Transportadora de Gas del Sur SA

BCBA:TGSU2

Earnings Call Transcript 2021-Q2

[Operator]

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 e-mail, please do not hesitate to contact TGS' 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.

[Alejandro Basso, Chief Financial Officer]

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 Gas del Sur.

To begin the call today, I would like to share with you some relevant news that have occurred since our last quarterly earnings call in May. Firstly, on addressing the COVID-19 pandemic, the vaccination campaign in Argentina is currently being carried 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 ease restrictions and is expected to contribute with a partial recovery of the economy activity during the second semester. It is important to remind you that TGS continues to run its operations, complying with all the protocols to keep its employees and suppliers safe.

Secondly, and addressing the transportation tariffs, on May 31st, ENARGAS officially notified TGS through a resolution that there would be no tariff adjustment since May, which confirmed what ENARGAS stated its renegotiation transitional agreement sent to TGS on April 28 and which this year 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, the potential transitional tariff adjustment starting April 2022; second, no mandatory investments required; and in the third place, the provision to pay dividends.

On July 5th, TGS filed administrative claims to the executive power, the Ministry of Economy and ENARGAS through which TGS requested the implementation of the pending semiannual tariff adjustment and it is determined in the integral tariff revision renegotiation signed in 2017, representing a 130% increase.

In the case of natural gas extrusion companies, ENARGAS 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 economies.

As seen on this slide, we reported a net income of ARS3.4 billion during the second quarter of 2021, which is higher than the ARS2.6 billion reported in the same quarter of 2020.

Total EBITDA decreased by ARS473 million, principally driven by ARS2.4 billion of the Natural Gas Transportation EBITDA, mostly related to the lack of the tariff adjustment. This was partially offset by a level increase of the Liquids business EBITDA of ARS1.8 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 ARS3.7 billion, explained mostly by the variation of the foreign exchange rate results. Also, during the quarter, income tax increased by ARS2.3 billion, mainly due to the higher income tax rate, which was increased by National Congress last June to 35% for total income on the excess of $50 million. The previous income tax rates were 30% for 2021 and 25% for 2022 and on.

Moving on to slide five, EBITDA for Natural Gas Transportation business decreased by ARS2.4 billion. This decline is basically explained by the ARS2.3 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 the transportation contracts were up 80% of the total transportation business revenues. The average life of these contracts is more than 10 years, allowing TGS to generate a steady flow of revenues. The lack of the tariff adjustments since April 2019 under the current inflationary context has caused a continuous deterioration in our operating margins.

On slide six, you can see that the EBITDA from the Liquids business grew during the second quarter of 2021, increasing approximately ARS1.8 billion to almost ARS4.4 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 ARS 4.2 billion. In addition, higher volumes of ethane of around 45,000 metric tons contributed to higher sales of ARS 1.2 billion. Higher volumes of propane by 15,000 metric tons were sold in the domestic market, generating additional sales of ARS 551 million.

The average price of natural gas increased from $2.1 per million of BTU 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 four launched at the end of last year and which started impacting this year in May as natural gas purchase agreements with previous prices expired in April. That resulted in a higher oil of ARS 1.7 billion. In addition, lower exports reduced revenues by almost ARS 1.7 billion due to lower volumes of propane by 24,000 tons and natural gasoline by 10,000 tons.

Turning to Slide 7. EBITDA for Other Services increased by 15%, mainly due to higher revenues of ARS 305 million generated by midstream services. Most of these higher midstream sales were generated by the services rendered with our gathering pipeline and conditioning plant located in Vaca Muerta.

On Slide 8, we can see that financial results recorded a positive variation of ARS 3.7 billion. This variation was mainly explained by the reduction of the foreign exchange rate loss of ARS 2.6 billion, which was attributable to a lower increase of the exchange rate, 4% in second quarter 2021 versus 9% same quarter 2020, and a lower dollar-denominated net liability balance.

In addition, the inflation exposure generated a higher gain of ARS 427 million. Financial asset income increased by ARS 363 million due to higher financial investment denominated in pesos and higher yields, and the valuation loss of ARS 273 million was generated by financial derivative instruments in the second quarter of last year.

Finally, turning to cash flow on Slide 9. Our cash position in real terms remained stable at the level around ARS 30 billion, equivalent to more than $300 million. EBITDA generated in the second quarter amounted to ARS 8.2 billion, out of which 56% was generated by the non-regulated business

CapEx amounted to ARS 1.6 billion, and our working capital increased by ARS 1.4 billion. We also purchased $2 million of our own debt paid interest for ARS 1.6 billion and income tax of ARS 1.8 billion.

Our cash position remains robust with no debt amortization in the short term. We expect to continue generating positive free cash flow in the near future despite the continuous deterioration of the Natural Gas Transportation EBITDA. This concludes our presentation.

I will now turn the call back to the operator, who will open the floor for questions. Thank you.

[Operator]

At this time we will be conducting a question-and –answer session [Operator Instructions] Our first question comes from the line of Konstantinos Papalias with PUENTE. Your may proceed with your question

[Konstantinos Papalias, PUENTE]

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 was there so much liquids in the internal market when production was almost in the same level as in the first quarter? And my second question is, regarding the prices for the procurement of the natural gas, what's the -- 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.

[Alejandro Basso, Chief Financial Officer]

Hi, Konstantinos. Well, as regard 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 the pandemic here in Argentina. So consumption was lower. And at the same time, as part of this liquids, especially the butane has now increased in -- has not increased in the enterprises in the regulated price.

So the demand has been increasing also, okay? 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 couple of contracts for three years, two years more than this year. The prices are below the reference gas plant, Argentina gas plant in price, okay?

[Konstantinos Papalias, PUENTE]

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

[Alejandro Basso, Chief Financial Officer]

Thank you. You’re welcome

[Operator]

[Operator Instructions] Our next question comes from the line of Martín Arancet with Balanz Capital. You may proceed with your question.

[Martín Arancet, Balanz Capital]

Hello. Martín Arancet here from Balanz Capital. First of all, thank you for the materials. I have two questions. The first one also about your Liquid business. As you mentioned, prices have been rising this year. I wanted to know what do 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 Plan Gas 4. Plan Gas 4 volumes are growing and commercial networks is rising. Any expectations of the government making a decision on the new trunk-like upgrade in 2021 or maybe after the election? Thanks.

[Alejandro Basso, Chief Financial Officer]

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 the summer as you know that this is a seasonal business in Argentina. So you have higher prices for the winter season. So the next quarter or the current quarter, 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, okay?

As regarding the regulated prices, well, in the propane case, the prices are quite similar to the export prices, okay? It's not -- it has a maximum price, which is less for parity. And as regarding the propane, it's around $120 per ton. So it's one -- a quarter of that it should be, okay?

Regarding the Plan Gas 4, well, we are seeing higher volumes than the previous year. And the volumes are growing. So we are quite -- we are happy with what is happening within Plan Gas 4. Expectations for next year, it will depend on the government fulfilling its obligations under this plan. And so if it happens, we are going to have additional volumes maybe for next year and on.

[Martín Arancet, Balanz Capital]

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

[Alejandro Basso, Chief Financial Officer]

Well, we are working on the expansion of our analyzing projects for expanding our conditioning plant in Tratayén in Vaca Muerta. And you know that we have a project to build a processing plant there. Currently, we're working, need to put step by step, okay, as we are analyzing how the gas demand is moving in the future.

[Martín Arancet, Balanz Capital]

Okay. Thank you.

[Alejandro Basso, Chief Financial Officer]

You’re welcome, Martín.

[Operator]

[Operator Instructions] 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.

[Alejandro Basso, Chief Financial Officer]

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.

[Operator]

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