Transportadora de Gas del Sur S.A. (NYSE:TGS) Q1 2020 Earnings Conference call May 11, 2020 10:00 AM ET

Company Participants

Alejandro Basso – Chief Financial Officer

Conference Call Participants

Chelsea Colon – Aegon Asset Management
Antonella Rapuano – Santander
Valeria Cisnero – Macquarie
Guilherme Levy – Morgan Stanley

Operator

Good morning. My name is Christine and I will be your conference operator today. At this time I would like to welcome everyone to TGS’ First 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’ 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, 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 30, 2020, unless otherwise noted.

Joining us today from TGS in Buenos Aires is Alejandro Basso, Chief Financial Officer; Leandro Perez Castaño, Financial Manager and Carlos Almagro, Investor Relations Officer.

And now, I would 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 first quarter earnings and highlights for the 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 the COVID-19 emergency. The Argentina Government established a strict quarantine starting March 20, however, among some activities considered essential is natural gas supply. Therefore, TGS has adopted the measures required to ensure the continuity of the falling natural gas supply service and it’s non-regulated activities, while protecting the health of its employees, suppliers, and contractors.

It is important to mention, as you are aware of the tremendous negative impact that the COVID-19 pandemic is causing on our economy and especially in Argentina.

First quarter earnings were slightly impacted by the deceleration of the economic activities in Argentina and worldwide starting March. However, we expect to suffer a further deterioration on our financial metric in the following quarters, which will be seeing a decrease of our liquids revenues given the significant reduction of the reference international prices beginning in March and more difficulties in the collection process of transportation bills from the distribution companies as they are also having lower collections from their residential and industrial claim. Additionally, the impact also follows the absence of the tariff increase in over a year.

Furthermore, other problems may arise due to the uncertainty around the evolution of the pandemic and consequently the prevention measures of Argentina and other countries will be adopting in the near term that could further erode the macroeconomic value.

To reduce the impact on the vehicle of the difficult conditions, we have decided to make a substantial reduction to our operating and capital expenses without impacting the safety and reliability of the natural gas transportation system and our non-regulated assets.

On a separate topic, I also want to remind you that we will – we still have a share buyback program in place for a maximum amount of ARS 2.5 billion, which is new to expire on September of this year. Currently, this year homes over six million ADRs in our treasury, which represents approximately 4% of the total capital block.

Finally, and before we go to this our quarterly performance, I will also mention that during the first quarter of 2020, TGS bought $17.6 million of outstanding bonds that were issued in May 2018 with the maturity in 2025 at the cost of $12.6 million.

Turning to Slide 4, I will now briefly talk about some of the highlights of our 2020’s first quarter results. All figures presented in this quarter are comparisons made with the previous first quarter are expressed in constant pesos as of March 31, 2020 as a result of the adoption of inflation adjustment for reporting purposes.

As you can see, we recorded a net income of ARS 3.4 billion compared with ARS 3.5 billion in the same quarter of 2019. This slight reduction is mainly explained by a decrease in the operating income by more than 10% or ARS 726 million, which in turn steams from a similar percentage decline in revenues and operating costs. This negative valuation was partially offset by lower financial expenses of ARS 596 million.

Moving on to Slide 5, we recorded lower natural gas transportation revenues during the first quarter, decreasing 9% to almost ARS 5.4 billion compared to ARS 5.9 billion in the same period of 2019. This decrease was mainly the result of the inflation adjustment, which amounted to almost ARS 2 million and was well above the 26% tariff increase effect of almost ARS 1 billion granted in April, 2019. In addition, a higher volume of natural gas transported interruptible and other transportation contracts in the first quarter of 2020 generated higher revenues of ARS 449 million.

On Slide 6, you can see that the revenues generated by the Liquids business declined in the quarter 18% in real terms, from ARS 7.2 billion to ARS 5.9 billion. The negative variation was mostly due to lower prices which lead to a ARS 1.1 billion reduction and is mostly explained by a decrease in the reference international prices of the propane, butane and natural gasoline, at an average of 20%, and around 18% for retail price. In addition revenues were also impacted by a reduction of ARS 457 million due to lower volumes sold, mainly attributed to a 25% decline of exported tons.

As seen as seen on Slide 7, Other Services revenues increased from ARS 586 million to ARS 872 million. Most of the revenue increase in this business segment is explained by the revenues of ARS 261 million generated by maintenance services, in Vaca Muerta which started operations in the second quarter of 2019.

On Slide 8, cost of sales decreased by ARS 726 million and was down to almost ARS 5.9 million. This 11% decrease is mainly the result of lower natural gas cost at almost ARS 1.1 billion of which ARS 929 million was mostly related to lower natural gas prices in dollars, which fell from an average of $3.4 per million BTU to $2.3 in the first quarter of 2020.

In addition natural gas cost decreased by ARS 141 million due to lower volumes of natural gas purchased during the first quarter of 2020, which declined by 6%. This decrease was partially offset by a higher depreciation property, plant and equipment at ARS 210 million and was mostly spend by the start of the depreciation of the midstream assets located in Vaca Muerta. In addition, a higher maintenance cost of natural gas transportation PP&E was incurred at ARS 107 million.

Moving on to Slide 9, administrative, and selling expenses remained almost without any variation. The main important one was the ARS 156 million receivable write off recorded during the first quarter of 2012 which was almost totally upset by a lower tax on export and turnover taxes for a total of ARS 114 million.

Let's move to Slide 10. Other operating results experienced a positive variation of ARS 106 million, which is mostly explained by ARS 107 million insurance claim collection likely to a targeting damage last year.

On Slide 11, we show the financial expense which decreased by ARS 596 million. The most important variation was the ARS 753 million decrease in inflation exposure again, as the net balance of the monetary liability, which was at constant inflation during the first quarter of 2020, was much higher than in the first quarter of 2019.

Additionally, the higher gain of ARS 605 million was generated by derivative financial instruments that this year helps to protect from low international prices of the propane, butane and natural gasoline. These derivative financial instruments expired at last April. Another positive variation in the financial expense was ARS 315 million generated by the acquisition of $17.6 million related to TGS 2025 notes. All these positive variations were offset by the following negative variations.

One, ARS 430 million higher foreign exchange rate loss [indiscernible] liability net position was higher in the first quarter of 2020, mainly even more than $200 million lower cash balance. In the second hand, ARS 342 million interest capitalization in the first quarter of 2019 when the midstream Vaca Muerta project was under construction. And ARS 337 million interest income reduction explained by a lower average reduction in peso interest rate and the lower average balance invested in temporary investment in Argentine pesos.

Finally, turning to Slide 12. You can see that income tax shows a slightly variation as taxable pre-tax income amounts in both quarters were very similar. This concludes our presentation. I will now turn the call back to the operator who will open the floor for questions. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Ezequiel Fernández with Balanced Capital. [ph] Please proceed with your question.

Unidentified Analyst

Hi. Good morning. Thank you for the materials. I have three questions. I would like to go one by one if you don't mind. The first one is related to the economic emergency law function last December, which included the 180 days freeze on traffics, but also argued for a revision of the overall tariff regulatory framework, already, I don't know if you have had any conversations with the government so far on this.

Alejandro Basso

Hi, Ezequiel. Regarding the emergency law, the revision is not for the whole regulatory framework. But it is about the – it’s a revision about the ENARGAS, what ENARGAS has done in the last four years, on the previous four years. This revision has not already started. What they have told us is that they are going to contract some consultants to perform this revision. That's all. So regarding the tariffs, we don't see that the tariffs are going to be adjusted this year, okay. Because they have to perform this revision first, the quarantine has been a problem for them to start their work. So I think that's what we all need to come to some delay in this process.

Unidentified Analyst

Okay. That's very clear. Thank you. And regarding the natural gas liquid business, I wanted to get a sense of on the gas purchasing side, the gas that you need to separate to frac. Is it – these are take or pay contracts, would you need to buy – would you need to pay for more gas than you actually need at least during the second quarter because of the pandemic?

Alejandro Basso

No, we are not foreseeing that problem. We have contracts in place for just 50% of our production of our needs. And we think that the – natural gas liquids production is going to be – it's not going to be reduced. Maybe the thing, but some reduction or the next month. But we are not seeing some over purchasing of natural gas for our shrinkage.

Unidentified Analyst

Okay. That's great. And finally do you have any CapEx spending on Vaca Muerta pipe for the remainder of the year?

Alejandro Basso

Yes. Maybe around $10 million, we have spent $20 million the first order and the remainder is around to $10 million.

Unidentified Analyst

Okay. That's all from my side. I was very clear. Thank you very much.

Alejandro Basso

Thank you, Ezequiel. See you.

Operator

Our next question comes from the line of Chelsea Colon with Aegon Asset Management. Please proceed with your question.

Chelsea Colon

Hi and thank you for the call. I just have a couple of questions. The first one is related to the Liquids business. I'm wondering if you can give us more information about the hedging that you do. And then my second question is, can you provide us a little bit more detail about the types of OpEx and CapEx reductions that you're planning for this year? If you could put some numbers around that, that would be very helpful. Thank you.

Alejandro Basso

Okay. Thank you. As regarding the liquid section, unfortunately it has already ended last April 30th. It was a put, so as we conducted two years ago, a long-term gas purchasing contact, we decided to contract for our Liquids business. So we have an important collection for these puts as the liquids prices went down significantly, okay. As regards our OpEx and CapEx we have budgeted for this – regarding OpEx $140 million and we are cutting that around 30% for this last nine months of the year, okay. As regards CapEx it's similar reaction of 30% one-third approximately.

Chelsea Colon

Thank you so much.

Alejandro Basso

Obviously it will depend – it will depend on the conditions, okay. We get some relief or if the liquids prices increase, we may review this reduction.

Chelsea Colon

And can you just remind me what the original CapEx budget was?

Alejandro Basso

We have a maintenance CapEx budget of around $60 million and we are cutting that in 30% to $40 million for the full year, okay. Now as regards Vaca Muerta on other projects we have $40 million, $45 million budget and we are cutting that to $30 million.

Chelsea Colon

Thank you.

Alejandro Basso

Okay. Thank you. You’re welcome.

Operator

[Operator Instructions] Our next question comes from the line of Antonella Rapuano with Santander. Please proceed with your question.

Antonella Rapuano

Hello. Thanks for taking my question. I have a couple of questions. The first one, regards on the delays that you are receiving on the collections from this lockdown situation, but also the downturn of the economics. So what have you seen, if you could give us an update in April and in the first week of May if you have seen the days of sales outstanding have been increasing or they reach a peak in April and now are coming down, if you could give us some update on that? And how could you expect these to move forward in the next month?

And then the other question is on the follow-up on the OpEx reduction. If you could give us some details on where are these reduction or this efficiency are going to come from? Is this going to come from lower prices in the natural gas or maintenance cost, maybe if you could give us some details on that would be very helpful? Thank you.

Alejandro Basso

Okay, thank you. With regards to collections, as you said collection difficulties increased on April, but currently went down. We have some delays with our –mainly with institution, companies and commission the total due is around ARS2 billion, out of which ARS1.3 billion are – it’s – has 30 days delay and the other one is 60 days delay, something like that.

Moving forward, quite difficult to say, well, it depends on the activity conditions in Argentina I would say, economic activity condition. I don't know – we didn’t know that yesterday the government has released a very important amount of activities, mainly production activities, so in that case it may [indiscernible] something the collections in the near future.

Regarding the OpEx reduction, OpEx does not include gas purchase, okay. So all the reduction I was talking about excludes the gas purchasing. It’s just for maintenance activity.

Antonella Rapuano

Great. Thank you.

Alejandro Basso

But we are delaying that this year, okay. Okay. You're welcome.

Operator

[Operator Instructions] Our next question comes from line of Valeria Cisnero with Macquarie. Please proceed with your question.

Valeria Cisnero

Hi, good morning. Thanks so much for the call. I wanted to ask a question about the cash balances it was truly high increasing cash from fourth quarter to the first quarter this year. What is the rationale of continuing with the share buybacks on some bond purchases in the current scenario, instead of preserving cash? And maybe you can share what is the minimum cash you want to hold this year? Thank you.

Alejandro Basso

Okay, thank you. Well, with regards to our buyback program – our share buyback program, this depends on future conditions. Currently, we’re seeing that our cash reserves are enough for us. So we are keep on purchasing JRC, price is low in our opinion. Okay. And the same for the bond purchasing. Okay.

Valeria Cisnero

And in terms of the minimum – on the minimum balance that you want to keep. Because I think by the first quarter – the first quarter was about $58 million to $60 million? How can we go?

Alejandro Basso

Well, our current cash balance is around $260 million total.

Valeria Cisnero

Okay. Maybe I was looking at the wrong number. Okay, thank you.

Alejandro Basso

Yes.

Operator

We have no further questions at this time. I would now like to turn the floor back over to – I'm sorry. We did get another question. Our question comes from Guilherme Levy with Morgan Stanley. Please proceed with your question.

Guilherme Levy

Hi. Good morning. Thanks for taking my question. I had just a follow-up on the OpEx reduction. I understand that it's going to be mainly on maintenance, but can you elaborate more on that? It’s going to be based, I don't know, may be in headcount reduction, or if there is some sort of exchange rate effect on that. That would be great. Thank you.

Alejandro Basso

Hi Guilherme. As you say, the reduction is mainly in maintenance. It does not include any headcount reduction. You know that Argentina has currently doubled the severance cost. So it's much expensive. So it's not – headcount reduction is not going to bring any OpEx reduction in the near future.

So it's mainly, maintenance, such on maintenance, so that we can postpone, that in the last four years, we have increased our maintenance activities a lot. As it was required in the tariff revision in the other business activities also. So we are just slowing down these increases, okay, and other non-essential activities.

Guilherme Levy

Okay, great. Thank you very much.

Alejandro Basso

You are welcome

Operator

Our next question comes from the line of [indiscernible]. Please proceed with your question.

Unidentified Analyst

Hi, guys. Thank you so much for the presentation. I just want to have an update on the PDV plant. I don't know if you are already, they already receiving the normal volume and also if you have reach an agreement with them regarding the take or pay contract for last year. Thank you.

Alejandro Basso

Well, as regard to the volumes, they have recently reduced the volumes to half. So we are foreseeing a reduction in our revenues, maybe in the next month. But you know that we have a take or pay contract. So it should be compensated at the end of the annual contract – at the end of April of next year. As regards of the take-or-pay from the previous contract year, we are – we have no any agreement yet. Okay.

Unidentified Analyst

Okay. Thank you.

Alejandro Basso

Thank you. You are welcome.

Operator

We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Alejandro Basso

Okay. Well, thank you for participating in our presentation – in our call today. And if you have any additional questions, you can contact our Investor Relations department. So we'll see you in the next call. Thank you.

Operator

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