Transportadora de Gas del Sur SA

BCBA:TGSU2

Earnings Call Analysis

Earnings Call Transcript 2021-Q4

[Operator]

Everyone for attending this year's Fourth Quarter 2021 results video conference. This year's issued its earnings report yesterday. If you did not receive a copy, please 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 were prepared in accordance with International Financial Reporting Standards, IFRS, and are stated in constant Argentine pesos, as of December 31st, 2021, unless otherwise noted. Joining us today from [Indiscernible] in Buenos Aires is Alejandro Basso, Chief Financial Officer. And now I will turn the video confidence over to Mr. Basso, Alejandro. Please begin.

[Alejandro Basso, Chief Financial Officer]

Thank you, Carlos. Good morning, everyone. And thank you for joining us today on this video conference to discuss the 2021's Fourth Quarter Earnings 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, I'm speaking about our natural gas transportation business; the ENARGAS plant gas, a transitional tariff increase of 60% starting March 1st as stated in resolution number 60. It is worth noting that this resolution follows a public hearing, which was held on January 19, in 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 ENARGAS as a result of integrity 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 we around 224% following the evolution of the wholesale pricing that's between March 2019 and January 2022. It is important to mention that this year's is not obliged to make any mandatory investments, but at the same time, the company cannot make any [Indiscernible] on payment until Integral study's revision is completed. Moving now our midstream business segment, it is relevant to say that after the execution of the 2021 CapEx of ARS 16 million, which increased the condition in plant capacity [Indiscernible] by ARS 2.4 million [Indiscernible] per day. We are currently investing another ARS 22 million to commission a new capacity increase of ARS 7 million actives per day, which is to be ready by next winter. In addition, a new model will [Indiscernible] during 2022 and 2023 having new conditioner capacity of 6.6 million cubic meters [Indiscernible] in winter of 2023, surpassing a total condition on capacity of 20 million of [Indiscernible] per day. The CapEx allocated to this project is estimated at ARS 82 million. All this expansion works was found to the increase in customer users cellulose production at Vaca Muerta, and additional needs for more missing services to transport on condition, the incremental gas volume before it's injection in the regulated pipelines. New agreements with gas producers were already negotiated and should be signed soon. Gas producers having making relevant investment to increase natural gas production following the [Indiscernible] local market price related to the gas plant launched by the government at the end of 2020. This gas plan pushed natural gas prices up to an average of ARS 3.5 per minimum BTU on the 2024 and also allowed some gas producers to export to treated you in the summer season. Finally, the smallest facilities you're off energy issued resolution number 67 to create a program to begin the construction [Indiscernible] pipeline that we renamed [Indiscernible] connecting [Indiscernible] open to our pipeline in [Indiscernible] in the promise of Buenos Aires during the initial stage. And are the second step, it will connect [Indiscernible] to the south of province of Santa Fe near San Genorimo near [Indiscernible]. In addition, DCS pipeline will be extended in the north of the province of Buenos Aires from [Indiscernible] that this year in spite, flow will be partially regarded on expansions of TCS and [Indiscernible] and pipelines will be carried out. Following these resolution that 60 branch issued decree numbers 76 through which granted a 35-year concession to [Indiscernible] company to be maintained an operator, the president [Indiscernible] traditional pipeline. This works are essential for TCS in order to further its missing business in Vaca Muerta, as well as execute other projects that this year is currently evaluating. Turning to Slide 4, I will now briefly address some of the highlights of our 2021's fourth 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 December 31, 2021. Following the provisions, studies by IFRS for financial reporting and hyperinflationary economies. As seen on the slide, we reported net income of ARS 6.8 billion during the fourth quarter of 2021, compared to a loss of ARS 5.4 million reported in the same quarter of 2020. Total EBITDA increased by ARS 593 million with a natural gas transportation EBITDA decreasing by ARS 3.2 billion and is explained by the lack of [Indiscernible] adjustment. These negative impacts was more than offset by the liquids EBITDA increase of ARS 3.4 million, which was mainly driven by the high international prices recorded during the fourth quarter of 2021. In addition, other services, EBITDA also rose by ARS 382 million, at least related to the midstream businesses -- business grows at the 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 amounted -- amounting 7 million, 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 plant and equipment impairment. Moving on to Slide 5, 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 a 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% in transitional tariff increase will bring some relief. It's important to highlight that approximately 80% of the transportation business segment revenues have been generated by [Indiscernible] contracts with an average life above 10 years, allowing us to generate a stable cash flow of [Indiscernible] fiscal revenues. Also, in the quarter, we recorded a higher property, plant and equipment maintenance expense of ARARS 509 million due to 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 ARARS 5 billion to ARARS 8.4 billion. As mentioned before, the main driver of this increase was the higher international prices, which have doubled compared to the average prices recorded in the fourth quarter of 2020, thus generating higher revenues amounting to ARARS 5.2 billion. Revenues also increased by ARARS 2.5 billion as export volumes and support volumes rose by 27,000 metric tons, moving from 37,000 to 64,000 metric tons. Additionally, ARARS 717 million revenue increase is related to higher ethane price. This ethane price increase was due to higher natural gas prices, as established in the agreement signed with PPV 40 soon. These positive effects were partially offset by a ARARS 2.6 billion high natural gas cost, which is mostly explained by the average price increase to ARS 2.5 per million BTU from ARS 1.4 previously. Also, and to a lesser extent, we recorded ARS 786 million negative variation due to monetary effect as inflation increased by more than 50% versus the 26% increase of exchange rate. As well as higher S4 taxes of ARS 715 million and on ARS 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 ARS 777 million generated by midstream services. ARS 636 million out of these higher midstream sales were generated by the services rendered of Vaca Muerta. As a result of the growing volume of [Indiscernible] gas which are spotted in our gathering pipeline and conditions in our plant located in south [Indiscernible]. As the annual inflation rate of 51% was higher than the annual foreign exchange rate increase of 26%, revenues were negatively impacted by ARS 444 million. On Slide 8, we can see that financial results recorded a positive variation of ARS 8.7 billion. This variation was mainly explained by the financial asset loss of ARS 7 billion generated in the fourth quarter of 2020. In addition, we recorded a lower foreign exchange rate loss of ARS 2.1 billion, which was attributable to a lower increase of 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 ARS 1 billion due to higher financial investment denominated in pesos and higher [Indiscernible] These effects were partially compensated by a lower inflation exposure gain of ARS 1.2 billion. Finally, turning to cash flow on Slide 9, our cash position in real terms increased by 3 million in the fourth quarter of 2021, from 37 billion to 40 billion, equivalent to around ARS 390 million. EBITDA generated the fourth quarter amounted to almost 12 billion out of which more than 80% was generated by the non-drive regulated businesses. CapEx amounted to 3.3 billion and our working capital increased by almost 1 billion. We also bought back ARS 1.3 million nominal value of our own debt and paid income tax of ARS 714 million. As you can see, our cash position remains robust with no debt amortization until 2025. In 2022, we expect to finance our ARS 150 million CapEx, mostly with our cash generation. This concludes our presentation. I will now turn the work to Carlos to -- who will open the floor for questions. Thank you.

[Operator]

Thank you, Alejandro. The floor is now open for questions. If you have a question, please send it using the Zoom chat. In the Q&A chatbox. 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 displayed 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 chatbox. Please hold while we poll for questions. Thank you. [Indiscernible] is asking about the sustainability of the higher [Indiscernible] margins that we are maintaining right now. His asking about the trend of an international prices and the cost of gas for 2022.

[Alejandro Basso, Chief Financial Officer]

Okay. And thank you, Guillermo (ph). First of all, we cannot speculate about prices. Prices are quite high right now. It will depends on the crisis and [Indiscernible] other factors. Nevertheless, we expected that prices will remain high, maybe not on carbon levels, but high in the future, for this year, at least. Regarding the call -- 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 near -- in the future, spring or in summer season. So we expect natural gas prices going up, but nevertheless, our margins are quiet good in spite of that fact. Okay.

[Operator]

And sorry. Generally but a considerable amount [Indiscernible]. This is the reason that I'm asking you to write your name on the we have work for [Indiscernible], sorry. And the second question is regarding the our level of cash flow. What are the option the company is evaluating to use this cash?

[Alejandro Basso, Chief Financial Officer]

Okay. As I said in the call, the use of cash for this year is expected to use in our capital expenditures of around ARS 150 million. We expect to use so that were future pass in that CapEx. Regarding the stock of cash, we expect to use it in the following years for projects that we are currently evaluating, rowing our [Indiscernible] plant and some other related projects that we are evaluating for evacuating the gas the from Vaca Muerta, also it's a good cash position to be able to pay our debt in the 2025, that is near, its coming close. Okay.

[Operator]

Another question is from Constantino [Indiscernible]. Hello, Constantino. His question is regarding the level of production of liquid for 2022 [Indiscernible]. Regarding that, how much of the gas that we will purchase in 2022 is in spot and how much is contracted? Maybe we can share this information. And the other concern is regarding the lack of a natural gas [Indiscernible] that [Indiscernible] regarding [Indiscernible] prices that there is a chance that the government will import less than expected or what is needed.

[Alejandro Basso, Chief Financial Officer]

Okay. Hi Constantino. Regarding the production of 2022, we are expecting lower production for this year as compared with 2021. Obviously, one of the fact is maybe the lack of enough gas for all the -- in winter. You know that in winter, we have a lower margin than in spring and the summer. So it's not going to -- you are not going to see a lower production coming at the same level in the lower margins. Regarding the spot we have most of the gas contracted in long term agreements. So I think that the spot currently, we're expecting 20% or less of our own natural gas needs contracted in spot prices. It's probably Argentina will face a lack of gas in the winter or the higher prices and the offering will be affected. And our Argentine government, from what I know, has not already contracted the energy for this winter, so it's a problem. But in the case of this year's, you will see surely a lower production, but the same time, the impact of margins are not going to be so significant due to the season.

[Operator]

Ignacio Furtaski, he is from in [Indiscernible] and whe -- his question is regarding perhaps it was the before regarding the use of the ARS 62 billion in the reserve. And now were in equity. Aside from CapEx in expansion of [Indiscernible] plant and we were thinking about to repurchase a share.

[Alejandro Basso, Chief Financial Officer]

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

[Operator]

The second question is from Ignacio, regarding the new gas pipeline. When it is expected to start operation, and he wants to know the amount of the CapEx.

[Alejandro Basso, Chief Financial Officer]

Okay, Ignacio, regarding the operations, the fastest that the government is trying to be -- to have some capacity online is for winter this year, it's going to be very, very tough. It's a very tough target, but they hope to cap some of the capacity for at moment, at least [Indiscernible] per day or something like that. Regarding the costs, it will depends on the bids that [Indiscernible] started. There are some figures presenting a decrease, but the actual costs will depend on those bidding process. Okay. The estimated cost in the resolutions were around ARARS 1.5 billion for the first stage, and another ARARS 1 billion for the second. Okay.

[Operator]

[Indiscernible] he ask -- his question is regarding the -- what is the positive impact expected from the increase in transportation tariffs? The 60% that will receive now In March.

[Alejandro Basso, Chief Financial Officer]

Well, if you are 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 increases 60%, but it has been put in place and [Indiscernible]. So we'll be -- and if you talk about nominal pesos, our -- in pesos, our revenues -- in historical nominal pesos, our revenues from transportation around ARS 20 billion. So the 60% of that is ARS 12 billion in annual basis. Okay?

[Operator]

Hello, Jelisic. Maybe in -- his question is regard adjustment for the end of the year. How it will be adjusted after that.

[Alejandro Basso, Chief Financial Officer]

Okay. Jelisic ' we cannot speculate a lot about that. The good news is that the ENARGAS has already started the process to review the tariff, they have nominated the University of Buenos aires to audit our audition, to feed assets and to establish the new inflation indices to adjust by inflation the rate base, but surely the process should be that an increasing tariff should be placed at the beginning of next year regarding these right base revision on the cost of capital some investments CapEx for the five-year period, and then we should have semestral adjustment. If you -- by inflation, by summing it to be chosen by ENARGAS. That's all, well, all I can say.

[Operator]

[Indiscernible], asking about the growth in revenues and [Indiscernible] coming from the investment in [Indiscernible] and the conditioning plant in 2022 and 2023. And if there are other expansion that we can see in the future.

[Alejandro Basso, Chief Financial Officer]

Okay. Well, we expect to grow, I would say at a rate of 25% VDA to the capital we are building, okay. The other question is? Yes. We have some -- our plan is to grow the plant with models of around 6 million kilometers per day. And it will depend on the demand of our services. We can construct one model each malls or maybe two models or up to three. I would say if you have an explosion of production in Vaca Muerta. In addition, what I already mentioned in the call.

[Operator]

[Indiscernible] gains regarding the CapEx between 2 million CapEx, when you would take -- when it would be made, and the second, the 82 million when it would be spent.

[Alejandro Basso, Chief Financial Officer]

Okay. Hi, Ezekiel (ph). Well, regarding the ARS22 million, the CapEx is already under place. The idea is to have the new capacity in service for the winter, maybe fully in August. So we are currently spending this ARS22 million. Regarding the ARS22 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 targets for the winter of 2023. We may have some delay regarding that project. It's no easy in Argentina right now.

[Operator]

Another question from Ezekiel (ph) is regarding the level of price of the gas, but we pay to the gas producer regarding the -- what the government pays under the Plan Gas 4. If we pay a premium over their prices or all the same?

[Alejandro Basso, Chief Financial Officer]

Okay. Well, up to now, we paid with a discount versus the price under the plant gas, but going forward, we're expecting higher prices on the implant gas, maybe 10% or 15%, or up to 20% higher prices up. Regarding the spot prices, okay? Our contracts, we were able to put in place contracts early last year, so our prices were lower than the -- for most of the gas needs that we have for enforcing and our prices are lower. But going forward, the prices will have a premium.

[Operator]

Another question in regarding -- Ezekiel Fernandez (ph) -- regarding the subsidies that have a balance on our financial statement -- that if you can explain what subsidies they are, what they consist of.

[Alejandro Basso, Chief Financial Officer]

Okay. There are two concepts, but the main concept is the propane, that is part parts of the propane. I would say around 20% of our total propane production it's sold to Propane -- Gas Propane net networks in several -- through our distribution companies in several provinces, mainly in the South of Argentina And the west and the south. This propane is subsidized by the government, so we collect a price -- a very low price from these distribution on other companies and the rest of have price as compared with it's [Indiscernible] is paid by the government to us. So the amount that you see in other receivers mainly comes from this concept. Regarding the collection of the subsidy, the government used to pay with the delay. But recently, we were able to collect important part as we oblige ourselves to keep on complying with this program from the current-year. So they paid us up to I remember, but maybe up to September last year, it was all everything paid. Okay.

[Operator]

We don't have any more questions. These concludes the question and answer section. Then we'll turn to Alejandro for final remarks.

[Alejandro Basso, Chief Financial Officer]

Okay. Thank you all for participating in this year's first quarter of 2021 conference call. We look forward to speaking with you again when we release our first quarter '22 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.