Transportadora de Gas del Sur SA (NYSE:TGS) Q3 2021 Earnings Conference Call November 9, 2021 9:00 AM ET

Company Participants

Carlos Almagro - IR
Alejandro Basso - CFO & VP, Administration, Finance and Services

Conference Call Participants

Carlos Almagro

Thank you for waiting. I'm Carlos Almagro from [indiscernible], and we will like to welcome anybody to this year's third quarter 2021 [indiscernible] conference. This is issued its [indiscernible] report yesterday. If you did not receive a copy via email, please do not hesitate to contact us. We 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 virtual 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, IFRS, and stating in constant [indiscernible] pesos as of September 30, 2021, unless otherwise noted.

Joining us today from TGS in Buenos Aires is Alejandro Basso, Chief Financial Officer; Leandro Perez Castaño, Finance Manager. And now I, will turn the conference over to Mr. Basso. Alejandro, please begin.

Alejandro Basso

Thank you, Carlos. Good morning, everyone, and thank you for joining us today on this conference to discuss the 2021's third quarter earnings and highlights for Transportadora de Gas del Sur. To begin the call today, I would like to share with you some [indiscernible] news [indiscernible] since our last earnings call in August. Firstly, as a result of increasing natural gas production, Vaca Muerta, driven by higher prices of natural assets due to the gas plant on trade government at the end of 2020, we made $16 million CapEx in our natural gas conditioning plant placed in [indiscernible]. This investment allow us to more than double its natural gas liquids triple capacity from 600 cubics per day to 1,100 cubics per day. Thus providing us to increase our capacity condition and higher volume natural gas of 7.8 million cubics per day from 5.4 cubics per day. In addition, we signed new agreements with gas producers, allowing us in terms of sport and conditioning, higher volumes of [indiscernible]

We are very excited to have reached such a milestone in our midstream business, and we hope to continue expanding our infrastructure and closing new agreements with gas producers.

Secondly, in terms of natural gas on potential tariffs and I'll just start working with years normally when we find a potential, the additional tax increase to be ramped at the beginning of 2022 in compliance with what and are just established last May.

I should remind you that this year, it's not a place to make any one of the investment, but at the same time, the company cannot make any new payment until [indiscernible] provision responded.

Thirdly, as a result of [indiscernible] contracts with a capacity of 5 million cubics per day that we aspired 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, October, we walked back around 2035 bond with a face value of $2.8 million. As a result, we currently hold $22.4 million of our bonds in trade.

Turning to Slide 4. I will now briefly address some of the highlights in our 2021's third quarter results. To remind you, all peers presented this quarter and comparison span in the previous quarters are expressed in constant pesos as of September 30, 2021. Following the provisions established by the IFRS for financial reporting in the inflationary economies.

As seen on the slide, we reported a net income of ARS 4.4 billion during the third quarter of 2021 compared to almost ARS 600 million reported in the same quarter of 2020. Total EBITDA decreased by ARS 3.1 billion, mostly due to the [indiscernible] ARS 2.6 billion decline of natural gas transportation EBITDA and is almost totally related to the [indiscernible]. In addition, the Liquids business EBITDA also fell by around ARS 900 million. It is worth mentioning that liquids business EBITDA nature during last year's third quarter was particularly calm as natural gas cost was very low, and we were able to export about 65,000 metric tons of LPG when we usually export much lower volume in the third quarter premium [indiscernible] it is winter season [indiscernible] slower [indiscernible] natural gas as such.

However, financial results created a positive variation of ARS 7 billion which more than offset the total EBITDA decline venture before. It is 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 relation in 2021 quarter was much lower.

Moving on to Slide 5. EBITDA to natural real transportation business increased by almost ARS 2.6 billion. Once again, this has happened since 2019 when we received the last time increase. The decline is only explained by the lack of the time to adjust by operating in [indiscernible] with [indiscernible].

Therefore, our operating margins have been deteriorating quarter after quarter. However, most of transportation revenues having generated ARS 18 million contract with an average life about 10 years, allowing us to generate a stable flow from the [indiscernible].

The positive variation was the ARS 131 million increase due to the higher natural gas volume transported and in charge of transportation volumes. On Slide 6, you can see that the bid for the Liquids business declined in the third quarter of 2021 from ARS 4 billion to ARS 3.1 billion. As we mentioned before, the EBITDA rate in the third quarter of 2020 was high due to the low cost of natural gas and the high level of export volume.

In the case of natural cost, in fact, it's mainly due to increase from $2.2 to $4 per million BTU, declining EBITDA ARS 3.3 billion. In addition, lower volume of liquids sold generated a negative variation of ARS 2.1 million, of which ARS 1.2 million, corresponding to lower volume responded to [indiscernible] down from 66,000 tonnes to only a maybe 8,000 metric tonnes. And we also recorded a decline of almost ARS 900 million due to a lower sales effect, which fell from 101,000 to 80,000 metrics. Now the negative factor was the ARS 1 million loss generated by the monetary effect of the annual inflation of 6% and the foreign exchange rate that will increase to 3%. Higher rental prices positively impacted our revenues by ARS 2.8 billion as well as higher than prices increased sales by ARS 1.1 billion. This same price adjustment was related to increase of natural cost as it this established in the recent signed with [indiscernible] Due to the lower volume of liquids sold in the third quarter of 2021, we purchased a lower volume of natural gas, which reduced variable costs by ARS 1.8 billion.

Turning to Slide 7. EBITDA from the other services increased by 37%, mainly due to higher revenues of EUR 600 million, generated by midstream services. Most of these higher midstream sales were generated by the services [indiscernible] as a result of loan volume of TGS was transported in our talent packaging and conditions in our plant located in [indiscernible].

In addition, we generated higher revenues of ARS 86 million due to some construction services. The annual inflation rate of 82% was higher than the annual foreign exchange rate increase of 33%. Its revenues were negatively impacted by ARS 322 million.

On Slide 8, we can see that the financial results reported a positive variation of ARS 7 million. This variation was mainly explained by the financial asset loss of ARS 4.6, million generated in the third quarter of 2020. In addition, we recorded a lower core tax rate loss of ARS 2.7 billion, which was attributable to a lower increase of exchange rate ARS 6 in third quarter 2021 versus almost ARS 6 in the same quarter of 2020 as well as a lower dollar remaining net liability balance.

In addition, financial asset income increased by ARS 355 million due to higher revenues sorry, increased by ARS 375 million due to higher financial investments than organized in pesos and higher yields. These effects were partially compensated by a lower inflation exposure again of ARS 700 million.

Finally, turning to cash flow on Slide 9, our cash position in real terms remained stable at the level of around ARS 33 billion, equivalent to more than $330 million. EBITDA generation in the third market -- third quarter amounted to ARS 7.3 billion, out of which was generated by the non-primary efficiencies.

CapEx amounted to ARS 2.2 billion, and our vertical increased by the same amount. We also back $1.5 million of nominal value of our own debt and pay income tax of ARS 710 million. As you can see, our cash position remains for us. No debt amortization until 2025. We expect to continue generating positive free cash flow in the short term despite the continuous deterioration of [indiscernible] operating margin.

That concludes our presentation, and we have turn it over to Carlos who will open the floor for questions. Thank you.

Question-and-Answer Session

A - Carlos Almagro

Thank you, Alejandro. [Operator Instructions]. Constantino, he's asking about the level of natural gasoline that we see a high price and the question is this price will sustain in the fourth quarter and the third quarter in 2022.

Alejandro Basso

Okay. Constantino, how are you? [indiscernible] Okay. Regarding international prices for the next two quarters, our expectations are that they will remain high, at a high level. It's very hard to predict that as prices, but the futures, the market are saying that to us.

Carlos Almagro

Okay. Second question is will you share your view on the potential impact on expand international travel line system on the surveillance sharing facility. Well, you know that this expansion is under analysis by the national government. They have even the couple of steps in these weeks, but this expansion is very -- the country is, this expansion for that to be able to evacuate all the gas that we have in bank. Maybe next year, without expansion, the capacity of our ECM and DCS pipelines were -- will be a limit.

Alejandro Basso

Regarding the impact of the new pipeline on [indiscernible], it should be a positive impact. At the same time, there are different facilities under a study at the [indiscernible]. So it may -- it's probable that the liquids coming from the new gas is need to be processed at the [indiscernible] also PGS case project in that respect.

Carlos Almagro

Last question is on the [indiscernible] impact on operations. We expect [indiscernible] to capture more outside from the lower operation of the meta facility. I mean the season with high international prices.

Alejandro Basso

We have this positive effect in October was just a 15-day platform that we have all reach switch of gas at serves a huge [indiscernible]

Carlos Almagro

Your question. [indiscernible] transportation service excluded from the timing set by the government?

Alejandro Basso

Okay, yes, the answer is yes, the transportation tariffs in the Vaca Muerta pipeline are not regulated, okay? Are established by us in 3 negotiations with the gas producers. What we cannot do is to discriminate, to judge different times for different from the same distance on the [indiscernible].

Carlos Almagro

Next question is from Bruno Montanari from Morgan Bank. Will you provide more color on the transitional type scheme. And if the company expects this to allow -- allow it to fully recover the margins. We will normalize transportation margin require for the [indiscernible] highs ahead.

Alejandro Basso

Hi, Bruno. That's more difficult to predict, okay? The -- regarding the conversations that we have within our gas, they just told us that they want to move the damage to [indiscernible] and in the first quarter of 2022. And that work on [indiscernible] started working on the tariff review contracts and on consultants to work on the rent base, the cost of capital and the allowance for field. But I cannot say that we will have a 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 increase in tariff, it happens, it will double at dollar [indiscernible] it's hard to predict.

Carlos Almagro

Okay. The next question is on [indiscernible] The OpEx have increased on potential business quarter-over-quarter, [indiscernible] in the third quarter of 2021. Any particular reason?

Alejandro Basso

You are talking about the increase in 2021 as compared to 2020. Brenda will have the pandemic situation down here as in many parts of the world. So our capability to on maintenance works were -- it's finish, okay? So we can see higher OpEx also this Page 21 as compared to 2020.

Carlos Almagro

The question is from [indiscernible] Can you speak to the shortage of last for processing billions in the third quarter 2021?

Alejandro Basso

Well, Matt, the shortage is what we were expecting. 2020 was a very positive particular year on that aspect. You know that the gas provision that supply for our solid plant in the winter is always reduced in the winter season due to the need of the large consumption center in [indiscernible]. So expected, we took in touch over that lack of gas to perform replacement, very importantly, replacement that we changed to [indiscernible] and we have one additional to be changed next year

Carlos Almagro

Next question is from Agustin [indiscernible] will you remind me what will be the share for the remaining study for 2022? Also remember that you will [indiscernible] for the number of value adjustment, what is the status of this process?

Alejandro Basso

We cannot predict what is the next adjustment on transition adjustment. But I was [indiscernible] that this will be below the inflation, general inflation, but we are not releasing. As regarding the legal actions, these legal actions are in place. And if we reach our amendment with the government for this new, the transitional agreement in that case will be obliged to suspend the attraction, those actions. And if we reach an agreement for the data tariff revision review, that case, we will have to grow all these actions, but there was no change in our strategy as regards [indiscernible]

Carlos Almagro

Well, we will not have more questions. This concludes the question and answer section. Then we'll turn to Alejandro for final remarks.

Alejandro Basso

Okay. Thank you, Carlos. Thank you for participating in TGS third quarter 2021 cost this fall. We look forward to speaking with you again when we release our fourth quarter earnings results. However, if you have any questions in the meantime, please do not hesitate to talk our Investor Relations department with any questions. Have a good day.