Transportadora de Gas del Sur S.A. (NYSE:TGS) Q2 2020 Earnings Conference Call August 10, 2020 10:00 AM ET

Company Participants

Alejandro Basso - CFO & VP, Administration, Finance and Services

Conference Call Participants

Ezequiel Fernández - Balanz
Bruno Montanari - Morgan Stanley
Antonella Rapuano - Santander

Operator

Good morning. My name is Doug, and I'll be your conference operator today. At this time, I'd like to welcome everyone to TGS' Second Quarter 2020 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 Investors 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 the International Financial Reporting Standards and are stated in constant Argentine pesos as of June 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. Sir, please begin.

Alejandro Basso

Thank you. Good morning, everyone, and thank you for joining us today on this conference call to discuss the second quarter earnings and highlights for Transportadora de Gas del Sur. To begin, I would like to talk about some relevant corporate events that have occurred since our last quarterly earnings call. First, I would like to make some remarks regarding how COVID-19 has impacted our operations. Since March 20, Argentina has been in different degrees of quarantine depending on how serious the virus has been affecting populations of different provinces.

I would like to remind you that all activities related to the natural gas industry are considered essentially. Under this context, we have been running smoothly our operations respecting all the protocols, which aimed to protect the health of our employees, suppliers and contractors.

On last quarter's conference call, I mentioned our concern regarding potential further deterioration of our financial metrics in the following quarters. As a result of the very low reference international prices of propane, butane and natural gasoline, which fell below $200 per metric ton in March, and more difficulties in collecting our transportation deals from the distribution companies, as they experienced some difficulties in the collection from their residential retailer and industrial clients.

Regarding the liquids reference international prices, they have partially recovered around $250 in the case of the LPG and around $350 in the case of natural gasoline. Such levels are still below the average prices we had in 2019, but they give us a better outlook in the liquid business segment.

In relation to the collection of our natural gas distribution clients, it has improved, but our concern remains high, considering that the collections may be eroded due to the general deterioration of their clients' income as a result of significant reduction of the economic activity all over the country. Another topic to mention is the decision made by the government through this decree number 543 to extend the tariff revision for another 6 months with the deadline in December 2020 without receiving any tariff adjustment until the end of this year.

In addition, this decrease establishes an extension from 3 to 6 monthly invoices, which certain discussed clients can keep unpaid without having their natural gas supply interrupted. This benefit is for low-income residential consumers and small and medium companies. This last measure may reduce the cash generation of the distribution companies, which could result in more delay in collecting our receivables.

Regarding the liquids business, in May, the government reduced the tax on export of our liquids from 12% to 0%. Meanwhile, the Brent oil price is below $45 per barrel. In the event that Brent oil price is above $45 and below $60, the tax on export rate will be between 0% to 8%. And when it's above $60, the rate will be 8%.

In relation to our operations in Vaca Muerta, we have just entered into an agreement with Shell with the purpose to provide midstream services for up to 1 million cubic meters per day for 2 years in Bajada de Añelo, a block operated by Shell. This agreement will imply for this year the construction of some facilities in this block. This is another important step we take to continue growing in the midstream business in Vaca Muerta.

As we announced in July, Mr. Gustavo Mariani, who was the Chairman of the Board of Directors, resigned, together with 2 other alternate members. Mr. Horacio Turri was appointed as Chairman of the Board of Directors at the meeting held on July 13.

Previously, in June, Mr. Mariano Batistella presented his resignation as member of Board of Directors. The Board of Directors has convened for a shareholders' meeting to be held on August 21 in order to appoint the substitutes.

In addition, in July, working group sold its 5% indirect shareholding of the TGS controlling company, CIESA to Safra Group. Thus, Safra Group increased its direct -- indirect shareholdings of CIESA from 18% to 23%.

Finally, before we address our quarterly performance, I would also likely to remind you that we still have a share buyback program in place for a maximum amount of ARS2.5 billion, which is due to expire on September 6. Currently, we hold 6.8 million of ADRs in our treasury, which represent approximately 4% of the total capital stock.

Turning to Slide 4. I will now briefly talk about some of the highlights of our 2020's second quarter results. All figures presented in this quarter and comparisons made with the previous quarters are expressed in constant pesos as of June 30, 2020, as a result of the adoption of inflation adjustment for reporting purposes. As you can see on the slide, we experienced a significant decline of net income, which fell from ARS5.8 billion to ARS1.7 billion, which is mainly due to the negative variation of the financial results of ARS3.8 billion and the natural gas transportation EBITDA decrease of ARS1.7 billion. Both of the negative variations were partially compensated by their income tax effect.

Moving on to Slide 5. As I mentioned before, EBITDA of natural gas transportation decreased by ARS1.7 billion. This decline is basically explained by the ARS2.2 billion loss generated by annual inflation of almost 50%, which was not compensated by any tariff adjustment. Minor positive variations partially compensated such big negative effects. Higher in trouble transportation revenues of ARS132 million and lower operating expenses for ARS325 million.

On Slide 6, you can see that the EBITDA generated by the liquids business in the quarter declined by around ARS600 million in real terms from ARS2.3 billion to ARS1.7 billion. The negative variation was mostly due to lower prices, which led to a ARS1.8 billion reduction, and this is mostly explained by a decrease of the reference international prices of LPG and natural gasoline at an average of almost 50%, which led to a revenue decrease of ARS1.6 billion.

In addition, revenues were also impacted by a reduction of ARS646 million, due to lower tons of ethane sold of around 25,000 tons from 85,000 to 60,000. These effects were partially compensated by ARS482 million higher revenues due to an increase of 30,000 tons of propane exported from 18,000 to 48,000, but the most relevant positive variation was the cost reduction by almost ARS1.4 billion as the average price of natural gas thus fell from $3.5 per million of BTU to $2.1 in the second quarter of 2020.

Turning to Slide 7, other services EBITDA increased from ARS308 million to ARS598 million. Most of the EBITDA increase in this business segment is explained by higher revenues of ARS252 million generated by midstream services, which was motorized by those rendered in Vaca Muerta, initiated in the second quarter of 2019. In addition, lower operating costs increased the EBITDA by ARS81 million. So negative effect, we had the reduction of construction services revenue by ARS92 million.

On Slide 8, we show the financial expense, which generated a negative variation of ARS3.8 billion. The most important variation was a negative variation of the foreign exchange results for ARS3.1 billion, which is mostly explained by the dollar foreign exchange rate increase of 9% in the second quarter, while in the second quarter of 2019 the foreign exchange rate remained stable.

Additionally, a higher loss of ARS364 million was generated by the derivative financial instrument that TGS held to protect from low international prices of the propane, butane and natural gasoline, which expired last April. Finally, a ARS225 million lower gain was generated due to inflation exposure in the second quarter of 2020 as the inflation level was lower than the one registered in the second quarter of 2019.

Finally, turning to Slide 9. You can see the cash flow of the second quarter. Our cash increased by ARS4.6 billion, where EBITDA amounted to ARS5.8 billion, CapEx ARS1.2 billion and interest payment ARS1.1 billion, which corresponded to the semi-annual coupon paid in May. It's important to highlight the reduction of working capital for ARS641 million that is mainly related to the ARS1 billion reduction of the past due trade receivables in natural gas transportation business as the distribution companies and CAMMESA have partially regularized their payables.

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

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from the line of Ezequiel Fernández with Balanz.

Ezequiel Fernández

I'm Ezequiel Fernández from Balanz Capital. I have just 1 question. I just wanted to get an idea. You're building up a relevant cash position. And I'm wondering what do you expect to be the main uses of this cash for the remainder of this year and the next one?

Alejandro Basso

Well, as regarding our cash program, what we are trying to do is to hold the highest position in dollars. And for the application of the cash flow, well, it will depend on the development of the projects that we have in the midstream business, okay? You know that Argentina is going to go ahead with a new gas plant. So we may have some opportunities in the midstream business following this new turn.

Ezequiel Fernández

Okay. Perfect. And maybe a follow-up on that one. May we expect something in terms of dividends for this year or the next one? And any news on any expansions at the capacity of the Cerri plant?

Alejandro Basso

Well, as regarding dividends, it depends on our shareholders' decision. I don't have any notice right now, and it's not planned any new dividend payment. And as regarding the Cerri expansion of -- well, I think that we don't have any plan at this moment.

Operator

Thank you our next question comes from the line of [indiscernible] with MetLife.

Unidentified Analyst

Congratulation for the strong cash position in this context. I have a couple of questions. One follow-up of the Salliqueló question regarding the cash position. You mentioned that the goal is to hold a strong cash position in dollar. If you can provide any detail how much do you have offshore or any comment on that? And the other one is regarding the liquids more regarding to the contract with Dow Chemical. I believe that you are expecting some compensation for the incident that occurred last year. If you have any updates regarding the potential inflow?

Alejandro Basso

Well, regarding the cash position, it's -- our cash is mostly in dollars offshore right now. And as regarding the Dow compensation, we already received this compensation due to the problems -- the breakdown they had last year, okay? It's around $2 million.

Operator

[Operator Instructions]. Our next question comes from the line of Bruno Montanari with Morgan Stanley.

Bruno Montanari

I just wanted to pick your brain and ask what would the company's game plan be in case the tariffs continue to be frozen into 2021? And also regarding the tariff freeze now for the second half of the year, if the company believes that you can kind of recover any losses arising from that situation?

Alejandro Basso

Okay. Regarding the -- I will start with 2020 first. I don't think that we are going to have any tariff relief this year, 2020. And our plan is to be very prudent with our CapEx and OpEx expenses in the whole business. Nevertheless, we think that we are going to have some tariff relief in 2020, we should have, but I'm not seeing that we're going to have a recovery of what we are losing this year. It's going to be difficult that -- obviously, we are going to pursue that objective -- that goal, but I don't see that it's going to be probable.

Bruno Montanari

And then a follow-up, also in line with news we have been reading about the gas plant and potentially the construction of a new pipeline, what would you need to see for TGS to be comfortable to participate in building a new pipeline? What conditions would you like to have?

Alejandro Basso

Well, obviously, the conditions should be an improving general economic situation in Argentina, financial situation, and we are going to have some -- we need an important EBITDA in our business to be able to invest in those projects. Nevertheless, our plan is to participate maybe with a lower share than we previously -- when we were talking a couple of years ago, okay?

Operator

Our next question comes from the line of Antonella Rapuano with Santander.

Antonella Rapuano

I have two questions, if I may. The first one is regarding the share repurchase you have made, and I was wondering if you were planning to cancel these shares? Or are you going to send it back to the market in some point of time? And my second question is regarding the working capital and also the days of sales outstanding, how are these, the distribution -- the distribution companies making the payments? Are you resisting any delays? And how is that comparing to the beginning of the pandemic in March, where distributors have a little bit of delays when paying transportation and also oil companies.

Alejandro Basso

Okay. Regarding the shares buyback program, we don't have any decision right now, but we have three years to cancel the shares previously bought. So we have no rush to make a decision that time. You may -- we may distribute that shares as a share dividend or something like that in the future. But I'm not seeing that we are going to send it back to the market except for that -- for a dividend distribution of shares.

And regarding the distribution companies, as compared with the pandemia -- the beginning of the pandemia, we are much better. Total due collections amounted to ARS3 billion at that moment, and we are currently below ARS2 billion, ARS1.8. [indiscernible] paying us regularly every month, but one -- a couple of them have some delay, one of them two months and other one 1 month, but they are paying every month with this delay. Was I clear?

Operator

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

Alejandro Basso

Okay. Thank you. Well, thank you for participating in this year's second quarter 2020 conference call. We look forward to speaking with you again when we release our third quarter 2020 results. However, if you have any questions in the meantime, please don't hesitate to contact our Investor Relations department with any questions. Have a good day.

Operator

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.