Transportadora de Gas del Sur Q4 2023 Earnings Call Transcript

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March 6, 2024

There are 2 speakers on the call.

Operator

Good morning, everyone. I'm Carlos Del Madro, Head of Investor Relations. I would like to welcome everyone to TCS 4th quarter 2023 results video conference. ECS 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.

Operator

After the company's remarks, we will host a Q and A session, where questions will need to be submitted in writing through the Q and 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 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 Standard, IFRS, and stating in constant Argentine pesos as of December 31, 2023, unless otherwise noteworthy. 29th today from TCS in Buenos Aires is Alejandro Basso, Chief Financial Officer.

Operator

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

Speaker 1

Thank you, Carlos. Good morning, everyone, and thank you for joining us today to discuss the 2023's Q4 earnings and highlights for TCS. 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 a Decree No. 55, through which an internal tariff revision will be conducted and completed by the end of December 2024.

Speaker 1

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 purpose, a public hearing was held on January 5, during which TCS requested a 5.67 percentage tariff increase that considers what was defined in a 2017 ITR and the 2 transitional tariff increases in the past 5 years, 1 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 2 condition capacity expansions, which would increase the total capacity to 28,000,000 cubic per day by next winter following a CapEx deployment of $320,000,000 It's worth mentioning that these expansions imply the installation of 2 new modules, which can be converted to a stacked 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 Stratasya.

Speaker 1

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 Cardares pipeline, a 90 kilometers new pipeline in the north province of Buenos Aires owned by Enarson. This pipeline connects TGS's system with TGNs, 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 10,000,000 of cubic meters per day, which will increase to 15,000,000 of 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 program commissioning of the 2 compressor plants this year, which both are in the process of being built, 1 at the beginning and the other one at the end of the 1st tranche of Presinete's Turkish NAND pipeline.

Speaker 1

These 2 compressor plants will allow for additional transportation capacity by 10,000,000 cubic feet per day, almost doubling its current capacity to 21,000,000 of cubits per day. The North pipeline reversal project has been delayed during the auction process. And as such, it is probable that it will be commissioned during the 2nd semester of 2024. Needless to say, how important this project is for natural gas supplies to the northwest of 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 2,030 7, following the recent discussions with the new national authorities, we believe that we will get this sanction granted this year.

Speaker 1

Turning now to Slide 4, I will briefly address some of the highlights for the 4th quarter results of 2023. Please keep in mind that all figures presented 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 economics. As seen in the slide, we reported a net loss totaling $23,500,000,000 during the Q4 of 2023, compared to a net income of $16,700,000,000 reported for the same quarter of 2022. Even when, as you can see in the slide, the total EBITDA fell by $6,600,000,000 equivalent to a decline of 15%. The largest impact came from the negative financial results, which were partially offset by its income tax effect.

Speaker 1

This significant financial loss was due to the Argentine peso devaluation, where the U. S. Dollar exchange rate increased from ARS 3.50 to ARS 8.08 per U. S. Dollar, impacting negatively our U.

Speaker 1

S. Dollar denominated net liability position. Moving on to Slide 5. EBITDA for the natural gas transportation business was negative at €1,800,000,000 in the Q4 of 2023. This large EBITDA deterioration is mostly related with a 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%.

Speaker 1

As seen in the slide, the inflation loss effect on revenues amounted to $15,100,000,000 compared to $7,600,000,000 registered given the positive effect of the 2023 tariff increase. In addition, operating expenses increased by $4,900,000,000 and PP and E maintenance also rose by almost $800,000,000 dollars Finally, revenues grew by €917,000,000 led by additional transportation services provided during the Q4 of 2023, mostly interruptible transportation services. On Slide 6, you can see EBITDA from the Liquids business decreased by 18% in the Q4 of 2023 to €21,900,000,000 compared to €26,800,000,000 reported in the Q3 of 2022. The following negative factors impacted this business segment EBITDA. 1st, a lower international propane price of about 15%, resulting in lower revenues of DKK4.7 billion 2nd, a lower export LNG volume of 57 1,000 tonnes, representing a 50% decline when compared 57,000 to 114,000 tonnes that implied lower EBITDA for another 4,700,000,000 dollars It surprised a lower volume of ethane amounting to 21,000 tons, a 19% decrease from 110,000 tons to 89,000 tons, resulting on lower revenues of €2,200,000,000 And in the 4th place, a 15% lower price of ethane, reducing revenues by €2,100,000,000 The monetary effect, together with the lower average cost of natural gas, which dropped from $3.1 per million BTU to 2.4 dollars per million of BTU partially compensated the negative impact by $4,500,000,000 and $3,700,000,000 respectively.

Speaker 1

Turning to Slide 7. EBITDA from Midstream and Other Services rose more than 130 percent to $19,000,000,000 compared to $8,100,000,000 Higher revenues resulted from the incremental volume of natural gas transported and condition in Vaca Muerta amounted to $11,600,000,000 transported natural gas volume rose from an average of 14,000,000 of cubic feet per day in Q4 of 2022 to 23,000,000 of cubic feet per day in 2023's quarter, while natural gas conditioning volume increased from an average of 8,000,000 of cubic feet per day to 15 1,000,000 of units per day. In addition, during the Q4 of 2023, €1,500,000,000 revenue was generated by services provided to Enarson in relation to the operational maintenance of the Netoce Tenerg and the Barcelo del Caballe 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 2,000,000,000 monetary effect loss.

Speaker 1

On Slide 8, as seen, the financial results, we just registered a negative variation of $63,700,000,000 This variation was mainly explained by a higher foreign exchange rate loss of $89,100,000,000 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 result variation of $43,600,000,000 These effects were partially offset by a higher financial asset income totaling $72,500,000,000 mostly resulting from higher nominal yields of our peso denominated financial investments 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 real terms rose in the Q4 of 20.3 by $114,000,000,000 to $437,000,000,000 which is roughly the equivalent to $542,000,000 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 Q4 amounted to €39,100,000,000 totally generated by the non regulated business as the transportation business EBITDA was negative by €1,800,000,000 CapEx for the period amounting to €43,800,000,000 And in the quarter, the bond coupon of $7,500,000,000 was paid.

Speaker 1

We obtained short term loans, amounted to $7,300,000,000 while the working capital increased by $277,000,000 Income tax advance payments totaled $2,700,000,000 As you can see, we maintained a comfortable level of cash position, which gives 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.

Operator

Thank you, Alejandro. Recording stopped. Recording in progress. Thank you, Alejandro. The floor is now open for questions.

Operator

If you have questions, please send us 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. Please hold while we poll for questions. We're sorry, but we have some problem with the connection.

Operator

Well, Qumie, we have some problem with the connection. As I told you, well, 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.

Speaker 1

Well,

Operator

the first question is from Carlos Morales from Omar Saarin, who Idugo. One question is regarding the tariff increase, the natural gas transportation. We have an estimate when this could be decided. This is the first question.

Speaker 1

Okay. Carlos, sorry for the delay. Regarding the tariff increase, natural gas transportation, currently, the Energas 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 was is going to be a good increase for us, but we cannot anticipate any decision right now. The decision is we were told that the decision is going to be taken in the next days.

Speaker 1

So we are expecting it with very, very anxiously.

Operator

The second question, regarding liquids, if we take for this Q1 in 2020 4, the volumes exported will be lower than the Q1 of 2023.

Speaker 1

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. We do what we are we do have we already did have this quarter is lower volumes in the same due some operational problems that DAO had.

Speaker 1

Nevertheless, we have a take or break contract, so we should be compensated for these lower volumes taken by ITAU maybe at in June this year.

Operator

Here, we have a question from Florencia Maciorga. What do you do, Florencia? His first question is regarding the our strategy with our bond that expired in 2025 and that given that this sixty-forty rule is no longer in place, which will be our strategy?

Speaker 1

Florencia, how are you doing? Well, regarding the bond, we are working on the strategy. Our idea is to go ahead with a new issue and a 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.

Operator

We have some questions that were answered regarding the same, the export of LPG and the decline. Any news regarding the LNG project, Lucid terminal?

Speaker 1

Sorry, I was muted. Have just finalized the analysis that we run with the engineering companies, and we are right now, we are analyzing the next steps.

Operator

Okay. Next question from Christian Ferra. Regarding the delay of the NASA Northern Front pipe reversal, if we take some kind of shortage in the gas supplies at the Sarek complex during winter?

Speaker 1

Well, in fact, these volumes of the country will not be provided by the gas producers to the northern part of Argentina should be replaced by LNG, additional LNG or additional liquids fuel, okay? So if the government is able to replace these volumes with the liquids on LG, in that case, we will not in Surrey. But it will depend on the 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 CEREC.

Operator

Good morning, Lorena and Rex for you. Well, here, there's confusion. In fact, she's asking about the tariff increase. 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 integral the transition tariff increase is will come in the coming days, okay?

Operator

Well, here from Pedro Nokkar, from that insecurity, his question is regarding the LNG plant project.

Speaker 1

Regarding the LNG planned project at Ataschen, we will start sooner with the study of the engineering cost and other cost to be able to take the decision to 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 at the end of this of 2024. The LNG plan is the same. It's such the same decision, the same work that we have to do.

Operator

Here is a question from Chelsea Colom for you. Her question is regarding that if we will receive after the first transitory adjustment, we will receive monthly tariff increases.

Speaker 1

Okay. Chelsea, the answer is yes. The Enagas is establishing a new methodology to adjust the tariff monthly after the 1 short 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 forward.

Operator

About the how much it was spent for 2024 regarding revenues and if the contract is in pesos or dollars?

Speaker 1

Jorge, how are you doing? Revenues coming from that contract are around $3,000,000 and EBITDA, dollars 1,000,000 The contract is mostly in pesos. Okay. Well, in fact, we have some a cargo that was expected for the end of December that was deferred to January. And also, we had some lack of gas supply, sorry, this quarter due to different maintenance that the gas producers have to have to do in their systems, in their fields.

Operator

Next question is from David Pardo. You expect to fund the CAPPET program with operating cash flow or is it to issue that?

Speaker 1

David, how are you doing? For 2024, we expect to fully fund our CapEx with our own generation operating cash flow. Next year, we will see, okay, because if we roll this LPG project so ahead, we are going to need to issue a new debt of it for loans.

Operator

A question from Chelsea Colom. Why was the same price lower, thinking that it was fixed to the contract with Pire Polisul?

Speaker 1

Okay, Chelsea. No, the reason for that is that the ethane price has a pass through of the natural gas that we purchased. So as natural gas prices went down this last month, the price of the thing is lower also. It's not a fixed price, okay? It's variable depending on the natural gas price.

Operator

One question from Ivan Cavazza from Compa Group. Regarding how much additional revenue would imply the commissioning of Mercedes and Carnalec pipe for this year?

Speaker 1

Ivan, it's not a significant amount. I don't have the figures right now, but it's not very significant amount, maybe $1,000,000 per year or something like that.

Operator

And the other question is the reversal of this year pipeline, will you like some additional revenue for senior years?

Speaker 1

Not in a direct way, but we will have additional revenues in our Vaca Muerta transport and conditioning services, okay? Because this traditional gas is flowing through the systems, TCN, the network station or TCSs. In that case, part of the gas or most of that gas should be treated and transported at our gathering and conditioning facilities in Vaca Muerta.

Operator

When the same volumes will be progressed?

Speaker 1

In fact, the ethane volumes had has been normalized since February 20, something like that.

Operator

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

Speaker 1

Okay. Thank you for participating in TGS' Q4 2023 conference call. We look forward to speaking with you again when we release our Q1 2024 results. If you've got any follow-up questions in the meantime, please do not hesitate to contact our Investor Relations department. Have a good day.

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Earnings Conference Call
Transportadora de Gas del Sur Q4 2023
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