Transportadora de Gas del Sur SA TGS

Recording in progress. Everyone for attending TCS fourth quarter 2021 results video conference. TCS issued its earning report yesterday. If you did not receive a copy, you do not hesitate to contact us by email. We would like to inform you that this event is being recorded and all participants will be in listen-only mode during the presentation. After the company's remarks, we will host a Q&A session. All questions will need to be submitted in writing through the Zoom 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, we are prepared in accordance with International Financial Reporting Standards, FRS, and stated in constant Argentine pesos as of December 31st, 2021, unless otherwise noted. Joining us today from TCS in Buenos Aires is Alejandro Basso, Chief Financial Officer. And now I will turn the video conference over to Mr. Basso, Alejandro. Please begin.

Thank you, Carlos. Good morning, everyone, and thank you for joining us today on this video conference to discuss the 2021 Fourth World Learnings 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 NRGAS 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 be defined by the NRGAS 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 price index between March 2019 and January 2022. It is important to mention that TCS 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 cap of 16 million, which increased the condition in plant capacity by 2.4 million square 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 conditional capacity of 6.6 million cubic meters per day in winter of 2023, surpassing a total conditional capacity of 20 million cubic meters per day. The capital allocated to this project is estimated at $82 million. All this expansion works respond to the increasing gas producers' shale gas production at Vaca Muerta and additional needs for more misting 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 investments to increase natural gas production following the convenient 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 the Resolution No. 67 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 Saliqueló in the province of Buenos Aires during the initial stage. And at the second step, it will connect Saliqueló to the south of the 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 TGS pipeline flow will be partially reverted 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 IASA, a state-owned company, to build, maintain and operate the Presidente Néstor Kirchner Pipeline. These works are essential for TGS in order to further grow its mystery business in Vaca Muerta, as well as execute other projects that TGS is currently evaluating. Turning to slide four, 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 DRAFARES for financial reporting in hyperinflationary economies. As seen on the slide, we reported net income of 6.8 billion during the fourth quarter of 2021, compared to a loss of 5.4 billion reported in the sixth quarter of 2020. Total EBITDA increased by 593 million, with the natural gas transportation EBITDA decreasing by 3.2 billion, and is explained by the lack of tariff adjustment. This negative impact was more than offset by the liquid EBITDA increase of 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 significantly, by 392 million and is related to the midstream business growth at Vaca Muerta. However, the main explanation of the bottom line positive variation of 12 billion stems from two negative accounting effects that were registered during the fourth quarter of 2020. The first one amounting 7 billion is related to the financial asset loss registered in the financial results which is included in an 8.7 billion positive variation. The second effect is related to the 4.7 billion property plan and equipment impairment. Moving on to slide five, EBITDA for natural gas transportation business decreased by almost 3.2 billion. Once again, as mentioned in the previous quarter, this EBITDA decrease measured in constant pesos is explained by the lack of the 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 is important to highlight that approximately 80% of the transportation business segment revenues have been generated by field 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 plan and equipment maintenance expense of $509 million due to the 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 $5 billion to $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 5.2 billion. Revenues also increased by 2.5 billion as export volumes rose by 27,000 metric tons, moving from 37 to 64,000 metric tons. Additionally, 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 2.6 billion higher natural gas cost, which is mostly explained by the average price increase to 2%. $2.5 per million BTU from $1.4 previously. Also, and to a lesser extent, we recorded 796 million negative variation due to monetary effects as inflation increased by more than 50% versus the 26% increase of this change rate, as well as higher export taxes of $715 million and $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 777 million generated by misting services. 636 million out of these higher misting sales were generated by the service rendered 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 Tratagena. As the annual inflation rate of 51% was higher than the annual foreign exchange rate increase of 26%, revenues were negatively impacted by 444 million. On slide 8, we can see that financial results recorded a positive variation of 8.7 billion. This variation was mainly explained by the financial asset loss of 7 billion generated in the fourth quarter of 2020. In addition, who recorded a lower foreign exchange rate loss of 2.1 billion, which was attributable to a lower increase of the exchange rate of 4% in the fourth quarter of 2021 versus 10% in the same quarter of 2020, as well as a lower dollar-denominated net liability balance. Additionally, financial asset income increased by 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 1.2 billion. Finally, turning to cash flow on slide 9, our cash position in real terms increased by 3 billion in the fourth quarter of 2021 from 37 billion to 40 billion. equivalent to around $390 million. EBITDA generated in the fourth quarter amounted to almost $12 billion, out of which more than 80% was generated by the non-regulated businesses. Capits amounted to $3.3 billion, and our working capital increased by almost $1 billion. We also bought back $1.3 million nominal value of our own debt and paid income tax of $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 capets, mostly with our cash generation. This concludes our presentation. I will now turn the word 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 it using the Zoom chat, the Q&A chat box. We will read and answer the question in the order in which they are received. Also, please make sure that your name and company are displaced to introduce to the audience. Please lower your hands once your question is answered. Should any participants need assistance, send us a message in the chat box. Please call while we call for questions. Thank you. Well, he said, I'm a lady for a woman. And he's asking about the sustainability of the higher NCL merchants. We are maintaining right now. But he's he's asking is about the trend of the international prices and the cost of gas for 2022.

Okay, thank you, Guillermo. First of all, we cannot speculate about prices. Prices are quite high right now. It will depend on the crisis in Ukraine and 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, is 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.

I'm sorry, Jeremy, but I confused you. Morgan Stanley, this is the reason that I'm asking you to Write your name and we'll work for you. The second question is regarding our level of cash and cash flow. 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 cap. Regarding the stock of cash, we expect to use it in the following years for projects that we are currently evaluating. uh growing our stratagem plant and some other related projects that we are evaluating for for uh evacuating the gas from from vaca muerta okay also it's a it's a good cash position to to be able to to pay our debt in the 2025 okay that is near is nearer than it's coming close. Okay?

Another question is from Constantino Papaglias from Puente. Hello, Constantinos. His question is regarding the level of production of liquid for 2022, our expectation. Regarding that, how much of the gas that we will purchase in 2022 is in spot and how much is contracted? We can share this information. And the other concern is regarding the lack of natural gas, the problem that is coming regarding the DLNG prices, that there is a chance that the government will import less than expected or what is needed.

Okay, hi, Constantino. Okay, regarding the production of 2022, we are expecting lower production for this year as compared with 2021. Obviously, one of the facts 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... it's not going to, you are not going to see a lower, the 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 in So I think that the spot currently, we are expecting 20% or less of our natural gas needs contracted in spot basis. And well, it's probable that Argentina will face a lack of gas in the winter, the higher prices and the And the offer will be affected. So our Argentine government, for what I know, has not already contracted the sheep 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 of margins are not going to be so significant due to the seasons.

Okay. Well, Ignacio is from Invertir en Bolsa. Well, his question is regarding perhaps it was before regarding the use of the 62 billion pesos in the reserve in our net equity. This aside from capex in the expansion of the plant, we were thinking about to repurchase shares.

Okay, well, Ignacio, how are you doing? We have no plans to further repurchase shares right now. We have no plan effective at this moment. I don't have plans for now. You know that equity reserve is an accounting issue, but I think that the... The medium term perspective for this research is to use it in these projects I already talked about, Intratagent and other projects.

Second question from Ignacio. regarding the new gas pipeline when it is expected 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 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 that moment, at least 10 million per day or something like that. Regarding the cost, well, it will depend on the bids that IASA have started. There are some figures presenting a decrease, but the actual cost will depend on those bidding processes. maybe the estimated cost in the in the in the resolutions were around 1.5 billion for the first stage and another 1 billion for a second. Okay.

Well, Raúl, hello, Raúl. He asked, his question is regarding what is the positive impact expected from the increase in transportation tariffs, the 60% that we'll receive now in March.

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 this 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 from transportation are around 20 billion pesos. So the 60% of that is 12 billion pesos in annual basis.

Okay. Hello, Jason. 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 Nargas has already started the process to review the tariff. They have nominated the University of Buenos Aires to audit our addition to fixed assets and to establish new inflation indices to adjust by inflation the rate base. surely the process should be that an increasing tariff should be placed at the beginning of next year regarding this rate-based revision and the cost of capital, op-eds and investments, cap-eds for the five-year period and then we should have a semestral adjustment if you by inflation but some index to be chosen by Nargas. That's all that I can say.

Guido Bisocero from Alaria is asking about the growth in revenues and BIDA coming from the investment in Tretaschen, 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% BDA to the capits that we are providing. building okay the other question is other project yes we have some our plan is to grow the plant with modules of around 6 million cubic meters per day and it will depend on the demand of our services we can construct one module each 18 months or maybe two modules or up to three, I would say if we have an explosion of production in Vaca Muerta. In addition, what I already mentioned in the call.

Hi, Ezequiel. Hi, Ezequiel Fernandez from Balance. He's asking regarding the capex, the 22 million capex, when it will be made, and the second 82 million when it will be spent.

Okay. Hi, Ezequiel. Well, regarding the 22 million, the cap 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 22 million, our plan is something more than 50 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 for. If we pay a premium over their prices or are they the same?

Okay. Well, up to now, we paid with a discount versus the... the price under the plant gas. But going forward, we are expecting higher prices on the plant gas, maybe 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 for most of the gas needs that we have for Surrey, our prices are lower. But going forward, the prices will have a premium.

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

Okay. There are two concepts, but the main concepts is the propane that is part of the propane. I would say around 20% of our total propane production is sold to propane, gas propane networks in several countries. 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 comes from this concept. Regarding the collection of this subsidy, the government used to pay it 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 everything paid. Okay.

Well, we don't have more questions. Well, 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.