Transportadora de Gas del Sur S.A. (NYSE:TGS) Q4 2020 Results Conference Call March 10, 2021 9:00 AM ET

Company Participants

Oscar Sardi - CEO
Alejandro Basso - CFO
Carlos Almagro - IR Officer

Conference Call Participants

Guilherme Levy - Morgan Stanley
Ezequiel Fernandez Lopez - Balanz
Robert Chang - Citi
Lorena Reich - Lucror

Operator

Good morning. My name is Paul, and I will be your conference operator today. At this time, I would like to welcome everyone to TGS's Fourth Quarter 2020 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 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 December 31, 2020, unless otherwise noted.

Joining us today from TGS and Buenos Aires is Alejandro Basso, Chief Financial Officer; and Carlos Almagro, Investor Relations Officer. I would now turn the call over to Mr. Basso. Sir, please begin.

Alejandro Basso

Thank you. Good morning, everyone, and thank you for joining us today on this conference call to discuss the 2020'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 relevant events that occurred since our last quarterly earnings call in November of 2020. Firstly, addressing the COVID-19 pandemic, as you may be aware, the situation in Argentina has been improving, due mainly to the factor that we are going through the summer season, the number of cases reported have lowered in general. Thus, many restrictions were lifted mainly during the last months of 2020, and the Argentine economy partially recovered after the collapse experienced in the second quarter, which, on an annual basis, contracted by 10% and is expected to rebound of more than 4% for 2021 based on the assumption that massive vaccination program will succeed in reducing the COVID-19 reported case.

Moving on to address the tariff adjustments. Last December, the Argentine government issued a decree number 1020 which established. First, the start of integral tariff revision with a 2-year deadline. Second, suspension of the current integrating revision agreement, which was signed in 2017. And in third place, the authorization for gas to transitionally adjust tariffs while the integral tariff revision takes place. After the transitional tariff adjustment, the Secretary of Energy, Simon, a public hearing to be held on March 15 to define the subsidy that the government will pay the gas producers under the new gas plant, which was launched in October 2020 as well as the price portion difference to be paid by the consumers.

In addition, ENARGAS called to a public hearing to be held on March 16 to establish tariff increases for the distribution and transportation companies. The tariff adjustments will be defined after the public hearings. What is worth noting for this fourth quarter is the recognition of ARS 3.1 billion in impairment of the natural gas transportation assets accounting value. Considering that this accounting value is being adjusted by inflation and the tariff remained without an increase in April 2019, accumulating a 35% increase, which has not been planted by ENARGAS , changing into account the semi-annual tariff adjustment contemplated in the interactivity agreement signed in 2017. In addition, the uncertainty of future tariff increase, coupled with expected high inflation underline this impairment.

During our last earnings call, we mentioned how important is the gas plan launched by the Argentine government in October for TCS as it impacts across all our business segments. Even though this plant pushed natural gas prices upward and that the cost of our liquids business, we know this gas plan is necessary to stop the production decrease, even that previous prices were not enough to repay investment based by the gas producers, mainly in the nonconventional production. Gas producers offer a total of 67 million cubic meters per day, slightly below the 70 million cubic meters volume per day defined by the government with an average price of $3.5 per million BTU under contracts for 4 years. An incremental volume of 3.6 million cubic meters per day was to be offered during the winter season.

As a result of the local shortage and the lower gas production in Bolivia, which will imply lower Bolivia natural gas imports of this year, the government launched a second bidding under the Gas plant to receive new offers from gas producers for additional volumes to be delivered in the winter season with the same price cut of $3.7 per million of BTU and some flexibility in the volumes to be offered in each month and the following 3 years. In this second bidding, a total volume of 4.5 million cubic per day was offered by the gas producers, which together with the 3.6 million offer in the first speeding totaled 8 million cubic per day as incremental volumes for winter season. In addition, the government called for international bidding to hire a second regasification chip to be located in Bianca to reclassify LNG from June to August.

Turning to Slide 4. I will now briefly talk about some highlights in our 2020 fourth quarter results. By the way, all figures presented in the quarter and comparisons made with the previous quarters are expressed in constant pesos as of December 31, 2020, following the provision established by the IRS for the financial reported in hyperinflationary economies. Seen in the slide, we reported a net loss of ARS 3.5 billion during the fourth quarter of 2020 compared to a net income of ARS 5.9 billion reported in the same quarter of 2019. And the bottom line negative variation is only explained by a ARS 6.2 billion negative variation of the financial results and the PP&E impairment of ARS 3.1 billion, which I mentioned before.

Moving on to Slide 5. EBITDA for natural gas transportation business decreased by ARS 300 million. This decline is basically explained by the ARS 1.9 million revenue loss generated by the annual inflation of 36%, which was not compensated by any tariff adjustment. This revenue decrease was partially offset by lower PP&E maintenance expenses of ARS 824 million and lower operating expenses of ARS 589 million. It's important to bear in mind that more than 80% of revenues are generated by firm transportation capacity contracts with an average life of more than 10 years, which allows for predictable stable revenues.

However, without any tariff adjustments in April 2019, as it is shown in the slide, the revenue stream measured in real terms has been decreasing due to the negative effect of inflation. In terms of collection, past due balance as of end of December remained stable at ARS 1.8 billion, the same level we had during the last semester.

On Slide 6, you can see that the EBITDA is generated by the liquids business during last quarter of 2020 decreased by approximately ARS 300 million, declining from ARS 3.6 billion to almost ARS 3.3 billion. The main explanation for the negative variation is related to a lower volume of LPG sold during the fourth quarter of 2020 at around 31,000 tons, which generated lower revenues of almost ARS 1 billion. Export volumes fell by 48,000 metric tons from 115,000 to 67,000 tons.

However, local size increased by 17,000 metric tons from 71,000 to 88,000. It is important to mention that LPG production increased by 5% in the fourth quarter of 2020. In addition, the average price decline of the fine and natural gasoline of 31% and 35%, respectively another $1 billion decrease in total revenue. These 2 negative effects were partially offset by a ARS 1.3 billion cost reduction, of which ARS 1.1 billion is due to the average lower price natural gas, which fell from ARS 2.22 to ARS 1.45 per million of Q and the other ARS 200 million decline corresponded to the lower volume of natural gas purchase.

Another positive variation, which helped to partially compensate the revenue decrease is the lower export tax of ARS 334 million as in the fourth quarter of 2019, the tax rate was 12%. And in the same quarter of 2020, the monthly variable tax rates were between 0% and 1.4%.

Turning to Slide 7. Other Services EBITDA increased for ARS 450 million to ARS 707 million. Part of the EBITDA increase in this business segment is explained by higher revenues of ARS 313 million generated by midstream services. This is mainly attributable to increasing revenues generated by the recovering pipeline and conditioning plant built in VacaMuerta between 2018 and 2019. We expect to continue growing this project in 2021 by deploying additional CapEx and increasing revenues, which will be generated by new agreements signed with gas producers.

On Slide 8, we can see that financial results experienced a negative variation of ARS 6.2 billion. This negative variation was explained by a ARS 4.6 billion loss generated by financial assets, a ARS 1.5 billion lower gain generated by inflation exposure and a higher exchange rate loss of ARS 719 million, which is explained by 10% dollar foreign exchange rate increase recorded in the fourth quarter of 2019 compared to the 3% increase in the same quarter of the previous year. All these negative effects were partially offset by the ARS 449 million positive variation generated by a same amount loss recorded in the fourth quarter of 2019 associated with the financial derivative instrument valuation.

Finally, turning to Slide 9. You can see the cash flow for the fourth quarter of 2020. Our cash decreased slightly by almost ARS 900 million, less than 5%, where EBITDA amounted to ARS 7.5 billion, of which the 3% was generated by nonregulated business. CapEx amounted to ARS 1.3 billion, and we paid interest of ARS 1.4 billion, and our working capital increased by almost ARS 500 million. Once again, I should highlight that our financial situation looks pretty good, considering the high level of cash of around ARS 240 million, our maturity profile without maturities in the following 4 years and that we expect to have a positive free cash flow for 2021 despite the current decline of 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.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Guilherme Levy with Morgan Stanley.

Guilherme Levy

I guess the first one is on the impairment charge in the regulated fees. If you can provide more color on that, perhaps if you can share with us the assumption to use own tariff adjustments going forward to do the impairment? And the second one is on the liquid business. What should we expect in terms of EBITDA and profitability this year with the expected increase in natural gas prices in Argentina with the pandemic?

Alejandro Basso

Just a second, please. Sorry, can you repeat the first question?

Guilherme Levy

Sure, sure. Sorry. Yes. So my first question is on the impairment charge. I just would like to understand better the assumptions that were taking to build this chart if perhaps you can share with us any assumptions of the tariff adjustments going forward that were used with the calculation, that would be great.

Alejandro Basso

Okay. I understand that you wonder about the net tariff adjustment, okay?

Guilherme Levy

Yes.

Alejandro Basso

Well, we have conversations with our gas during the last days of January and the first days of February. We have not arrived at any agreement with them. You know that we have to -- they are proposing us to agree with them in a transition agreement. But we have not arrived at any agreement in -- so they offer -- they started to say that we should lower our tariffs by 15%, then 4%, and then they arrived at 0. But we have not -- the numbers -- the figures they use are not correct. They used a very low inflation for next year. And they have not taken into account some operation and maintenance expenses that we postponed last year for this year due to the pandemic and some other discussions.

So currently, I should say that we have a 0 adjustment, but with no agreement. That may change after the public hearing that to take place in March 15, okay? Regardless, the no agreement, they should work or we should work with in a tariff -- integrator revision the next year -- during this year. So if we don't reach any agreement, we will have to -- we have the right to go through the tariff revision process. Do you have a start? Okay for you? Guilherme? And the other question is about the natural gas price for our Liquids business.

Guilherme Levy

Yes, exactly. I just wanted to get a few -- to get a little more sense of what to expect in terms of profitability for this business in 2021?

Alejandro Basso

Well, 2 things mainly, an increase in the natural gas price obviously, due to the gas plan that the government has put in place. And the other one, we have very good international prices right now and we expect that these prices may lower in the near future, but at the high level as compared with last year, okay?

So we are expecting that the EBITDA for the Liquids business may be around something similar to last year, at the end of the day. Higher prices and higher volumes may remain ahead.

Operator

Our next question comes from Ezequiel Fernandez with Balanz.

Ezequiel Fernandez Lopez

A. Thank you for the materials. This is Ezequiel Fernandez from Balanz. I have 3 questions. I would like to go one by one, if you don't mind. The first one is you were mentioning high international prices for propane, butane, natural gasoline. I was wondering if you were selling at the spot or in short-term or long-term contracts in each of these products?

Alejandro Basso

Currently, we are selling a spot contracts for [indiscernible] key exports and in the case of natural gasoline, we have signed a 2 months contract.

Ezequiel Fernandez Lopez

Okay, mostly spot and short term. That's great. My second question is related to the transitional tariffs on regulated gas pipes business. We have the public hearing for March 16. Is there any other dates that we should be mindful or any other road map or obligation from the regulator to get this fixed in a certain amount of time?

Oscar Sardi

Okay. They should come to -- with the new tariff for April 1, but they are not obliged to do that. In my opinion, the pass-through of the natural gas, the will have natural gas price -- is a problem right now. They have internal discussions in the government to -- about the subsidy.

Ezequiel Fernandez Lopez

Yes, I know what you are referring to.

Alejandro Basso

So that may delay the process. I don't think that transportation and [indiscernible] ties should delay the process, but natural gas [indiscernible].

Ezequiel Fernandez Lopez

Yes, the energy component, it's going to take longer, naturally. Okay. Perfect. And I don't know if you can give us an idea of where you saw gas prices in the industrial segment for January and February after the start of Plan Gas 4?

Alejandro Basso

Well, they are quite low for January and very higher than the December and November, but quite low, quite under the...

Ezequiel Fernandez Lopez

Okay. So they didn't they did not catch up as much to Plan Gas 4?

Alejandro Basso

No. Not so far.

Operator

[Operator Instructions] Our next question comes from with Cosentino [indiscernible] with [indiscernible].

Unidentified Analyst

So I would like to ask 2 questions related to the Bahía Blanca natural gas regasification plant. First of all, does this bring -- does this FSRU bring substantial revenues due to transport? And if there are any plans regarding the reversion of the GasoductoNoreste, the northern pipeline and how would that affect your business? I mean, if there is substantial volumes from VacaMuerta, maybe there's an idea of reversing the pipeline, and then all the business changes substantially in the Buenos Aires province.

Alejandro Basso

Okay. I will start with the second question, then you can repeat me the first one. Regarding the probable reversion on the future of the northern pipeline, I think that we are not going to see any impact in the TGS business. It's just a question to replace Bolivian gas that is going down currently, and that's all, okay? The consumption and the -- then the supply of natural gas and one exploring should remain the same. The first question was about?

Unidentified Analyst

The first question was about the Bahía Blanca floating storage regasification unit. Will it bring substantial revenues in terms of gas transport for TGS?

Alejandro Basso

No, no, no. Because you know that we have long-term transportation contracts, more than 10 years on average. And these contracts provide for the transfer from the South from the West to one side. And what the regasification in Bahía Blanca does is to replace the gas coming from the south that is quite lower than it should be another contract. So there are no -- any additional revenues for this year.

Operator

Our next question comes from Robert Chang with Citi.

Robert Chang

I was just wondering, can you guys provide any color or updates on your offshore cash as far as the amount and have the composition of those assets? Also, just a follow-up, have you guys kind of been able to circumvent -- paying the coupons on your debt with that offshore balance.

Alejandro Basso

Robert, regarding the -- our total cash is around $240 million in total, is mostly offshore. And the second one about the coupon payments, we don't have any specific plan just to pay them at the due date. That's what you wanted to know.

Robert Chang

But you're paying our coupons with the official FX from the BCRA, correct?

Alejandro Basso

Yes. Well, that may be a possibility in the future, yes.

Robert Chang

Okay. But in that eventuality, how are you kind of able to avoid having to use your offshore cash balance for that?

Alejandro Basso

Because we -- you have discussed and available, you are supposed to get the Central Bank authorization approval.

Robert Chang

Okay. So just a last follow-up. Do you have any color on what those offshore -- what that offshore cash balance is comprised of as far as like long-term instruments or securities?

Alejandro Basso

Bank deposits, maybe long-term bank deposit.

Operator

Our next question comes from Lorena Reich with Lucror.

Lorena Reich

Just a follow-up on the tariffs, that the first person asked. So right now, it appears to be no agreement. So you go to the hearing, and there's no agreement and what happens until an agreement is reached, the tariffs remain frozen until the negotiation and then the -- dissolve. The tariff regulation stand, or how does it work?

Alejandro Basso

Well, the agreement of the -- the draft of the agreements provided for an adjustment up in 1 year some additional adjustment in 1 year term. If the tariff revision have not taken place at that moment, okay? We don't sign an agreement, which I don't know, maybe we should wait for the tariff revision to have adjustment of time, okay?

Lorena Reich

So there's no agreement so it could take up to a year for the tariff revision. And then in the meantime, tariffs will remain frozen at current levels. Is that correct. Yes?

Alejandro Basso

That maybe depends.

Lorena Reich

Okay. what's your expectation year in the ongoing.

Alejandro Basso

We required a 58% increase. The gas to that -- say no, I don't know what is going to happen after the public hearing, sorry. Maybe we reach an agreement with some adjustment -- positive adjustment for sure okay. And then in that case, we will have the right to add additional adjustment in 1 year term.

Lorena Reich

Okay. And then on the other services and telecommunications business, is that -- are you expecting that to grow or to remain a small part of your business? In particular [indiscernible].

Alejandro Basso

The new gas plant, we are expecting that the midstream services may go up in the near future. And the telecommunications, a slight growth we are expecting.

Lorena Reich

And so the midstream in the short- or medium-term what's your expectation for the midstream as percentage of the total business because before it was split mostly half and half more or less on the regulated and nonregulated. Then the Liquids business grew and then this one started to grow.

Alejandro Basso

So our strategy is to make the nonregulated business growth. And so -- and we had the tariff frozen, although with a slight increase in the near future, you can expect that the nonregulated portion of the business may grow at a relative level. But at the same time, the midstream services should grow in total values, okay, at the same time. I don't know [indiscernible] million per year, something like that on the EBITDA.

Operator

[Operator Instructions] There are no further questions at this time. I would like to turn the floor back over to A - Alejandro Basso for any closing comments.

Alejandro Basso

Well, okay. Thank you for participating in TGS Fourth Quarter 2020 Conference Call. We look forward to speaking with you again when we release our first 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

This concludes today's conference call. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful day.