Transportadora de Gas del Sur SA (TGS) 2017 Q4 法說會逐字稿

My name is Devon, and I will be your conference operator for today. At this time, I would like to welcome everyone to TGS Fourth Quarter 2017 Earnings Results call. TGS issued its earnings report Wednesday. If you did not receive a copy via e-mail, please do not hesitate to contact us in New York City at (646) 284-9435.

Before we begin this 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 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 the International Financial Reporting Standards, and are stated in nominal Argentine pesos, unless otherwise noted. Joining us from TGS in Buenos Aires is Javier Gremes Cordero, Chief Executive Officer; Alejandro Basso, Chief Financial Officer; and Carlos Almagro, Investor Relations Officer.

I would now like to turn the conference over to Mr. Basso, please go ahead.

Thank you. Good morning, everyone, and thank you for joining us today on this conference call to discuss the fourth quarter earnings and highlights for Transportadora de Gas del Sur.

Firstly, I would like to briefly talk about the new tariff increase, which is expected to be implemented as of April 1, 2018.

Please, see Slide 3. As a reminder, in March of 2017, ENARGAS (inaudible) to have transportation price increase of 214%, along with Charge for Access and Use increase of 37%. However, and according to the provisions of Resolution No. 74, the Ministry of Energy decided to run these tariff increases in 3 stages. As a result, the transportation tariff increase of 64% was implemented as of April 2017. In December 2017, the tariff rose by 81%, while the Charge of Access and Use was adjusted by almost 30%. These last 2 increases include the first wholesale price index adjustment.

In February 20, 2018, a public hearing was held to discuss increase in the transportation tariff effectiveness April on account of what the integral agreement establishes. As it has not come into effect yet.

Thus, we expect another tariff increase of approximately 42%. In addition, this year, has requested to ENARGAS an average tariff increase of 7%. For all the routes with deliveries in the Greater Buenos Aires area with a goal of building a 47-mile pipeline and a compressor plant in the north of Buenos Aires province with the capacity of 388 million cubic feet per day. The estimated cost is around $120 million (sic) [$150 million].

Moving on to the following slide, I will now give you a brief explanation of the 2017 fourth quarter results. The figures presented are compared with the same period of 2016. As you can see, on Slide 4 of the presentation, we recorded 111% increase in terms of net income amounted to ARS 975 million.

This figure compares to a net income of ARS 462 million in the same period of 2016.

This increase is mostly explained by higher operating income generated by the liquids business at ARS 467 million. In addition, the rate and income generated by the Natural Gas Transportation increased by ARS 180 million.

Moving on to Slide 5. Natural Gas Transportation revenue during the fourth quarter increased by ARS 711 million or 95%, to almost ARS 1.5 million compared to ARS 751 million in the same period of 2016.

Most of the variation is due to the tariff increases that came into effect in April 2017, at an average of 58%, in December 2017 at 78%, which generated higher revenues of ARS 426 million and ARS 312 million, respectively.

On Slide 6, you can see that the revenues generated by the production and commercialization of liquids increased by 5 -- 53% or ARS 851 million. This increment is explained mostly by higher reference international prices, which rose more than 35% and generated ARS 502 million more in revenue. In addition, revenues rose by ARS 188 million due to a higher U.S. dollar exchange rate.

Additionally, we exported almost 19,000 more tons of propane and natural gasoline, which generated additional revenues of ARS 176 million.

As you can see on Slide 7, other services revenues rose by ARS 49 million or 29% to ARS 217 million.

This increase is partly explained by more services provided to the natural gas producer. Among others treatment and compression of natural gas, which increased our sales by ARS 27 million. Secondly, a higher foreign exchange rate generated higher revenues of ARS 22 million.

Slide 8, we can see the variations of the cost of sales, which rose ARS 807 million or 58% (sic) [56%] to around ARS 2.2 billion. This is finally explained by higher expenses, maintenance of property, plant and equipment of the transportation business amounting to a ARS 326 million.

In addition, the cost of natural gas, which is used for the production of liquids, grew by ARS 276 million. Of the total ARS 214 million are related to higher natural gas prices in pesos due to the 9.5% increase of prices in US dollars as well as the 14% increase in the average foreign exchange rate. The other ARS 68 million were related to a 6% increase in the volume of natural gas purchased during the fourth quarter of 2017. In addition, we also have a higher labor cost of ARS 76 million.

Moving on to Slide 9. Administrative and selling expenses rose by ARS 56 million or 22% (sic) [23%] to ARS 295 million. The increment is mostly attributable to an increase in turnover tax of ARS 46 million due to the higher regulated revenues.

By moving to Slide 10, we can see the negative variation of the ARS 112 million in other operating results, which is mainly explained by the write-off of some tax receivables.

On Slide 11, we can see that the financial results declined by 17% or ARS 26 million to ARS 127 million. This is mainly due to the higher interest income earned during the fourth quarter of 2017 as the Argentine pesos interest rate and invested capital were higher. In addition, a tax receivable discount of ARS 48 million that disturbed in previous quarter of 2017 was reversed as such tax receivable was written off.

These 2 positive factors were partially compensated by a higher foreign exchange rate loss as the Argentine pesos devaluation in this last quarter was more than double to that registered during the fourth quarter of 2016.

Moving on to Slide 12, you can see that the income tax increase ARS 235 million to ARS 385 million. A ARS 253 million increase was due to the higher pretax income. This variation was partially offset by ARS 103 million positive impact of the income tax rate reduction on the deferred income tax liability, which the Argentine government approved within the tax reform in December 2017. The nominal rate will be reduced for 35% to 30% for the fiscal years of 2018 and 2019 and to 25% for 2020 and thereafter.

Looking into our financial information on Slide 13, as of the end of 2017, this year has cash and financial investments equivalent to $229 million, reflecting a strong cash position. Our financial debt amounted to $241 million. Terms of Natural Gas Transportation CapEx committed with ENARGAS in relation to the 200% transitional tariff increase of 2016. This year's fulfills, as of December 31, 2017, the total committed amount of ARS 794 million. In addition, within the 5-year investment plan approved under integral tariff revision this year, also has already invested ARS 782 million out of the almost ARS 1.2 billion committed to implemented during the first year which ends on March 31, 2018.

This concludes our presentation. I will now turn the call back to the operator, we will open the floor for questions. Thank you.

(Operator Instructions) Our first question is with Bruno Montanari with Morgan Stanley.

I have a couple of questions. First one is about investments. So on top of this investment on the 47-mile pipeline in Buenos Aires, what does the company plan to do with the cash generation in the next 1, 2 years in terms of additional investments? And two, we know noticed that for the net income, you reported this year, the board recommended a 100% is allocated to the dividend reserve. So I was wondering when TGS would be in a position to actually propose and pay dividends on the back of the net income of 2017?

Javier Gremes Cordero speaking. Regarding the use of funds, investments, well, as you mentioned, these project Mercedes-Cardales, is one of the projects that we would like to encourage. Of course, this is a matter that ENARGAS, the regulatory authority will decide. We are working with them in that sense.

In addition, we have mentioned this before, we want, as a company, with our technical capabilities, technical knowledge to be a solution, to be an answer for the producers here in Argentina and well known in the (inaudible) we call that the midstream business. We want to be present there and be a solution for the producers in the development of Vaca Muerta. So we are, as I said in the previous call, we are with -- in conversations with the producers, some of the producers here in the Vaca Muerta zone and they are pretty well advanced. I mean, we hope that we can have good news in the short tenure. And also with a Neuquén province. So this is an important challenge, and I think it's got an answer for producers and an answer for the country, Argentina for the development of Vaca Muerta and they just want to be involved there. This, regarding investment in the short tenure. Regarding dividends, well, we need to wait for the...

Shareholders meeting.

Shareholders meeting (inaudible) next April (inaudible) and after that, we will have the decision in order to, how the dividends are going to be paid. We -- we also need the internal tariff agreement to be approved by the government. We are expecting that to be at the end of this month and well, that's a key issue for us.

All right. And then I also assume that you need to fulfill 100% of the CapEx of ARS 1.2 billion, right?

That's regarding the 2016 CapEx. That CapEx should be approved by ENARGAS, but we think that we already fulfill that, which (inaudible) and that before the ENARGAS and the ENARGAS has audited them so we are expecting for their formal approval.

Our next question is from [Florencia] with PTCC.

I would like to ask you a follow-up regarding the development plans regarding Natural Gas Transportation business. Any timeline regarding the project? You know some vendors, any agreement that we are expecting to be announced in the short term?

It's difficult to say or to fix a timeline, yes? Because this involves conversations with the authorities with Neuquén Province and so this will take some time. But as I said, my feeling is that we are pretty well advanced and perhaps in the next months we can have some announcements. This is regarding really the midstream -- what we call the midstream business, no? Regarding transportation transmission, well, this is Mercedes-Cardales, I mentioned, I think ENARGAS is a national authority -- regulatory authority, will take some months to decide. I think that we don't -- we will not have a decision from them at least midyear, no -- yes, midyear on not before. And of course, we -- and regarding Transmission business, we are continuously looking at any expansion needs that may happen in the near future connected with, of course, development of Vaca Muerta, mainly and other basins in the country. But we don't have a timeline there, it's just following the news.

Perfect, I understand. And the final question is more regarding the LPG business. Any guidance regarding EBITDA generation given currently international prices are above a year ago but maybe the cost in natural gas maybe will offset that. Any expectation or guidance in terms of generation in LPG business for this year?

Okay. It's not easy to predict because we depend on the international prices and natural gas price down here in Argentina.

Last year, we have a very good -- we had a very good EBITDA, okay? But -- and currently, the international prices are quite similar to the average of last year. But they are below the last quarter of 2017. Okay?

Our next question is with [Francisco] (inaudible) with (inaudible).

I've got 2 questions. The first is on operating expenses in the Transport business in the quarter. It was somewhat surprised by the decline -- sequential decline in EBITDA from the transport segment, a lot of that was cost driven. I just want to understand the extent to which what drove the cost increase and the extent to which that's going to be recurring in nature? And the second question is on the transport project, in the province of Buenos Aires. What are your expectations regarding competition for that 47-kilometer extension, will there be a public bidding process? How do you think ENARGAS will handle the extension from the competitive perspective? Those are the 2 questions.

Okay. [Francisco], regarding the operating expenses you know that we've had a plan that we filed with ENARGAS when the tariff revision process, and we are complying that plan, and you will see that in the last part of the year -- in the summer part of the year, our maintenance expenses are higher due to the need to reduce pressure in the pipelines to perform some of these maintenance, okay? So it's under our expectations that the increase in operating expenses in the last quarter of 2017.

Regarding the second question, well, as you well said, our project is this 47-mile pipeline plus compressor plant. Really, as you take the project as it is, we do not have any competition because other projects that is presented there is not a pipeline, it's just certain investments in the north system to give some capacity for the power generation, yes? In our case, this pipeline and compressor plant is a completely different project, where we have been like a second ring, I don't know if in English that's a word, yes, second ring for the city, where we will bring capability and reliability for the system. We will increase pressures in the different city gates, no? In order to facilitate the distribution companies to make data expansions more comfortable with more pressure and in a more efficient way. So TGS project is much superior than the others with a more broad scope. So of course, I mean, going to your question, ENARGAS will take into account both projects. We are confident that -- and we know because we are already in conversations that they know that our project is -- one, given this broad solution to the Buenos Aires, (inaudible) yes, again it's a broad solution. And in addition with our (inaudible) capability to be increased in time, with more compression plant. So the other is just a project for that volume, yes? For that solution for the power generation companies. In our case, it's a project that may be of scale in the future, given more reliability to the system. I mean, if you think perhaps more into the future, yes? With Vaca Muerta, is develop, well, gases will come from this side, from the South, and this project will facilitate to reach with that additional gas in that future to the center of the consumption. So we feel confident that ENARGAS will analyze these 2 different projects and to be -- they will see with good eyes, our.

Our next question is with [Alan Trovato] with [Pointe.]

My question is, I think it was a very good year for the Natural Gas liquids business. I am talking about evolution of international prices of LPG, which propane increased like 40%, and even outperformed the evolution of the WTI and Henry Hub. So I would like to know if you could give us some color on the outperformance of the LPG prices and gasoline prices, and then what do you expect this year because historically, there has been a strong correlation between the WTI, Henry Hub, but it was a very good year for LPG and for you in the prices?

Well, as you say, last year was a very good year regarding nature -- international prices. Currently, the international prices are similar to the average of 2017, and the futures for those prices are somehow below the, I don't know, 10% below the current prices. But we cannot speculate with such international prices, okay?

Yes. The second question I think you have already answered that is whether the 7% tariff increase for the Mercedes-Cardales, I would like to know when you expect to receive ENARGAS response. Maybe did you say mid-2018?

Midyear, this year. Midyear, this year. Yes.

Okay, and in that case, I think, this will be a 2 years project, probably?

18 months, yes, and the tariff should be effective upon the completion of the project, okay?

(Operator Instructions) There seems to be no questions at this time. So I would now like to turn the conference back over to Mr. Basso for closing remarks.

Okay. Thank you for participating this year's fourth quarter 2017 conference call. We look forward to speaking with you again when we release our first quarter 2018 results, however, you have any questions, in the meantime, please do not hesitate to contact our Investor Relations department with any questions. Have a good day. Thank you, bye.