Transportadora de Gas del Sur SA (TGS) 2020 Q3 法說會逐字稿

Good morning. My name is Rob, and I'll be your conference operator. At this time, I'd like to welcome everyone to TGS Third Quarter 2020 Results 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'd 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 International Financial Reporting Standards and are stated in constant Argentine pesos as of September 30, 2020, 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 the call over to Mr. Basso. Thank you. You may begin thank you.

Thank you. Good morning, everyone, and thank you for joining us today on this conference call to discuss the third quarter earnings and highlights for Transportadora de Gas del Sur. To begin the call today, I would like to talk about some relevant corporate events that have occurred since our last quarterly earnings call in August.

Firstly, addressing the COVID-19 pandemic, I would like to mention that since mid-March, when the Argentine government started the quarantine across the country, all natural gas industry activities were considered essential and exempt from interruptions. As such, we have been running all our operating and administrative activities under strict protocols, including and having the minimum personnel in place to protect the health of our employees, suppliers and constructors. Currently, there are different levels of restrictions in place depending on each province and municipality and the amount of sick people in each jurisdiction.

On August 21, TGS held a Shareholders' Meeting during which Carolina Sigwald was appointed as a member of the Board of Directors to fill the vacancy left by a former director, who resigned last June. In addition, 4 alternate Directors and 2 members of the Statutory Committee were appointed. On such date, Carolina Sigwald was appointed as member of the Executive Committee by the Board of Directors.

Also worth noting is that last month, the Argentine government launched a new gas plan, aimed at increasing production by offering higher prices to gas producers with a maximum of $3.7 per million of BTU. The terms of the contracts will be of 3 years with a minimum total volume of 70 million cubic meters per day, which is to be allocated to natural gas distributors and for electricity generation. Additional volume could be tendered for the winter season. The price to be paid to gas producers will result in a competitive auction.

It is relevant to say that the average price of natural gas at TGS paid for its Liquids business in the last 9 months has been at around $2. This gas plan may imply an increase in our [bio] costs for the Liquids business, but it was probably [with regard to] the decrease of the natural gas production. If the decrease in production continues, it could strengthen the natural gas supply that TGS needs to run this business segment. In addition, this plan will help us strengthen our transportation service and boost our midstream business in the locomotive formation.

Finally, on August 21, a new share buyback program was approved by the Board of Directors for a period of 210 days, expiring on March 22, 2021. The maximum amount is for ARS 3 billion. Currently, we hold 42 million of shares in our treasury, which represent approximately 5% of the total capital stock.

Turning to Slide 4. I will now briefly talk about some highlights in our 2020 third quarter results. By the way, all figures presented in this quarter and comparisons made with the previous quarters are expressed in constant pesos as of September 30, 2020, following the provisions established by the IFRS for financial reporting in hyperinflationary economies. As seen in the slide, we reported a higher net income during the third quarter of 2020 at ARS 391 million compared to ARS 58 million net income reported in the same quarter of 2019. It is important to highlight the EBITDA increase in our Liquids business at ARS 2.3 billion, while we recorded an EBITDA decrease in Natural Gas Transportation of ARS 1.4 billion and recorded a positive variation in the financial result of ARS 853 million.

Moving on to Slide 5. As I mentioned before, EBITDA from Natural Gas Transportation decreased by ARS 1.4 billion. This decline is basically explained by the ARS 2 billion revenue loss generated by annual inflation of almost 37%, which was not compensated by any tariff adjustment. This revenue decrease was partially offset by lower PP&E maintenance expenses of ARS 546 million. It's important to bear in mind that more than 80% of revenues are generated by firm transportation capacity contract with an average life of approximately 10 years, which allow for predictable and stable revenues in the future. However, without any tariff adjustments since April 2019, revenues measured in real terms have been decreasing due to inflation negative effect.

As I mentioned on the last earnings conference call, the government has decided to postpone any tariff adjustment until the end of this year. For the time being, we are not aware of when it will take place and what the percentage will be. Nonetheless, this TGS has provided regulated natural gas, relevant information that was requested to refine the new tariffs. In terms of collections, even though past due receivables balance declined during the quarter by ARS 800 million to almost ARS 1 billion from ARS 1.8 billion, currently, it's in the same level as it was at the beginning of the quarter.

On Slide 6, you can see that the EBITDA generated by the Liquids business during the third quarter increased by around ARS 2.3 billion in real terms, moving from ARS 340 million to almost ARS 2.7 billion. In fact, I should remind you that in the third quarter of 2019, due to operating problems suffered by PBB Polisur, TGS sold only around 6,000 tons of the same compared to the normalized volumes sold in this quarter of approximately 100,000 tons. This explains most of the increase in the Liquids' EBITDA, which resulted in a sales increase of ARS 2.2 billion.

Also relevant to say is that higher sales volumes was a result of increase in LPG export of around 30,000 tons to 66,000 tons in the 2020 quarter compared with 36,000 tons in the last year's quarter, which generated additional sales of ARS 631 million. Another positive variation that resulted on lower natural gas prices of ARS 1 billion is explained by lower average natural gas prices as it fell from $4 per million BTU to $2.2 in the third quarter of 2020.

All of these positive variations were partially offset by higher natural gas volume purchased with an increased variable cost of ARS 1.2 billion. In addition, lower export part price of propane reduced revenues in the domestic market by ARS 417 million.

Turning to Slide 7. Other service EBITDA increased from ARS 110 million to ARS 734 million. Part of the EBITDA increase in this business segment is explained by higher revenues of ARS 200 million generated by midstream services, which was mainly attributable to increasing revenues of midstream service spending rendered in Vaca Muerta. Furthermore, lower operating cost increased EBITDA by ARS 223 million. As a negative effect, we recorded a reduction in construction services revenues of ARS 65 million.

On Slide 8, we can see that financial expense decreased by ARS 853 million. The most important change was the positive variation of the foreign exchange results of ARS 5.2 billion, which is mostly explained by the 8% dollar foreign exchange rate increase recorded in the third quarter of 2020 compared to a significant increase of 36% in the same quarter of last year. This positive effect was partially offset by a ARS 3 billion loss generated by financial assets and ARS 1 billion lower gain generated by inflation exposure of our financial position as inflation during this quarter was lower than the one registered in the third quarter of 2019.

Finally, turning to Slide 9. You can see the cash flow for the third quarter. Our cash increased by ARS 2.4 billion, where EBITDA amounted to ARS 6.9 billion, of which 50% was generated by the transportation business segment, CapEx business segment. CapEx was ARS 1.4 billion, and our working capital was reduced by ARS 665 million, mainly due to higher collections from 2 natural gas distribution company.

Despite the deterioration of EBITDA for our regulated business, given the lack of tariff adjustment, we do expect to continue generating a positive operating cash flow, which together with no debt maturities in the following 4 years puts this on a solid financial position.

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 Ezeq Fernández with Balanz.

This is Ezequiel Fernández from Balanz. I have 2 questions. The first one is related to the implementation of Plan Gas. We're currently in an environment where local gas prices are around $2.5 per MMBtu across the different segments. The planned auction could take them above $3 or maybe $3.5 per MMBtu for the power generation offtake and the gas distributors. Do you think that this is also going to increase prices on the unregulated segment from the current levels?

Ezequiel, it's Alejandro. We think that it may have an impact on the industrial gas prices, okay? We know the size of this increase, but it will surely have an impact, mainly in winter. You know that our production at [Cherri] is higher, much higher in the -- out of the winter season. So -- but nevertheless, it didn't have an impact on our natural gas price.

At the same time, the same contract with Dow, with PBB Polisur has sort of hedged for the increasing gas price.

Okay. Perfect. And my second question is related to the Liquids business, in particularly the butane garrafa. I -- we understand that an increase in the peso price happened in October. I joined a little bit late to the call. I don't know if you commented on this already, but if you could tell us a little bit how much in percentage terms that was for TGS in particular?

Yes. Ezequiel, it was an increase of 10%.

Okay. Would you say that the current price per ton is around ARS 10,000?

Yes. ARS 11,000 per ton, yes.

(Operator Instructions)

Our next question is from Lorena Reich with Lucror Analytics.

I have a question on the targets. I know you mentioned that you don't know what's going to happen by [190] -- you've been in conversations with the government to get a sense of what's going to happen in next year. And also, given that whatever assumption you have on tariffs and also given the normalization in the Liquids business, if you can give us a sense of the business mix you're expecting in terms of those 2 businesses or the 3 businesses for 2021?

Okay. So as regards to the tariff, we have just started conversations within our gas. It's pretty soon to say something about the tariff evolution. They have requested OpEx and CapEx projections for next year, and we have submitted that information. But there are some talks here that the increase in tariffs is going to be in connection or in similar to the expected inflation. But that's very broad assumption because we are not -- we don't know what's going to happen with inflation next year, okay?

Just regarding the Liquids business, I couldn't understand you fully. What was the question?

What do you expect to be the business mix between the Transportation and the Liquids business going forward? I think that partly will depend on the tariff adjustment, whether there is one or not. But now we've seen this quarter that the Liquids business grew because of -- well, the lack of tariff adjustment in the Transportation business and also the normalization versus 3Q '19. So going forward, what do you expect the contribution of this segment to be for total revenues?

Well, as regard to the Transportation business, if the tariff increase is going to be lower than the inflation, we are going to have some impact there of real or actual inflation, okay? As regarding the Liquids business, even though we are going to suffer from some increase in the natural gas price, the Liquids' prices are higher, and we expect higher prices for next year. And as I said before, the thing has passed through for natural gas. So maybe EBITDA in dollars terms in the Liquids business could be somewhat similar to this year, which actually is a very good year for the Liquids business, in spite of the pandemic.

(Operator Instructions)

Our next question comes from [Augustine Banasari] with [Mondal.]

This is [Augustine Banasari] from [Mondal.] Just one quick question, the -- if you can comment, what is included in the other financial assets that you mentioned as a liquid assets to calculate the net debt?

Okay. There, we have a loss. It was an accrual. In fact, it's not a cash loss coming from the purchase and sale of certain bonds, okay? Because we have to book at the official exchange rate.

Okay. But this is not in the balance sheet, right? I mean there is 2 new accounts that the financial assets, and I think it's something liquid that you are using like cash equivalent. So what is in there?

It's what I said before, it's a loss coming from the purchase and sale of certain bonds, okay? It's not a cash loss.

Our next question comes from [Magus Wozniacki] with Ara Partners.

I have a follow-up on Ezequiel's first question. Could you give us more color on what are your expectations of how your business will be impacted by the implementation of Plan Gas? Do you expect any material change there?

Well, as regards with the natural gas price, it will have -- it will surely have a material impact because current prices of around $2 per million BTU are not sustainable prices for the gas producers to develop their fields. So you may see something around $3, something like that in the future, okay? But at the same time, as I said before, we are going to have a compensation for this increase in natural gas prices in the ethane as it has a [petrol] in the provisions of the contract. And in the LPG and natural gasoline because of what we are expecting of the fact that we are expecting higher prices for next year, mainly as the impact we suffered this year during the pandemic, the second quarter.

Okay. And what about the pipeline at Vaca Muerta. Do you expect it to be...

Well, as we said -- as I said in the -- in my speech, for the Vaca Muerta, the Plann Gas is a very good news because of the fact that we are expecting higher volumes and maybe new opportunities to develop our infrastructure there, okay?

(Operator Instructions)

Our next question comes from Jorge Vargas with BTG Actual (sic) [BTG Pactual].

I answered a little bit later to the call. I don't know if you answered this question already, I'm sorry about that. And my question is, if you could give -- provide us more details on an important increase you had on the cash flow provided by investing activities.

Okay. As regarding CapEx, we have lower CapEx this year than the last year due to the fact that in 2019, we finalized all the Vaca Muerta infrastructure process. And then in the financial assets, we have an increase due to -- that we decided to invest in certain bonds during the period, okay?

There are no further questions at this time. At this time, I'd like to turn the call back over to Mr. Basso for closing comments.

Okay. Thank you all for participating in this year's third quarter 2020 conference call. We look forward to speaking with you again when we release our fourth quarter 2020 results. However, if you have any questions in the mean time, please do not hesitate to contact our Investor Relations department with any questions. Have a good day.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.

Thanks.