Transportadora de Gas del Sur SA (TGS) 2021 Q4 法說會逐字稿

Good morning, everyone. I am Carlos Almagro, Head of Investor Relations. I would like to welcome everyone for attending tgs' Fourth Quarter 2021 Results Videoconference. tgs issued earnings report yesterday. If you did not receive a copy, you do not hesitate to contact us by e-mail. We would 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 videoconference 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 December 31, 2021, unless otherwise noted.

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

Thank you, Carlos. Good morning, everyone, and thank you for joining us today on this videoconference to discuss the 2021's fourth 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 relevant news that have occurred since our last quarterly earnings call in November.

To start and speaking about our Natural Gas Transportation business, the ENARGAS granted us a transitional tariff increase of 60% starting March 1 as stated in Resolution No. 60. It is worth noting that this resolution follows a public hearing, which was held on January 19, during which we requested an 80% tariff increase starting March and a second adjustment of 25% starting September of this year, both as a transitional increase previous to the one that is to defined by the ENARGAS as a result of Integral Tariff Revision, which is set to end by year-end.

The tariff increase that should be applied, if we consider the lack of increases since April 2019, should be around 224% following the evolution of the wholesale pricing that's between March 2019 and January 2022. It is important to mention that tgs is not obliged to make any mandatory investments. But at the same time, the company cannot make any dividend payment until the Integral Tariff Revision is completed.

Moving now to our midstream business segment. It is relevant to say that after the execution of the 2021 CapEx of $16 million, which increased the conditioning plant capacity in Tratayén by 2.4 million cubic meters per day, we are currently investing another $22 million to commission a new capacity increase of 7 million cubic meters per day, which is to be ready by next winter. In addition, a new model will be built during 2022 and 2023, adding new conditioning capacity of 6.6 million cubic meters per day in winter of 2023, surpassing a total conditioning capacity of 20 million cubic meters per day. The CapEx allocated to this project is estimated at $82 million.

All these expansion works correspond to the increasing gas producers' shale gas production at Vaca Muerta and additional needs for more midstream services to transport and condition the incremental gas volume before its injection in the regulated pipelines. New agreements with gas producers were already negotiated and should be signed soon. Gas producers have been making relevant investment to increase natural gas production following the [concurrent] local market price related to the gas plan launched by the government at the end of 2020. This gas plan pushed natural gas prices up to an average of $3.5 per million of BTU until 2024 and also allowed some gas producers to export to Chile during the summer season.

Finally, last month, the Secretary of Energy issued Resolution No. 67 and to create a program to begin the construction of a natural gas pipeline that will be named President Néstor Kirchner connecting Tratayén in Neuquén to our pipeline in Salliqueló in the province of Buenos Aires during the initial stage. And at the second step, it will connect Salliqueló to the south of province of Santa Fe near San Jerónimo. In addition, tgs pipeline will be extended in the north of the province of Buenos Aires from Mercedes to Cardales. The TGN pipeline flow will be partially regarded and expansions of the tgs and TGN pipelines will be carried out.

Following this resolution, the executive branch issued Decree No. 76, through which granted a 35-year concession to IEASA, a state-owned company, to build, maintain and operate the President Néstor Kirchner pipeline. These works are essential for tgs in order to further grow its midstream business in Vaca Muerta as well as execute other projects that tgs is currently evaluating.

Turning to Slide 4. I will now briefly address some of the highlights of our 2021's fourth 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 December 31, 2021, following the provisions established by IFRS for financial reporting in hyperinflationary economies.

As seen on the slide, we reported net income of ARS 6.8 billion during the fourth quarter of 2021 compared to a loss of ARS 5.4 billion reported in the same quarter of 2020. Total EBITDA increased by ARS 583 million with the Natural Gas Transportation EBITDA decreasing by ARS 3.2 billion and is explained by the lack of tariff adjustment. This negative impact was more than offset by the Liquids EBITDA increase of ARS 3.4 billion, which was mainly driven by the high international prices recorded during the fourth quarter of 2021. In addition, Other Services EBITDA also rose by ARS 382 million and is related to the midstream business growth at Vaca Muerta.

However, the main explanation of the bottom line positive variation of ARS 12 billion stems from two negative accounting effects that were registered during the fourth quarter of 2020. The first one, amounted -- amounting ARS 7 billion, is related to the financial asset loss registered in the financial results, which is included in an ARS 8.7 billion positive variation. The second effect is related to the ARS 4.7 billion property, plant and equipment impairment.

Moving on to Slide 5. EBITDA for Natural Gas Transportation business decreased by almost ARS 3.2 billion. Once again, as mentioned in the previous quarter, this EBITDA decrease measured in constant pesos is explained by the lack of tariff adjustments in April 2019. So as you can see in the slide, our operating margins have been deteriorating quarter-after-quarter. However, we expect that the recent 60% transitional tariff increase will bring some relief.

It's important to highlight that approximately 80% of the transportation business segment revenues have been generated by firm transportation contracts with an average life above 10 years, allowing us to generate a stable cash flow of nominal peso revenues. Also in the quarter, we recorded a higher property, plant and equipment maintenance expense of ARS 509 million due to pandemic slowdown in 2020.

On Slide 6, you can see that the EBITDA from the Liquids business increased in the fourth quarter of 2021 from ARS 5 billion to ARS 8.4 billion. As mentioned before, the main driver of this increase was the higher international prices, which have doubled compared to the liquid average prices recorded in the fourth quarter of 2020, thus generating higher revenues amounting to ARS 5.2 billion.

Revenues also increased by ARS 2.5 billion as export volumes rose by 27,000 metric tons, moving from 37,000 to 64,000 metric tons. Additionally, ARS 770 million revenue increase is related to a higher ethane price. This ethane price increase was due to higher natural gas prices as established in the agreement signed with PBB Polisur.

These positive effects were partially offset by a ARS 2.6 billion higher natural gas costs, which is mostly explained by the average price increase to $2.5 per million BTU from $1.4 previously. Also, and to a lesser extent, we recorded ARS 796 million negative variation due to monetary effects as inflation increased by more than 50% versus the 26% increase of the exchange rate as well as higher export taxes of ARS 715 million and ARS 405 million due to higher natural gas consumption.

Turning to Slide 5. EBITDA from Other Services increased by 36%, mainly due to higher revenues of ARS 777 million generated by midstream services. ARS 636 million out of this higher midstream sales were generated by the service vendor at Vaca Muerta as a result of the growing volume of shale gas we transported in our gathering pipeline and conditioned in our plant located in Tratayén... As the annual inflation rate of 51% was higher than the annual foreign exchange rate increase of 26%, revenues were negatively impacted by ARS 444 million.

On Slide 8, we can see that financial results recorded a positive variation of ARS 8.7 billion. This variation was mainly explained by the financial asset loss of ARS 7 billion generated in the fourth quarter of 2020. In addition, we recorded a lower foreign exchange rate loss of ARS 2.1 billion, which was attributable to a lower increase of exchange rate of 4% in the fourth quarter of 2021 versus 10% in the same quarter of 2020 as well as a lower dollar-dominated debt liability balance. Additionally, financial asset income increased by ARS 1 billion due to higher financial investment denominated in pesos and higher yields. These effects were partially compensated by a lower inflation exposure gain of ARS 1.2 billion.

Finally, turning to cash flow on Slide 9. Our cash position in real terms increased by ARS 3 billion in the fourth quarter of 2021 from ARS 37 billion to ARS 40 billion, equivalent to around $390 million. EBITDA generated in the fourth quarter amounted to almost ARS 12 million, out of which more than 80% was generated by the nonregulated businesses. CapEx amounted to ARS 3.3 billion and our working capital increased by almost ARS 1 billion. We also bought back $1.3 million nominal value of our own debt and paid income tax of ARS 714 million. As you can see, our cash position remains robust with no debt amortization until 2025. In 2022, we expect to finance our $150 million CapEx, mostly with our cash generation.

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

(Operator Instructions) Guilherme Levy from Morgan is asking about the sustainability of the higher NGL margins as we are maintaining right now. What he is asking is about the trend of the international prices and the cost of gas for 2022.

Okay. Thank you, Guilherme. First of all, we cannot speculate about prices. Prices are quite high right now. It will depend on the crisis in Ukraine and several other factors. Nevertheless, we expected that prices will remain high, maybe not at current levels but high in the near future for this year, at least. Regarding the cost of our gas consumption, the trend currently in Argentina is upside, it's going up. The prices that we saw in the first quarter are no longer to be seen in the future spring and summer season. And so we expect natural gas prices going up. But nevertheless, our margins are quite good in spite of that fact.

The second question is regarding the -- our level of cash -- cash flow. What is -- what are the options the company is evaluating to use this cash?

Okay. As I said in the call, the use of cash for this year is expected to use in our capital expenditures of around $150 million. We expect to use our future cash in that CapEx. Regarding the stock of cash, we expect to use it in the following years for projects that we are currently evaluating, growing our Tratayén plant and some other related projects that we are evaluating for evaporating the gas from Vaca Muerta, okay? Also, it's a good cash position to be able to pay our debt in 2025, okay? That is near -- is nearer than -- it's coming close.

Another question is from Konstantinos Papalias from PUENTE. His question is regarding the level of production of liquid for 2022, our expectation. And regarding that, how much of the gas that we will purchase in 2022 is spot and how much is contracted, if you can share this information? And the other concern is regarding the lack of natural gas. It's a problem that is regarding the LNG prices that there is a chance that the government will import less than expected or what is needed.

Okay, regarding the production of 2022, we are expecting lower production for this year as compared with 2021. Obviously, one of the fact is maybe the lack of enough gas for all in the winter. You know that in winter, we have a lower margin than in spring and summer. So it's not going to -- you are not going to see a lower production coming at the same level in the lower margins, okay?

Regarding the spot, we have most of the gas contracted in long-term agreements. So I think that the spot currently, we are expecting 20% or less of our natural gas needs contracted in spot basis. And well, we -- it's probably Argentina will face a lack of gas in the winter, the higher prices and the offer will be affected. So our Argentine government, for what I know, has not already contracted the LNG for this winter. So it's a problem, okay? But in the case of tgs, you can see -- you will see surely a lower production. But at the same time, the impact on margins are not going to be so significant due to the season.

Well, Ignacio (inaudible) is from Invertir en Bolsa. Well, his question is regarding perhaps it was I said before, regarding the use of this ARS 62 billion in the reserve in our net equity set aside from CapEx in the expansion of the Tratayén plant, if we were thinking about to repurchase shares.

Okay. We have no plans to further repurchase shares right now. We have no plan effective at this moment. We don't have plans for now. You know that, that equity reserve is an accounting issue. But I think that the medium-term perspective for these reserves is to use it in these projects I already talked about, in Tratayén and other projects.

The second question from Ignacio regarding the new gas pipeline. When do you expect it to start operation? And he wants to know the amount of the CapEx.

Okay, Ignacio. Well, regarding the operations, the fastest that the government is trying to be -- to have some capacity online is for winter next year. It's going to be very, very tough. It's a very tough target. But they hope to have some of the capacity for at the moment, this 10 million cubics per day or something like that.

Regarding the cost, well, it will depend on the bids that IEASA have started. There are some figures presenting the decrease. But the actual cost will depend on those bidding processes, okay? The estimated cost in the resolutions were around ARS 1.5 billion for the first stage and another ARS 1 billion for the second. Okay?

Well, [Rahul Bhat]. He asks -- his question is regarding the -- what is the positive impact expected from the increased in transportation tariffs, the 60% that we will receive?

Well, if you're talking about constant pesos, I would say that the impact will be to have some revenues, our revenues for 2022 similar to our 2021 level because we are expecting an inflation of more than 50%. And increase is 60%, but it has been put in place this month. So it will be -- and if you talk about nominal pesos, our -- in pesos, our revenues -- in historical nominal pesos, our revenues are from transportation around ARS 20 billion. So the 60% of that is ARS 12 billion on an annual basis.

[Jacek Mitic], his question is regarding the tariff adjustment for the end of the year and how it will be adjusted after that.

Okay, [Jacek]. Well, we cannot speculate a lot about that. The good news is that ENARGAS has started -- has already started the process to review the tariff. They have nominated the University of Buenos Aires to audit our addition to its assets and to establish new inflation indices to adjust by inflation the rate base. But surely, the process should be that an increase in tariffs will be placed at the beginning of next year regarding this rate base revision and the cost of capital, OpEx and investment CapEx for the 5-year period. And then we should have a semestral adjustment by inflation but some index to be chosen by ENARGAS. That's all what I can say.

Guido Bizzozero from Allaria, he's asking about the growth in revenues and EBITDA coming from the investment in Tratayén, the conditioning plant in 2022 and 2023 and if there is other expansion that we can see in the future.

Okay. Well, we expect to grow, I would say, at a rate of 25% EBITDA to our -- to the CapEx that we are building, okay? The other question is?

He's asking if there are other.

Other projects? Yes, we have some -- our plan is to grow the plant with models of around 6 million cubic meters per day. And it will depend on the demand of our services. We can construct 1 model each 18 months or maybe 2 models or up to 3, I would say, if we have an explosion of production in Vaca Muerta, in addition what I already mentioned in the call.

Ezequiel Fernández from Balanz. He's asking regarding the CapEx, the $22 million CapEx, when it will take -- when it will be made and the second, $82 million, when it will be spent.

Okay. Ezequiel, regarding the $22 million, the CapEx is already under place. The idea is to have the new capacity in service for the winter, maybe fully on August. So we are currently spending this $22 million. Regarding the $82 million, our plan is something more than $50 million for this year and the remainder for the first half of 2023. It's going to be tough to comply the target for the winter of 2023. We may have some delay regarding that project. It's not easy in Argentina right now. Okay?

Another question from Ezequiel is regarding the level of price of the gas that we pay to the gas producer regarding what the government pays under the Plan Gas 4, if we pay a premium or the prices are the same.

Okay. Well, up to now, we paid with a discount versus the price under the Plan Gas. But going forward, we are expecting higher prices under Plan Gas, maybe at 10% or 15% or up to 20% higher prices. Regarding the spot prices, okay, our contracts, we were able to put in place contracts earlier -- early last year. So our prices were lower than the -- for most of the gas needs that we have for [serving], our prices are lower. But coming -- going forward, the prices will have a premium.

Another question regarding -- Ezequiel Fernández, regarding the subsidies that we have a balance in our financial statement that if we can explain what subsidies are they, what consists of.

Okay. There are two concepts, but the main concept is the propane that is a part of the propane, I would say, around 20% of our total propane production is -- it's sold to propane -- gas propane networks in several -- through our distribution companies in several provinces, mainly in the south of Argentina, in the west and the south.

This propane is subsidized by the government. So we collect a price -- a very low price from this distribution on other companies. And the rest of the price, as compared with the export parity, is paid by the government to us. So the amount that you see in other receivables mainly came -- comes from this concept.

Regarding the collection of this subsidy, the government used to pay with a delay. But recently, we were able to collect an important part as we oblige ourselves to keep on complying with this program from the current year. So they paid us up to -- I don't remember. But maybe up to September last year, it was all -- everything paid. Okay?

Well, we don't have more questions. Well, okay, this concludes the question-and-answer section. Then we'll turn to Alejandro for final remarks. Thank you.

Okay. Thank you all for participating in tgs' fourth quarter 2021 conference call. We look forward to speaking with you again when we release our first 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.