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Edited Transcript of TGSU2.BA earnings conference call or presentation 11-May-20 2:00pm GMT

Q1 2020 Transportadora de Gas del Sur SA Earnings Call

Buenos Aires Jun 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Transportadora de Gas del Sur SA earnings conference call or presentation Monday, May 11, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alejandro Mario Basso

Transportadora de Gas del Sur S.A. - CFO & VP of Service

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Conference Call Participants

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* Antonella Rapuano

Santander Investment Securities Inc., Research Division - Research Analyst

* Chelsea Colón

Aegon Asset Management - Credit Research Analyst of Emerging Markets

* Ezequiel Fernández López;Balanz Capital

* Guilherme Levy

Morgan Stanley, Research Division - Research Associate

* Valeria Cisnero;Macquarie

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Presentation

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Operator [1]

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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's 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.

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Alejandro Mario Basso, Transportadora de Gas del Sur S.A. - CFO & VP of Service [2]

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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 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 Argentine 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 public natural gas transportation service and its nonrelated 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 in the world economy and especially in Argentina. First quarter earnings were slightly impacted by the deceleration of the economic activities in Argentina and with -- whereby starting March. However, we expect to suffer a further deterioration on our financial metrics in the following quarters, which will be seen in a decrease of our liquids revenues given the significant reduction of the reference international prices beginning March and more difficulties in the collection process of transportation business from the distribution companies as they are also having lower collections from their residential and industrial clients.

Additionally, the impact also follows the absence of a 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 that Argentina and other countries will be adopting in the near term that could further erode the macroeconomical variant.

To reduce the impact 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 systems and our nonregulated assets. On a separate topic, I also want to remind you that we still have a share buyback program in place for a maximum amount of ARS 2.5 billion, which is due to expire on September 6.

Currently, TGS holds over 6 million ADRs in our treasury, which represents approximately 4% of the total capital stock. Finally, and before we address 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 a 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 and 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, stems from a similar percentage decline in revenues and operating costs. This negative variation 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 billion 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 under 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 led to a ARS 1.1 billion reduction and is mostly explained by a decrease in the reference international prices of LPG 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 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 midstream 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 billion. 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 of BTU to $2.3 in the first quarter of 2020.

In addition, natural gas costs 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 of property, plant and equipment at ARS 210 million and was mostly explained 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 $156 million receivable write off recorded during the first quarter of 2020, which was almost totally offset by a lower tax on export and turnover taxes for a total of ARS 140 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, related to a turbine 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 sic [increase] in inflation exposure gain as the net balance of the monetary liability which was exposed to inflation during the first quarter of 2020 was much higher than in the first quarter of 2019. Additionally, a higher gain of ARS 605 million was generated by derivative financial instrument that TGS helped to protect from low international prices of the propane, butane and natural gasoline. These derivative financial instruments expired last April.

Another positive variation in 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 as the dollar-denominated liability net position was higher in the first quarter of 2020, mainly even more than $200 million lower cash balance.

In the second half, ARS 342 million interest capitalization in the first quarter of 2019 when the midstream Vaca Muerta project was under construction. And the ARS 337 million interest income reduction explained by a lower average reduction in peso interest rate and a 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 the 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Ezequiel Fernández with Balanz Capital.

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Ezequiel Fernández López;Balanz Capital, [2]

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I have 3 questions. I would like to go one by one, if you don't mind. The first one is related to the economic emergency law sanctioned last December which included the 180-day freeze on tariffs but also argued for a revision of the overall tariff regulatory framework, the (inaudible). I don't know if you have had any conversations with the government so far on this?

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Alejandro Mario Basso, Transportadora de Gas del Sur S.A. - CFO & VP of Service [3]

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Ezequiel, regarding the emergency law, the revision is not for the whole regulatory framework but for -- it is about the -- it's a revision about the ENARGAS, what the ENARGAS has done in the last 4 years -- on the previous 4 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. As regards as of 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 ENARGAS to start their work. So I think that's why we are going to have some delay in this process.

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Ezequiel Fernández López;Balanz Capital, [4]

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Okay. That's very clear. And regarding the natural gas liquids business. I wanted to get a sense of -- on the gas purchasing side, the gas that you need to separate, to frack. 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?

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Alejandro Mario Basso, Transportadora de Gas del Sur S.A. - CFO & VP of Service [5]

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No. We are not foreseeing that problem. We have contracts in place for just the 50% of our production of our needs, and we think that -- natural gas liquids production is going to be -- it's not going to be reduced, maybe they're paying at some reduction but -- on the next months, but we are not seeing some overpurchasing of natural gas for our shrinkage of the plant.

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Ezequiel Fernández López;Balanz Capital, [6]

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

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Alejandro Mario Basso, Transportadora de Gas del Sur S.A. - CFO & VP of Service [7]

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Yes. Maybe around $10 million. We have spent $20 million the first quarter and the remainder is around $10 million.

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Operator [8]

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

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Chelsea Colón, Aegon Asset Management - Credit Research Analyst of Emerging Markets [9]

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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?

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Alejandro Mario Basso, Transportadora de Gas del Sur S.A. - CFO & VP of Service [10]

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Okay. Thank you. As regarding the liquids hedging, unfortunately, it has already ended last April 30, it was a put. So as we contracted 2 years ago, a long-term gas purchasing contract, we decided to contract a put for our Liquids business. So we have an important collection for this put as the liquids prices went down significantly. Okay? And as regards to our OpEx and CapEx, we have budgeted for this year -- as regarding OpEx $140 million and we are cutting that around 30% for this last 9 months of the year. Okay? As regards to CapEx, it's a similar reduction of 30%, 1/3 approximately. And obviously, it will depend on the conditions. Okay? If we get some tariff relief or if the liquids prices increase, we may review this reduction.

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Chelsea Colón, Aegon Asset Management - Credit Research Analyst of Emerging Markets [11]

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

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Alejandro Mario Basso, Transportadora de Gas del Sur S.A. - CFO & VP of Service [12]

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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? And as regards to Vaca Muerta or other projects, we have $40 million -- $45 million budget, and we are cutting that just to $30 million.

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Operator [13]

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(Operator Instructions) Our next question comes from the line of Antonella Rapuano with Santander.

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Antonella Rapuano, Santander Investment Securities Inc., Research Division - Research Analyst [14]

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I have a couple of questions. The first one regards on the delays that you are registering 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 this 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 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.

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Alejandro Mario Basso, Transportadora de Gas del Sur S.A. - CFO & VP of Service [15]

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Okay. Well, as regards to collections, as you said, collection difficulties increased in -- on April but currently went down. Our -- we have some delays with our -- mainly with the institutional companies and CAMMESA. The total due is around ARS 2 billion, out of which ARS 1.3 billion are -- it has 30 days delay and the other one is 60 days delay, something like that. Moving forward, it's quite difficult to say, it will depends on activity conditions in Argentina, I would say, economic activity condition. I don't know -- we don't know that yesterday the government has released a very important amount of activities, mainly production activities. So in that case, it may include something, the collections in the near future. As regarding on OpEx reduction, OpEx does not include the gas purchase. Okay? So all the reduction I was talking about excludes the gas purchasing. It's just for maintenance activity.

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Operator [16]

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(Operator Instructions) Our next question comes from the line of Valeria Cisnero with Macquarie.

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Valeria Cisnero;Macquarie, [17]

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I wanted to ask a question about the cash balances. It truly was a high decrease in cash from fourth quarter to the first quarter this year. What is the rationale of continuing with the share buybacks and 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?

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Alejandro Mario Basso, Transportadora de Gas del Sur S.A. - CFO & VP of Service [18]

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Okay. Thank you. Well, as regards to our buyback -- our share buyback program, it will depend on future conditions. Currently, we think that our cash reserves are enough for us. So we are -- keep on purchasing shares if the price is low in our opinion. Okay? And the same for the bond purchasing. Okay?

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Valeria Cisnero;Macquarie, [19]

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And in terms of the minimum -- on the minimum balance that you want to keep? Because I think by the [first] quarter -- end of the first quarter, it was about $58 million to $60 million. How low can you go?

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Alejandro Mario Basso, Transportadora de Gas del Sur S.A. - CFO & VP of Service [20]

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Our current balance is around $160 million total.

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Valeria Cisnero;Macquarie, [21]

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Okay. Maybe I was looking at the wrong number.

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Operator [22]

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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.

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Guilherme Levy, Morgan Stanley, Research Division - Research Associate [23]

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I have 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, maybe in headcount reduction or if there is some sort of exchange rate effects on that, that would be great?

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Alejandro Mario Basso, Transportadora de Gas del Sur S.A. - CFO & VP of Service [24]

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Guilherme, as you said, the reduction is mainly in maintenance. It does not include any headcount reductions. You know that Argentina has currently doubled the severance cost. So it's much expensive. So it's not – head count reduction is not going to bring any OpEx reduction in the near future. So it's mainly maintenance, certain maintenance that we can postpone. You know that in the last 4 years, we have increased our maintenance activities a lot as it was required in the tariff revision and in the other business activities also. So we are just slowing down these increases. Okay? And other nonessential activities.

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Operator [25]

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Our next question comes from the line of [Agustin Buenasera with Monera].

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Unidentified Analyst, [26]

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I just want to have an update on the PBB plant. I don't know if you are already -- they are already receiving the normal volume and also if you have reached an agreement with them regarding the take-or-pay contract for last year?

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Alejandro Mario Basso, Transportadora de Gas del Sur S.A. - CFO & VP of Service [27]

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Well, as regards to the volumes, they have recently reduced the volumes to a 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 contractual year, we are -- we have not made any agreement yet. Okay?

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Operator [28]

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

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Alejandro Mario Basso, Transportadora de Gas del Sur S.A. - CFO & VP of Service [29]

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Okay. Well, thank you for participating in our presentation and 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.

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Operator [30]

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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.