Transportadora de Gas del Sur SA TGS

Good morning, everyone, and thank you for waiting. I'm Carlos Almagro from IR, and we would like to welcome everyone to TCS Third Quarter 2021 Result Videoconference. TCS issued its report yesterday. If you do not receive a copy via email, please do not hesitate to contact us. We inform you that this event is being recorded and all participants will be in listen-only mode during the presentation. After the company remarks, we will host a Q&A session. Starting this quarter, we will 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 our new 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, FRS, and stated in Constant National Times Pesos as of September 30, 2021, unless otherwise noted. Joining us today from TCS in Buenos Aires is Alejandro Basso, Chief Financial Officer, and Leandro Pérez Castaño, Finance Manager. 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 third quarter earnings and highlights for Transportadora de Jardín Sur. To begin the college day, I would like to share with you some relevant news and cup of cards since our last quarter earnings call in August. Firstly, as a result of increasing natural gas production at Bata Muerta, driven by higher prices of natural gas attributable to the gas plant, launched by the government at the end of 2020, we made a $16 million cap in our natural gas conditioning plant, placed in Tata Geno. This investment allowed us to more than double its natural gas liquid treatment capacity from 600 qubits per day to 1,000 400 cubic meters per day, thus preventing us to increase our capacity to condition a higher volume of natural gas of 7.8 million cubic meters per day from 5.4 cubic meters per day. In addition, we signed new agreements with gas producers, allowing us to transport and condition higher volumes of natural gas at Baca Monaco. We are very excited to have reached such a milestone in our industry and business, and we hope to continue expanding our infrastructure and closing new agreements with gas producers. Secondly, in terms of natural gas and potential tariffs, EnerGas started working with FGTS in order to define a potential transitional tariff increase to be granted at the beginning of 2022 in compliance with what EnerGas established last May. I should remind you that DGS is not obliged to make any mandatory investment, but at the same time the company cannot make any dividend payment until the territory revision is completed. Thirdly, as a result of having firm transportation contracts with a capacity of 5 million qubits per day that will expire 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 and October, we bought back our own 2025 bond with a face value of $2.8 billion. As a result, we currently hold $22.4 billion of our bond in treasury. Turning to slide four, I will now briefly address some of the highlights in our 2021's third quarter results. To remind you, all fields presented in this quarter and comparisons made with the previous quarters are expressed in constant pesos as of September 30th, 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 4.4 billion during the third quarter of 2021, compared to almost 600 million reported in the second quarter of 2020. Total EBITDA decreased by 3.1 billion, mostly due to the only 2.6 billion decline of the natural gas transportation EBITDA, and is almost totally related to the lack of the tariff adjustment. In addition, the liquids business MDA also fell by around 900 million. It is worth mentioning that liquids business MDA generation during last year's third quarter was particularly high, as natural gas cost was very low and we were able to export about 65,000 effective tons of LBG when we usually export a much lower volume in the third quarter period, considering that it is winter season and liquids production is slower. However, financial results created a positive variation of 7 billion, which more than offset the total VDI decline mentioned 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 the valuation in 2021's quarter was much lower. Moving on to slide five, the PDA for natural gas transportation business decreased by almost 2.6 million. Once again, as it has happened since 2019, when we received the last tax increase, The decline is only explained by the lack of a tariff adjustment while operating in an economy with high inflation. Therefore, our operating margins have been deteriorating quarter after quarter. However, most of our transactional revenues have been generated by dreams of efficient contracts with an average life of about 10 years, allowing us to generate a stable flow of monolithic sororities. A positive variation was the 131 million clearing increase due to the high natural gas volume transported under the interrupted transportation conditions. On slide 6, you can see that the VDA from the liquids business declined a third quarter of 2021 from 4 billion to 3.1 billion. As we mentioned before, the VDA generated in the third quarter of 2020 was high due to the low cost of natural gas and the high level of LPGX force volume. In the case of natural gas cost, the impact is mainly due to the increase from $2.2 to $4 per million BTU, declining a VDA of $3.3 billion. In addition, lower volume of liquids sold generated a negative variation of 2.1, of which 1.2 corresponded to lower volume of supported fuel regime, down from 66,000 tons to only 8,000 tons. And we also recorded a decline of almost 900 million due to a lower size of the tank. which fell from 101,000 to 80,000 metric tons. Another negative factor was the one billion loss generated by the monetary effect of the annual inflation of 50% and the foreign exchange rate annual increase of 50%.

Thank you.

Higher international prices positively impacted our revenues by 2.8 million, as well as higher ETH prices increased sales by 1.1 million. This ETH price adjustment was related to increased natural gas costs, as it is established in the agreement signed with BBB Policy. Due to the lower volume of liquid sold in the third quarter of 2021, we purchased a lower volume of natural gas, which reduced variable costs by 1.8 billion. Turning to slide seven, the PDA from the other services increased by 37%, mainly due to higher revenues of 600 million generated by midstream services. Most of these higher mystery sales were generated by the services, Prandtl and VacaWater, as the result of low volume of shale gas we transported in our current pipeline and conditioned in our plant located in Travesia. In addition, we generated higher revenues of 86 million due to some construction services. As the annual inflation rate of 52% was higher than the annual foreign exchange rate increase of 33%, its revenues were negatively impacted by 322 million. On slide 8, we can see that financial results recorded a positive variation of 7 billion. This variation was mainly explained by the financial asset loss of 4.6 billion generated in the third quarter of 2020. In addition, we recorded the lower foreign exchange rate loss of 2.7 billion, which was attributable to a lower increase of exchange rate, 3 pesos in third quarter 2021 versus almost 6 pesos in the same quarter of 2020. as well as a lower dollar terminated net liability balance. In addition, financial asset income increased by 355 million due to higher revenue, sorry, increased by 355 million due to higher financial investment denominated in pesos and higher yields. These effects were partially compensated by a lower inflation exposure gain of 700 million. Finally, turning to cash flow, on slide 9, our cash position in real terms remains stable at the level of around 33 billion pesos, equivalent to more than $330 million. MPTA generation in the third quarter amounted to $7.3 billion, out of which 64% was generated by the non-regulated businesses. Capits amounted to $2.2 billion, and our earning capital increased by the same amount. We also bought back $1.5 million nominal value from our own debt and paid income tax for $710 million. As you can see, our cash position remains robust, with no debt amortization until 2025. We expect to continue generating positive free cash flow in the short term, despite the continuous deterioration of the natural capital rotation operating margin. This concludes our presentation. I will now turn the floor to Carlos, who will open the floor for questions. Thank you.

Thank you, Alejandro. The floor is now open for questions. If you have a question, please send us through Zoom chat. We will read and answer them in the order in which they are received. Also, please make sure your name and company are explained to introduce you to the audience. Please lower your hand once your question is answered. Should any participants need assistance, send us a message in the chat box. Please call while we hold for questions. Well, Constantino Papaglias from Puente. Thank you for your questions. He's asking about the level of natural gasoline that we see a high price. And his question is if this price will sustain in the fourth quarter and the third quarter of 2022.

Okay, Constantino, how are you? Thank you for joining us. Okay, regarding international prices for the next two quarters, our expectations are that they will remain high. It's very hard to predict the prices, but the futures and the market are saying that to us.

Second question is Could you share your view of the potential impact of expanding the national truck line system on the Surrey NCL facility?

Well, you know that this expansion is under analysis by the national government. They have given a couple of steps in these weeks. But this expansion is very, the country needs this expansion to be able to evacuate all the gas that we have in Guacamole. You know, maybe next year, without expansion, the capacity of our TGN and TGS pipelines will be at the limit. Regarding the impact of the new pipeline on Surrey, it should be a positive impact. At the same time, there are different facilities under study at Neuquen, so it's probably that the that the liquids coming from the new gas in the pen is going to be processed at the wellhead, right? Also TGS has a project in that respect.

Last question is how did the mega maintenance impact our operations? We expect survey to capture more upside from the lower operation on the mega facility and in a system with high international prices.

We had this positive effect in October, but it was just a 15-day impact.

We have more rich gas, richer gas at that survey, but it's not a huge impact. Okay, the next question. Jacek Simic, thank you for your question. Is the Vaca Muerta transportation service excluded from tariffs set by the government?

Okay, hello, Jacek. Yes, the answer is yes. The transportation tariffs at the Vaca Muerta pipeline are non-regulated. They are established by us in free negotiations with the gas producers. What we cannot do is to discriminate, to charge different tariffs for the same distance. And the tariffs are dollars.

Next question is from Bruno Danari, from Holland. Could you provide more follow-up on the transitional tariff scheme, and if the company expects this to allow it to fully recover margins? would normalize transportation margin required further than it hides ahead?

I don't know. Well, that's more difficult to predict. Okay. Regarding the conversations that we have with Nargas, they just told us that they They want to move the tariffs, to increase the tariffs, and in the first quarter of 2022, and then to work on, and they have just started working on the tariff review. They have contracted a couple of consultants to work on the red base and on the tariff. the cost of capital and the allowance for fuel. But I cannot say that we will have 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 transition and increasing data, if it happens, will be lower than that. But it's hard to predict.

Okay, the next question is from Ezequiel Fernandez. He talked about that the op-eds have increased transportation business, quarter over quarter, materially, building third quarter in 2021. Any particular reason?

Oh, well, you, hi, Ezequiel. You're talking about the increase in 2021 as compared to 2020. In 2020, we have the pandemic situation down here as in many parts of the world, so our capability to perform maintenance works where it's finished. Okay, so you can see higher op-eds all through this 2021 as compared to 2020.

Next question is from the man. Can you speak to the shortage of gas for processing experience in the third quarter of 2021?

Well, hi Matt. The shortage is what we were expecting. 2020 was a very positive, particular year in that respect. You know that gas gas provision, gas supply for our serving plant in the winter is always reduced in the winter season due to the need of the large consumption center in Buenos Aires for the residents in winter. So it's expected we will come in touch with that lack of gas to perform some replacement, very important replacement at the our solar plant will be changed to turbines. And we have one additional to be changed next year.

This question is from Agustin, Buonasora. Will you remind me what will be the assessment for the related study for 2022? Also, I remember that you were about to start legal actions for the lab of study and assessment. What is the status of this process?

Hi, I'm Steve. We cannot predict what is the next adjustment or the next transition adjustment. But I was saying that it surely will be below the inflation, the annual inflation. But we cannot predict it. As regarding the legal actions, these legal actions are in place. And if we reach an agreement with the government for this new transition agreement, in that case, we'll be obliged to suspend those actions. And if we reach an agreement for the tariff revision review, in that case, we will have to We don't have more questions.

This concludes the question and answer section.

Then we will turn to Alejandro for final remarks.

Okay, thank you, Carlos. Thank you for participating in this year's third quarter of 2021. We look forward to speaking with you again when we release our fourth quarter 2021 results. However, if you have any questions in the meantime, please do not hesitate to contact our Investor Relations Department.