Transportadora de Gas del Sur SA TGS

Good morning, my name is Laura and I will be your conference operator today. At this time, I would like to welcome everyone to TGS second quarter 2021 results earnings conference call. TGS issued its earnings report yesterday. If you did not receive a copy via email, please do not hesitate to contact TGS's investor relations department. Before we begin the call today, I would like to remind you that forward-looking statements made during today's conference call do not account for future economic circumstances, industry conditions, and the company's performance and financial results. These statements are subject to a number of risks and uncertainties. All figures included herein were prepared in accordance with the international financial reporting standards and are stated in constant Argentine pesos as of June 30th, 2021, unless otherwise noted. Joining us today from TGS in Buenos Aires is Alejandro Basso, Chief Financial Officer, Leandro Perez Castaño, Finance Manager, and Carlos Almagro, Investor Relations Officer. And now I would like to turn this call over to Mr. Basso. Sir, please, you may begin your presentation.

Thank you. Good morning, everyone, and thank you for joining us today on this conference call to discuss the 2021 second quarter earnings and highlights for Transportadora de Jabel Sur. To begin the call today, I would like to share with you some relevant news that have occurred since our last call in May. Firstly, in addressing the COVID-19 pandemic, the vaccination campaign in Argentina is currently coming out at a fast pace. More than 55% of the population have received at least one dose of vaccine, and more than 15% of the population have received two doses. The recent mass vaccination has contributed to its restriction and is expected to contribute with a partial recovery of economy activity during the second semester. It is important to remind you that TCS continues planning its operations, complying with all the protocols to keep its employees and suppliers safe. Secondly, and addressing the transportation tariffs, on May 31st, NRGAS officially notified TCS through a resolution that there would be no tariff adjustment since May, which confirmed what Enargas stated in renegotiation transition agreement sent to TCS on April 28, and which TCS did not accept. In addition, Enargas has established some interim conditions until a new integral tariff revision is finished, whose deadline is December 2022. The most relevant conditions are, one, a potential transitional tax adjustment starting April 2022, second, no mandatory investments required, and in the third place, the prohibition to pay dividends. On July the 5th, TCS filed administrative claims to the executive power, the Ministry of Economy and Mineral Gas, through which TCS requested the implementation of the pending semiannual tariff adjustment as it is determined in the Integral Tariff Revision Renunciation signed in 2017, representing a 130% increase. In the case of natural gas distribution companies, the NRGAS increased their tariffs by around 30% starting last May, which represents approximately a 6% increase in the amount to be paid by the residential consumers and a 4% increase for small and medium-sized companies. Turning to slide four, I will now briefly address some of the highlights in our 2021 second 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 June 30, 2021, following the provisions established by the IFRS for financial reporting in hyperinflationary economics. As seen on this slide, we reported a net income of 3.4 billion during the second quarter of 2021, which is higher than the 2.6 billion reported in the same quarter 2020. Total EBITDA decreased by 473 million, principally driven by 2.4 billion all of the natural gas transportation EBITDA, mostly related to the lack of the tariff adjustment. This was partially offset by a relevant increase of the liquids business, a big VA, of 1.8 billion, which is mainly due to the higher reference international prices, even when the variable cost also increased. Financial results reflected a positive variation of 3.7 billion, explained mostly by the variation of the foreign exchange rate results. Also, during the In the last quarter, income tax increased by 2.3 billion, mainly due to the higher income tax rate, which was increased by the National Congress last June to 35% for taxable income on the excess of 50 million. The previous income tax rates were 30% for 2021 and 25% for 2022 alone. Moving on to slide five, the PDA for natural gas transportation business decreased by 2.4 billion. This decline is basically explained by the 2.3 billion revenue loss generated by the annual inflation of 50%, which was not compensated by any tariff adjustment. Operating costs increased slightly by almost 3%. The revenues generated by film transportation contracts 80% of the total transportation business revenues. The average life of these contracts is more than 10 years, allowing TCS to generate a steady flow of revenues. The lack of the tariff adjustment since April 2019 under the current inflationary context has caused a continuous deterioration in our operating markets. On slide six, you can see that the DTA from the liquids business grew during the second quarter of 2021, increasing approximately $1.8 billion to almost $4.4 billion. This significant increase of more than 70% is mostly explained by higher reference international prices, which on average more than doubled and generated additional revenues of $4.2 billion. In addition, higher volumes of methane of around 35,000 metric tons contributed to higher sales of 1.2 billion. Higher volumes of propane by 16,000 metric tons were sold in the domestic market, generating an initial sales of 551 million. The average price of natural gas increased from $2.1 per million of ETU to $2.9 as a result of new reference prices in the local market which were offered by the gas producers to the government under the gas plan 4 launched at the end of last year and which started impacting TGS in May as natural gas purchase agreements with previous prices expired in April. This resulted in a high arrival cost of 1.7 billion. In addition, lower exports reduced revenues by almost 1.7 billion due to lower volumes of propane by 24,000 tons and natural gasoline by 10,000 tons. Turning to slide 7, EVDA from other services increased by 16%, mainly due to higher revenues of 305 million generated by midstream services. Most of these higher missing sales were generated by the services rendered with our gathering pipeline and conditional plan located in Balcamuata. On slide eight, we can see that financial results recorded a positive variation of 3.7 billion. This variation was mainly explained by the reduction of the foreign exchange rate loss of 2.6 billion. which was attributable to a lower increase of the exchange rate, 4% in Q2 2021 versus 9% Q3 2020, and a lower dollar-dominated net liability balance. In addition, the inflation exposure generated a higher gain of $427 million. Financial asset income increased by 363 million due to higher financial investment, denominated in pesos, and higher yields. An evaluation loss of 273 million was generated by financial derivative instruments in the second quarter of last year. Finally, turning to cash flow on slide nine, our cash position in real terms remains stable at the level around 30 billion pesos equivalent to more than $300 million. The VDA generated in the second quarter amounted to $8.2 billion, out of which 66% was generated by the non-regulated business. Capital amounted to $1.6 billion, and our working capital increased by $1.4 billion. We also purchased $2 million of our own debt, paid interest for $1.6 billion, and income tax for $1.8 billion. Our cash position remains robust with no debt amortization in the short term. We expect to continue generating positive fresh cash flow in the near future despite the continuous deterioration of the natural gas transportation EPBA. This concludes our presentation. I will now turn the call back to the operator who will open the floor for questions. Thank you.

At this time, we will be conducting a question and answer session If you would like to ask your question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question comes from the line of Constantinos Papalias with Puente. You may proceed with your question.

thank you very much have a good day and congratulations on your results i would like to refer to the liquids unit business unit i'd like to know why why was there so much liquids in the internal market when production was almost in the same levels as in the first quarter and my second question is Regarding the prices for the procurement of the natural gas, what should we expect for the next quarters? Have you made any contracts? Could you tell us about the prices of these contracts and the maturities? Thank you. Thank you very much.

Hi, Konstantinos. How are you doing? Well, as regards the liquids in the domestic market, you know that this quarter we have more demand from the domestic markets than the previous year. You know that last year we suffered a pandemic here in Argentina, so consumption was lower, and at the same time, as part of these liquids, especially the butane, has not increased in their prices, in the regulated price, so the demand has been increasing also. And the second question, regarding the contracts, we were able to sign all the contracts that we need for the next year, And also we have a couple of contracts for three years, two years more than this year. And the prices are below the reference gas plan, Argentina gas plan price.

Okay? Thank you. Thank you very much. And again, congratulations on your results.

Thank you. You're welcome.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from Martin Arante with Balance Capital. You may proceed with your question.

Hello. Martin Arante here from Balance Capital. First of all, thank you for the materials. I have two questions. The first one is also about your liquid business. As you mentioned, prices have been rising this year. I wanted to know what you expect for the rest of 2021. And in the local market, what is the price of the regulated ton of butane today, and if you expect an increase this year. And my second question is about Plangas Cuatro. Pangas 4 volumes are growing and conventional production is rising. Any expectations of the government making a decision on the new trunk pipe upgrade in 2021 or maybe after the election? Thanks.

Okay. Okay, Martín, how are you doing? As regards to the liquids, The liquids, the gas price, we expect lower prices for the spring and summer. You know that this is a seasonal business in Argentina, so you have higher prices for the winter season. So the next quarter, the current quarter, you know it's winter, July, August, and September, so prices should be higher than the previous quarter, and then it's going to go down for the spring and summer season. As regarding the regulated prices, in the propane case, the prices are quite similar to the export prices. It has a maximum price, which is the export parity. And as regarding the propane, it's around $120 per ton, so it's a quarter that it should be. As regarding the plant gas 4, we are seeing higher volumes than the previous year. um the the the volumes are growing so we are uh we are uh quite we are we are happy with with what is happening with the with the plan uh expectation for next year it will depend on the on the government fulfilling its obligations under this plan and so if it happens that we are going to to have additional volumes maybe for next year and and on

And as a follow-up question, do you have any other non-regulated projects in Vaca Muerta?

Well, we are working on the expansion of our analyzing projects for expanding our conditioning plant, FataGen, in Vaca Muerta. You know that we have a project to build a processing plant there. Currently, we're working on it, but step by step, okay? As we are analyzing how the gas demand is moving in the future.

Okay, thank you.

You're welcome, Martín.

As a reminder, if you would like to ask a question, please press star one on your telephone keypad. One moment while we pull for questions. Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Alejandro Basso for closing remarks.

Okay, thank you for participating in this year's second quarter 2021 conference call. We look forward to speaking with you again when we release our third quarter 2021 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.

Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.