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Edited Transcript of TGSU2.BA earnings conference call or presentation 8-Mar-19 2:00pm GMT

Q4 2018 Transportadora de Gas del Sur SA Earnings Call

Buenos Aires Mar 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Transportadora de Gas del Sur SA earnings conference call or presentation Friday, March 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alejandro M. Basso

Transportadora de Gas del Sur S.A. - CFO & VP of Administration, Finance & Services

* Jorge Javier Gremes Cordero

Transportadora de Gas del Sur S.A. - CEO & General Director

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Conference Call Participants

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* Antonella Rapuano

Santander Investment Securities Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Christine. I will be your conference operator today. At this time, I would like to welcome everyone to TGS's Fourth Quarter 2018 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 us in New York City at (646) 284-9435.

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 in constant Argentine pesos as of December 31, 2018, unless otherwise noted.

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

And I will now turn the call over to Mr. Basso. Sir, please begin.

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Alejandro M. Basso, Transportadora de Gas del Sur S.A. - CFO & VP of Administration, Finance & Services [2]

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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 briefly talk about the new tariff increase, which is expected to be implemented starting April 1, 2019, following what it was -- started as an internal tariff reduction -- revision in 2017. This is a tariff adjustment to reflect the evolution of the Wholesale Price Index in the period September 2018, February 2019. For this purpose, on February 26, 2019, a public hearing was held during which we requested to ENARGAS a tariff increase of approximately 35%, which includes the 10% difference of lower tariff increase granted by ENARGAS in October 2018 and an additional 25%, which is at the estimate of the Wholesale Price Index increase last semester. It is important to mention that the company is complying with its 5-year CapEx plan. So far, we have invested ARS 2.4 billion in 2018 alone and ARS 3.2 billion since April 2017.

Moving on to the share buyback program, as you may remember, we launched a program in May last year, which expired in September. Following its expiration, we launched a new program for a period of 180 days, which recently expired. Under these 2 programs, we bought 1.7% of the total capital, for which we paid approximately $40 million. Yesterday, the Board of Directors launched a new buyback program for up to ARS 1.5 billion, which will last 180 days.

On other news, as we announced last November, as the result of a new agreement signed with the gas producer, TGS was granted an extension for transportation concession to build and operate a 15-mile new gathering pipeline with a transportation capacity of 551 million cubic feet per day, which is an extension of the north branch whose construction was announced in April of 2018. We expect a total committed CapEx for the whole project of $250 million.

As we move on to the Slide 4, I will now briefly talk about some highlights of 2018 fourth quarter results. As you probably know, considering that the accumulated inflation for the last 3 years has been higher than 100%, Argentine companies should adjust their financial information by inflation. As such and from now on, all the figures will be expressed in constant pesos as of the end of each quarter. In this case, as of December 31, 2018, comparisons are made with figures from the same figure in 2017, which are also stated in constant pesos as of December 31, 2018.

As you can see, we recorded a net income of ARS 7.6 billion compared with ARS 1.1 billion in the same quarter of 2017. The increase is mostly explained by: One, higher rated income for ARS 1.2 billion associated with the transportation tariff increase as well as the significant devaluation of the Argentine pesos in the period between May and September 2018, which positively impacted nonregulated revenues denominated in U.S. dollars. Two, additionally, a ARS 2.4 billion variation in financial earnings, mainly due to the appreciation of the local currency. And finally, a positive variation in income tax for ARS 2.9 billion.

Moving on to Slide 5, as you see, we recorded higher Natural Gas Transportation revenues during the fourth quarter, increasing by 72% to more than ARS 3.8 billion compared to ARS 2.2 billion in the same period of 2017. The increase is mostly due to higher tariffs and this came into effect in April 2018 at 50%, in December 2017 at an average of 78% and the last one of almost 20% as of October 2018. This old tariff adjustment generated higher revenues of ARS 2.2 billion. This increase in revenues was partially offset by an inflation adjustment effect, which amounted to ARS 635 million.

On Slide 6, you can see that the revenues generated by production and commercialization of Liquids increased by 26%, measured in real terms. The main variation is related to a higher average U.S. dollar exchange rate, which increased by more than 110% and generated higher revenues of ARS 2.6 billion. Secondly, we also sold a higher volume of ethane, totaling almost 37,000 tons and increasing our revenues by ARS 536 million. This was due to the long-term contract we entered with PBB Polisur in 2018. These 2 positive effects were partially offset by an inflation adjustment effect, which amounted to ARS 1.1 billion as well as lower volumes exported of more than 35,000 tons of LPG and natural gasoline, which resulted in lower revenues of around ARS 635 million and lower international prices, which negatively impacted revenues by ARS 411 million.

As shown on Slide 7, other services revenues rose by 48% to ARS 486 million. This increase is mainly explained by hiring -- higher foreign exchange rate average, which generated higher revenues amounted to ARS 204 million. Furthermore, additional construction services rendered increased revenues by ARS 107 million. The inflation adjustment effect of ARS 101 million partially offset these 2 positive variations.

On Slide 8, we can see the variation in the costs of sales, which rose 29% to ARS 4.8 billion. One of the variations stemmed from higher costs of the natural gas used in the Liquids business, which rose ARS 583 million. Of this total, ARS 1 billion are related to higher natural gas prices in pesos generated by the huge increase in the average foreign exchange rate even when the average price in dollars was 10% lower. In addition, higher volumes of natural gas purchased during the fourth quarter of 2018 increased cost by ARS 85 million. These increases were partially offset by the effect of inflation adjustment for ARS 502 million.

In addition, operating costs of the Natural Gas Transportation business segment grew by ARS 293 million, operating cost of the nonregulated business segment rose by ARS 139 million and labor cost increased by ARS 43 million.

Moving on to Slide 9, administrative and selling expenses rose by 133% to ARS 1 billion. The increment is attributable, firstly, to the new tax on exports, which was implemented starting September 2018 and which has generated a cost of ARS 249 million in the last quarter. Similarly, we recorded an increase in turnover tax of ARS 141 million, which is mostly related to higher regulated revenues and lastly, ARS 121 million due to a trade receivable write-off provision.

On Slide 10, we can see the financial results for the fourth quarter, which resulted in a positive variation of ARS 2.4 billion. This variation is mainly split by the -- explained by the peso appreciation during the fourth quarter of 2018. During which, the foreign exchange rate decreased by 8.6% while in the fourth quarter of 2017, the foreign exchange rate increased by 7.7%. This constructed -- this construct -- contrast generated a positive valuation of financial income of almost ARS 1.5 billion. We also registered higher gains of ARS 810 million related to the exposure to inflation. In addition, you can see other minor positive changes due to the higher interest income amounted to ARS 225 million as our total average financial investment, denominated in pesos, and the average yield were much higher along -- with gains totaling ARS 215 million generated by derivative instruments. All these positive variations were marginally offset by higher interest expenses of ARS [288] million related to a higher foreign exchange rate and a higher debt level, which grew almost $250 million to $540 million.

Finally, income tax is a positive result of ARS 2.1 billion in the fourth quarter of 2018, which generated a positive variation of ARS 2.9 billion compared with the same quarter of 2017. Such 2018 fourth quarter positive result is due to the benefit of a reduction of income tax to be paid in the future for ARS 4.7 billion, considering that the company can deduct a higher depreciation generated by property, plant and equipment revaluation. This revaluation, which was made only for tax purposes, required a onetime tax of ARS 1 billion, which partially offset the aforementioned positive effect. Lastly, income tax charge increased by ARS 755 million due to higher pretax income.

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) And sir, there appear to be no questions at this time. I will prompt one more time. (Operator Instructions) And our first question comes from Antonella Robano (sic) [Antonella Rapuano] with Santander.

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Antonella Rapuano, Santander Investment Securities Inc., Research Division - Research Analyst [2]

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I'd like to know well on the today's tender of the -- all the consultation period to present the indication of interest about the expansion of capacity in the midstream. Do you plan to participate on it? Do you have any news about it?

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Jorge Javier Gremes Cordero, Transportadora de Gas del Sur S.A. - CEO & General Director [3]

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Yes. Javier speaking. We obviously have been following this over the past months as we mentioned in several meetings. It's something -- it's a picture that is -- hasn't been [that easy in order to] evacuation in Vaca Muerta gas as the main pipelines will be really full for this winter. So yes, we are -- of course, it's very recent. And it's really a new regulation that was not stated before. So we are going to analyze it. And yes, the intention is -- the intention, as I mentioned before, is to be part of this kind of infrastructure. Of course, we need to go through foundations. And as I already mentioned, I cannot say that for sure, but we are going to analyze it.

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Operator [4]

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(Operator Instructions) And there appear to be no further questions at this time. I will turn the call back over to Mr. Basso for any closing remarks.

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Alejandro M. Basso, Transportadora de Gas del Sur S.A. - CFO & VP of Administration, Finance & Services [5]

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Okay, thank you. Firstly, I want to have some clarification that the -- in fact, the Board of Directors of TGS has decided to postpone the decision on the -- on a new buyback program. So we don't have any buyback program right now in place.

With that, I thank you for participating in TGS fourth quarter 2018 conference call. We look forward to speaking with you again when we release our first quarter 2019 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.

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Operator [6]

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Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.