Transportadora de Gas del Sur SA (TGS) 2021 Q1 法說會逐字稿

Good morning. My name is Doug, and I will be your conference operator today. At this time, I'd like to welcome everyone to TGS' First Quarter 2021 Results Earnings Conference Call.

TGS issued its earnings report last Friday. 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 the 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 International Financial Reporting Standards and are stated in constant Argentine pesos as of March 31, 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'd like to turn it over to Mr. Basso. Sir, please begin.

Thank you. Good morning, everyone, and thank you for joining us today on this conference call to discuss the 2021 first 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 2 months ago.

Firstly, on addressing the COVID-19 pandemic, the second wave started a few weeks ago. As such, the executive power tightened the restrictions, trying not to compromise the partial economic recovery, which is expected to be around 6% in 2021 after the 10% decline registered in 2020. TGS, as essential service provider has continued to run its operations while complying with all the protocols to keep its employees and suppliers safe.

Secondly, and addressing the transportation tariffs. On March 16, a public hearing was held sponsored by ENARGAS in order to define transitional tariff adjustments for the distribution and transportation companies. During such public hearing, TGS placed a request to get a 58.6% tariff increase just to meet our financial needs to pay operating and financial costs, CapEx and taxes without considering any profitability.

On April 28, TGS received a renegotiation transitional agreement from ENARGAS, in accordance with Decree 1,020, establishing the following: in the first place, no tariff adjustment for TGS since May 2021; second, ENARGAS will define a new transitional tariff adjustment starting April 2022 in case there is no definitive renegotiation agreement in place then; in third place, no mandatory investments are requested; and finally, it forbids any dividend payments, repayment of loans and trade payables with shareholders, acquisition of other companies and grant of receivables.

On April 30, through a letter sent to the ENARGAS, TGS stated that considering the current context in which TGS operates and the terms and conditions proposed by ENARGAS, it's not feasible that TGS signs the transitional agreement as no tariff increase was granted.

Turning to Slide 4. I will now briefly address some of the highlights in our 2021 first 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 March 31, 2021, following the provisions established by the IFRS for financial reporting in hyperinflationary economies.

As seen in the slide, we reported a net income of ARS 3.9 billion during the first quarter of 2021 compared to a net income of almost ARS 4.9 billion reported in the same quarter of 2020. Even when total EBITDA increased by ARS 1.4 billion, supported by a 100% increase of ARS 2.9 billion in the liquids business and a 34% decrease of ARS 1.8 billion in the transportation business, higher negative financial results and income tax, which both totaled a negative variation of ARS 2.4 billion, were the main drivers of the ARS 1 billion net income decrease.

Moving on to Slide 5. EBITDA for Natural Gas Transportation business decreased by ARS 1.8 billion. This decline is basically explained by the ARS 2.2 billion revenue loss generated by the annual inflation of 43%, which was not compensated by any tariff adjustment. This revenue decrease was partially offset by lower PP&E maintenance expenses amounting to ARS 283 million and lower operating expenses of ARS 399 million.

It's important to bear in mind that almost 80% of revenues are generated by [firm transportation] capacity contracts with an average life of more than 10 years, which allows for predictable and stable revenues. However, without any tariff adjustments in place since April 2019, as seen in the slide, the revenue stream measured in real terms has been decreasing due to the negative effect of inflation. In term of collections, past due receivable balance of end of March remained stable at ARS 1.9 billion, the same level we have had since June 2020.

On Slide 6, you can see that the EBITDA generated by the liquids business grew during the first quarter of 2021, increasing approximately ARS 2.9 billion to almost ARS 5.8 billion. This significant increase is mostly explained by higher reference international prices, which increased by almost 50% in average and generated additional revenue amounting to ARS 1.9 billion. In addition, higher export volumes of 25,000 metric tons contributed to higher sales of ARS 1 billion.

Another positive effect was the lower price of natural gas, which reduced variable costs by ARS 1.2 billion. Average price was $1.50 in first quarter of 2021 compared to $2.30 per million of BTU in the same quarter of 2020. However, price of natural gas will increase from the second quarter, especially considering the new gas plant launched by the government last October, through which natural gas producers will be paid an average price of $3.50 per million BTU.

In addition, another factor that may push prices up is the reduction of gas production at the Neuquén basin given the social protests, which blocked routes and roads leading to the fields for 3 weeks last month. Our positive variation was generated by a ARS 231 million insurance compensation for lost earnings due to operating problems suffered by PBB Polisur in 2019, which lowered dramatically our sales of ethane, mainly in the third quarter.

All of these positive variations were partially offset by a lower price of ethane, resulting in a revenue reduction of ARS 742 million. This lower price of ethane was related to the lower price of natural gas.

Finally, lower volumes of ethane at 22,000 metric tons impacted revenues in ARS 498 million. This decrease is related to maintenance works carried out by PBB Polisur in its facilities.

Turning to Slide 7. Other Services EBITDA increased from ARS 674 million to ARS 1 billion. Part of the EBITDA increase in this business segment is explained by higher revenues of ARS 356 million generated by midstream services. This is mainly attributable to the increase in revenues generated by the gathering pipeline and conditioning plant built in Vaca Muerta between 2018 and 2019.

On Slide 8, we can see that the financial results recorded a negative variation of ARS 1.3 billion. This variation was mainly explained by a ARS 1.4 billion loss generated by financial assets as well as 2 gains recorded in the first quarter of 2020: the first, a ARS 601 million gain generated by financial derivative instruments; and the second a ARS 451 million gain attributable to the purchase of $17 million face value TGS' bonds. All these negative effects were partially offset by a ARS 784 higher gain generated by inflation exposure, a lower exchange rate loss of ARS 289 million and higher interest income of ARS 118 million.

Finally, turning to Slide 9, you can see the cash flow for the first quarter of 2021. Our cash position increased by ARS 4.5 billion or almost 20%. EBITDA amounted to ARS 10.4 billion, of which 56% was generated by nonregulated business. CapEx amounted to ARS 1.4 billion, and our working capital increased by ARS 1.7 billion.

Once again, I should highlight that our financial situation looks pretty good considering the higher level of cash of around $300 million. Furthermore, we have no debt amortization in the following 4 years, and we expect to be positive free cash flow for the rest of 2021 despite the current decline 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 Instructions) Our first question comes from the line of [Constantinos Papalias] with [Fuente].

I'd like to ask you regarding the liquids segment. What can we expect from oil prices going up? And how will that affect your revenues? And since there is expected to be a lack of natural gas in Argentina, could we expect the Secretary of Energy to force a higher quarter of regulated LPG volumes, obliging you to maybe sell more volume of LPG to the internal market at lower prices?

Well, in reference to the prices to the -- are you hearing me? Hello?

Yes, yes. I am here. Yes, yes, of course.

Okay. Perfect. Well, regarding the prices of liquids, well, we cannot speculate about that. The future are somehow lower than current prices, but they are in pretty good shape for us.

And regarding the lack of natural gas and higher quota of domestic LPG, they are 2 different things. The lack of natural gas could impact us on the availability of gas to produce the liquids. We may have some problems in the near future because of the fact of the social conflicts that we have in Neuquén, the -- well, that would be a problem. Nevertheless, we are currently performing some maintenance work in our Cerri plant. So we don't have the full supply of natural gas, okay?

And regarding the higher quota of products, well, we already have received this -- the entire quota of butane compared with the previous year because of the fact that we produce -- our portion of production was higher in 2020 than in 2019. It was around 20,000 tons, an additional 20,000 tons compared with 2020.

Going to the -- for the future, we cannot anticipate an increase. It will depend on the production of any producer and our participation on the whole production of this year.

(Operator Instructions) Our next question comes in the line of Martín Arancet with Balanz Capital.

Congratulations on the strong results. I have 2 questions. Well, as you mentioned, TGS has a sizable cash position and cash flow outlook this year. What can we expect for cash uses for the rest of this year? Maybe more share bond repurchases or any project that seems closer to development?

And my second question will be, well, we estimate -- and you mentioned that your gas purchases cost is close to the last MMBTU or below the seasonal price last -- price of the last quarter. Do you expect to buying below because (inaudible) price throughout the winter month? More specifically, have you already contracted most of the winter gas volumes? Or do you expect to do have some as spot terms?

Regarding the first question -- the second, I didn't get the question fully. So I will -- if you can repeat it, this will be good for us. Regarding the first question as the use of the cash, well, we don't have any program right now for repurchase shares, for purchasing shares or other -- so we just -- it will depend on the projects that can appear in the near future, okay. We are working, obviously, in Vaca Muerta, but it will depend on the -- if the producers go ahead with increasing their production in Vaca Muerta amount. And the second question, I would -- if you can repeat it, please?

Yes, of course. Well, you mentioned that your gas purchase cost was below plan last quarter. And I do expect this cost to increase in the next quarters. I wanted to know what do you expect. If you can give us some further knowledge on this?

Okay. Well, we are in the process of signing new contracts for natural gas, and these prices are going to be below -- slightly below plan last quarter. The spot prices, we cannot speculate. It will depend on supply and demand, but they may be in the winter higher than that quarter. Nevertheless, as I mentioned before, as we are performing some maintenance works, we don't expect for this winter to need much spot contracts. Hope that okay. It's clear.

Our next question comes from the line of Lorena Reich with Lucror Analytics.

Just wanted to get a sense of -- I don't know if you explained this at the beginning of the call, so I'm sorry. What's the expectation in terms of tariff increases in transportation business. You mentioned what happened. But going forward, what's the expectation?

The other question is on cash. Those 300 -- no -- the $300 million, are those in dollars or in pesos locally. And finally, if you can just give some detail on the Neuquén situation.

Okay. Lorena, perfect. Regarding the tariff piece, we already explained that we received a proposal, an agreement proposed by the ENARGAS with a 0% increase. We -- so that's what we want to get this year, I guess.

For the next year, we -- the ENARGAS has already started the tariff revision process. So well, we should have a tariff revision, a renegotiation of the current tariff. And if this revision is delayed to the end of the year, we should have a tariff increase in the first quarter of next year, okay. Maybe now April 2022.

Okay. But because you rejected what was offered for 2021, that means you -- I mean, that end the negotiation and then you get no increase yet.

Yes. For '21, it has already ended. Yes. Okay. Regarding the cash, we have more than 2/3 in dollars and the other one in pesos invested in different things. Okay.

And regarding the Neuquén situation, you mean the social conflict? They are already finished but you don't know if they can -- I think that most of the people are okay with the proposal of the province government offer. But in some places, there are still some conflict, but those conflicts don't have any impact in the production. They are far from the plant site.

Our next question comes from the line of Guilherme Levy with Morgan Stanley. I'm sorry, he fell out of queue. (Operator Instructions)

There are no more questions in the queue. I'd like to hand the call back to management for closing remarks.

Okay. Well, thank you for participating in TGS's first quarter 2021 conference call. We look forward to speaking with you again when we release our second 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.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.