question is from Ezequiel Fernández. He talked about that the OpEx have increased acquisition business quarter-over-quarter, (inaudible) in the third quarter of 2021. Any particular reason?

Ezequiel, you are talking about the increase in 2021 as compared to 2020. (inaudible) we have the pandemic situation down here as in many part of the world. So our capability to perform maintenance works were -- it's finished, okay? So you can see higher OpEx also this 2021 as compared to 2020.

Next question is from (inaudible). Can you speak to the shortage of gas for processing payments in the third quarter of 2021?

Well, [Matt], the shortage is what we were expecting. 2020 was a very positive particular year on that aspect. You know that the gas provision, gas supply for our Cerri plant in the winter is always reduced in the winter season due to the need of the large consumption center in (inaudible) for the residentials in winter.

So expected, we (inaudible) of that lack of gas to perform some replacement, (inaudible) replacement (inaudible) change to cubics. And we have one additional to be changed next year.

Next question is from (inaudible). Will you remind me what will be the (inaudible) for the (inaudible) for 2022? Also remember that you (inaudible) adjustment. What is the status of this process?

We cannot predict what is the next adjustment on -- transitional adjustment. But I was (inaudible) that this (inaudible) will be below the inflation, general inflation, but we are not releasing. As regarding the legal actions, these legal actions are in place. And if we reach our commitment with the government for this new -- the transitional agreement, in that case, we'll be obliged to suspend the actions -- those actions. And if we reach an agreement for the (inaudible) tariff revision review, in that case, we will have to withdraw all of these actions, right? But there was no change in our strategy as regards (inaudible).

Well, we do not have more questions. This concludes the question-and-answer section. Then we'll turn to Alejandro for final remarks.

Okay. Thank you, Carlos. Thank you for participating in TGS Third Quarter 2021 Conference Call. We look forward to speaking with you again when we release our fourth quarter earning 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.