Transportadora de Gas del Sur S.A. (NYSE:TGS) Q4 2019 Earnings Conference Call March 9, 2020 10:00 AM ET

Company Participants

Alejandro Basso - Chief Financial Officer

Conference Call Participants

Operator

Good morning. My name is Daryl and I will be your conference operator today. At this time, I would like to welcome everyone to TGS' Fourth Quarter 2019 Results 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 us in New York City at 646-284-9421.

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 the IFRS and are stated in constant Argentine pesos as of December 31st, 2019 unless otherwise noted.

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

And now I will 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 fourth 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, we are very proud to announce the total commissioning in time of the Vaca Muerta midstream project after completing works related to the construction of the natural gas conditioning plant in Tratayén and the extension of the north tranche which we announced in November 2018.

In terms of the transportation tariff adjustment, I would like to remind you that the last adjustment took place in April of 2019 at the rate of 26% increase. The next one should have been granted last October for 29%, but this was postponed by the former national government till February of 2020.

In return, to compensate the increased postponement, we were allowed to reduce the committed CapEx by the same amount of the revenues that this shale could have built in the last quarter of 2019.

Last December after the current national administration took office and an emergency law was approved by the National Congress which established among other things the ENARGAS intervention, no tariff adjustment for six months and a tariff revision during this period. We are not aware of the initiation of this revision yet and we expect that it will happen soon.

Last Friday, TGS launched the sixth buyback program for 180-day period for a maximum amount of ARS2.5 billion. At the end of 2019, TGS held almost 2 million treasury ADRs which represented 1.24% of the total capital stock. I would like to remind you that in November, TGS distributed the total treasury shares held at that moment at -- which represented the 3.7% of the company's capital stock.

Turning to slide number 4, I will now briefly talk about some of the highlights of our 2019 fourth quarter results. All figures presented in this quarter and comparisons made with the previous fourth quarter are expressed in constant pesos as of December 31st, 2019 as a result of the adoption of inflation adjustment for reporting purpose.

As you can see we recorded a net income of ARS4.4 billion compared with ARS12 billion in the same quarter of 2018. This net income reduction is mainly explained by the ARS4.4 billion negative variation of the income tax and a ARS3.3 billion decrease of the financial income.

Moving on to slide numbered 5, we recorded lower natural gas transportation revenues during the fourth quarter which was down 12% to ARS5.2 billion compared to ARS5.9 billion in the same period of 2019 -- 2018. This decrease was mainly the result of the inflation adjustment which amounted to ARS2 billion and was much higher than the tariff increase effect of almost ARS1.1 billion which was granted since last April.

In addition a higher volume of natural gas transported interruptible and other transportation contracts in the fourth quarter of 2019 generated higher revenues of ARS184 million.

On Slide number 6, you can see that the revenues generated by the Liquids business declined 5% in real terms. Negative variation was mostly explained by the following factors; one a decrease of international price of the propane by more than 30% led to a ARS735 million reduction; two lower price of ethane of 15% cost a decline of ARS418 million; and sales price lower volume of ethane of around 20,000 metric tons resulted in lower revenues of ARS416 million.

These negative effects were partially compensated by higher export revenues of propane and butane of additional 35,000 metric tons which generated ARS720 million increase in revenue. In addition around 10,000 metric tons of regional propane were sold in the local market which contributed an increase in revenues of ARS156 million.

Also higher sales of ARS211 million were registered in relation to butane exports generated by trading infrastructure and higher revenues of ARS95 million for services which are provided to our clients in Galván Port.

As shown on slide number 7, Other Services revenue went up slightly from ARS747 million to ARS763 million. Inflation negative effect of ARS244 million was almost neutralized by the increase of revenues due to higher foreign exchange rate which amounted to ARS218 million.

In the fourth quarter of 2019, revenues generated by midstream services rose by ARS135 million, which was mainly attributable to the start-up of operations in Vaca Muerta and was partially offset by lower sales of ARS86 million generated by the construction services.

On slide number 8, cost of sales and administrative and selling expenses decreased by ARS935 million and was down to ARS8 billion. Almost half of this decrease was due to lower natural gas cost of ARS461 million, where ARS676 million was mostly related to lower prices of natural gas in dollars, which fell from an average of $3.5 per million of BTU to $2.2 in the fourth quarter of 2019.

However, natural gas cost rose by ARS115 million, due to higher volumes of natural gas purchased during the fourth quarter of 2019, which increased by 5%. In addition to the lower natural gas cost, lower tax on export and turnover tax for ARS205 million and a trade receivable write-off provision for ARS204 million recorded in the fourth quarter of 2019 were the reasons for most of the total variation of the cost of sales and administrative and selling expense.

Moving on to slide number 9, other operating results decreased by ARS260 million to ARS18 million. This variation is mostly explained by a loss of ARS250 million generated in the fourth quarter of 2018 in relation to retirements of fixed assets.

On slide number 10, we show the financial results for the fourth quarter, which registered a negative variation of ARS3.3 billion. This variation is mainly explained by a ARS2.9 billion negative variation generated by foreign exchange rate results as the exchange rate decreased 6% in the fourth quarter of 2018, thus generating an income of ARS1.9 billion an increase by the same percentage in the last quarter, which generated a ARS950 million loss.

In addition, interest income decreased by ARS628 million, which is explained by the significant reduction of temporary investment denominated in Argentine pesos. This reduction was made to reduce the exposure to peso devaluation losses. Another important negative variation was the reduction of the financial results for ARS562 million generated by changes of the valuation of derivative financial instruments that the company holds to protect from low international prices of the propane, butane and natural gasoline. These negative variations were partially offset by a higher gain of ARS660 million generated by the inflation exposure as the net balance of the monetary liabilities which are exposed to inflation in the last quarter of 2019 was much higher than in the fourth quarter of 2018.

Finally turning to slide number 11. You can see that income tax during the fourth quarter of 2019 experienced a negative variation of ARS4.4 billion, principally due to the ARS5.6 billion gain registered in the fourth quarter of 2018, which was generated by a lower deferred income tax liability as the Argentina permitted the recognition of the revaluation of the property plant and equipment for income tax purposes. This revaluation permits to pay lower income tax as the company can deduct a higher depreciation every fiscal year. This negative variation was partially compensated by a ARS1.2 billion lower income tax charge in the last quarter of 2019, due to lower taxable income. 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

Alejandro Basso

Okay. Thank you for participating in this year's fourth quarter 2019 conference call. We look forward to speaking with you again when we release our first quarter 2020 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. You may disconnect your lines at this time. Thank you for your participation and have a great day.