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

Q3 2019 Transportadora de Gas del Sur SA Earnings Call

Buenos Aires Nov 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Transportadora de Gas del Sur SA earnings conference call or presentation Friday, November 8, 2019 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 Administration, Finance & Services

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Conference Call Participants

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* Antonella Rapuano

Santander Investment Securities Inc., Research Division - Research Analyst

* Juan Alonso;Cohen;Analyst

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Presentation

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Operator [1]

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Good morning. My name is Rob, and I'll be your conference operator today. At this time, I would like to welcome everyone to TGS's Third Quarter 2019 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) 284-9421.

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, IFRS, and are stated in constant Argentine pesos as of September 30, 2019, unless otherwise noted.

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

And now I will 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 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 third 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, at the beginning of September, the Secretary of Energy issued Resolution 521 through which the tariff increase to become effective from October, was officially postponed to January 2020. The estimated tariff increase was 29%.

In addition and with the purpose to neutralize the negative effect derived from the loss of revenue, the resolution permit TGS to reduce its committed CapEx for the following 2.5 years by the same amount of the revenues that TGS could have built in the last quarter of 2019. TGS submitted the CapEx reduction proposal to the ENARGAS, and we're currently waiting for its approval.

At the end of August, TGS launched the fourth buyback program for a 90 days period with a maximum amount of ARS 3.2 billion. As a result of the 4 buyback programs implemented as of today, TGS has invested $70 million in purchasing 3.7% of the company's capital stock. These shares would be distributed amongst the shareholders on November 13, following the shareholders' decision made in its meeting of October '17.

Moving on to the ethane sales to PBB Polisur. As we mentioned in the last conference call, due to some operational problems suffered by the client, we sold less ethane since the end of June, impacting the revenues in the third quarter. After several weeks without selling any tons of ethane in the last days of September, we started to sell small volumes, and during October, the volumes sold increased to the normal level.

In term of the international tender to build and operate a new pipeline for Tratayén to Salliqueló in the province of Buenos Aires, the national government has decided to postpone the deadline for presenting the bids to March 31.

Finally, we're very proud to announce the commissioning of the 56-kilometer pipeline of North Tranche in Vaca Muerta on November 3. We expect to finalize the construction of the natural gas conditioning plant in Tratayén, and the expansion of North Tranche announced in November 2018 by the end of December.

Turning to Slide 4. I will now briefly talk about some of the highlights of our 2019 third quarter results. All figures presented in this quarter on comparisons made with previous third quarter are expressed in constant pesos as of September 30, 2018, as a result of the adoption of inflation adjustments for reporting purposes.

As seen, we recorded a net income of ARS 41 million compared with ARS 551 million in the same quarter of 2018. The main negative variation was the decline in operating income, which was partially offset by lower income tax and a reduction of net financial expense.

Moving on to Slide 5. We recorded lower natural gas transportation revenues during the third quarter, down 10% to ARS 5.1 billion compared to ARS 5.7 billion in the same period of 2018. This decrease was mainly the result of lower volumes natural gas transported under interruptive and other transportation contracts in the third quarter of 2019, generating lower revenues of ARS 403 million. In addition, the 2 tariff increases of 20% in October 2018 and 26% in April 2019, were insufficient to compensate for inflation of 53% in the last 12 months, which made the revenues fall by ARS 192 million.

On Slide 6, you can see that the revenues generated by the liquids business declined 45% in real terms. The negative variation of ARS 2.7 billion was mostly explained by international price decline of more than 40%, in the case of the propane and butane and almost 30% for natural gasoline. The effect in revenues was a reduction of ARS 1.6 billion.

In addition, due to operating problems suffered by PBB Polisur in late June, ethane sold in the third quarter of 2019 amounted only to around 6,000 metric tons compared to almost 61,000 tons in the third quarter of 2018.

As a result, liquid revenues fell ARS 1.2 billion. Additionally, the negative inflation adjustment effect was almost offset by a higher U.S. dollar exchange rate, resulting in a negative net variation of ARS 184 million.

As shown on Slide 7, other services revenue declined by 12% to ARS 720 million. This decrease is mainly explained by the negative inflation adjustment effect of ARS 280 million. A higher foreign exchange rate generated higher revenues amounted to ARS 172 million, which, together with higher midstream service of ARS 91 million, partially compensated the main negative variation. Lower revenues generated by the construction services for ARS 80 million, also impacted negatively in the variation of the revenues in the business segment.

On Slide 8, we see a 14% decrease in cost of sales during the quarter, down to ARS 5 billion. The main key factor was the lower natural gas costs in the liquids business, which decreased by ARS 1.1 billion. Of this total ARS 608 million was mostly related to a lower average price of natural gas in dollar terms, which fell from $5.2 per million of BTU to $3.92 in the third quarter of 2019.

Meanwhile, the negative effect of the higher exchange rate was almost offset by the inflation adjustment effect. Furthermore, natural gas costs fell by ARS 346 million due to lower volumes of natural gas purchased during the third quarter of 2019, which decreased by more than 10%.

This lower consumption of natural gas stem from the lower volumes of ethane dispatch to PBB Polisur in the third quarter of 2019.

However, repair and maintenance expenses of property plant and equipment of the natural gas transportation business increased by ARS 295 million, measured in real terms, which partially compensated the reduction of the variable cost in the production of liquids.

Moving on to Slide 9. Administrative and selling expenses remained constant. The highest increase was related to export tax amounted to ARS 68 million, as you probably recall, the start became effective in September 2018. However, the turnover tax declined by ARS 43 million, while labor costs also decreased in ARS 15 million.

On Slide 10, we show the financial results for the third quarter, which resulted in a positive variation of ARS 722 million. This variation is mainly explained by a high inflation, positive adjustment amounting to ARS 1.9 billion in the third quarter of 2019, as the net balance of the monetary liabilities, which are exposed to inflation, was much higher than in the third quarter of 2018.

The negative impact of ARS 103 billion, which partially offset it -- offset the aforementioned positive effect stems from the significant reduction of income interest earned during 2019's third quarter, explained by the reduction of temporary investment denominated in Argentine pesos. This reduction was made to reduce the exposure to peso devaluation losses.

Finally, turning to Slide 11. You can see that income tax during the third quarter of 2019, experienced a positive valuation of ARS 1.2 billion, and was explained by the new income tax regulation in relation to the inflation adjustment that should be taken into account for tax purposes since the current fiscal year.

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 is from the line of Juan Alonso with Cohen.

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Juan Alonso;Cohen;Analyst, [2]

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I would like to -- if you could give us some thoughts on -- about your main expansion projects, mainly the new gas liquefaction plant and what's the status on -- or if you expect to add compression capacity to Tratayén facility?

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

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Okay. Well, regarding the LNG project, we're advancing in the project in the technical status that are almost done. Now we're in the process of the -- of working with off-takers and with natural gas producers just to develop the project. And obviously, the new financial conditions may put some restraints on the financing of the project, but we are advancing with the final retail engineering and this market solutions to the project.

As regards with the Tratayén plant, we're working currently in a smaller project, which doesn't need a new liquids pipeline. And it's just a $15 million investment that can expand the plant by 2 million cubic meters per day. You know that the plant will have 5 million cubic meters per day, that's small, when we are going to finalize there. And that -- in this case, the project would be able to produce some liquids that we're expecting to explore to Chile, okay?

At the same time, we're working with the big project, but -- that with current conditions, and this project will depend on the developing of the natural gas pipeline from production to Salliqueló to be able to have more gas production, okay? So just sort of standby conditions right now.

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Juan Alonso;Cohen;Analyst, [4]

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Okay. And one last, if I may. And what is the status on the Transportadora, Alejandro? Do you still plan to make the bid? I assume it is. And would you still be financing part of the project with ANSES or how is the project finance or your plans for the...

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

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Well, you know that the bid has been postponed -- has recently been postponed to March 31. And as regarding the conditions for the bid, the government just said that they're going to include in the bill -- in the bid the Mercedes-Cardales connection pipeline. So as the project is going to be able to reach the BA area and the Northern Buenos Aires area without a second stage, okay, maybe in 10 cubics per day -- 10 million cubics per day.

As regards to the financing, there has been no change. I think that the ANSES is still there. But nevertheless, it's going to be defined by the new government, all I think. It's my opinion that the new government is going to review all the conditions that were -- are included in this business.

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Operator [6]

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(Operator Instructions) The next question is from the line of [Guido Roses] with Goldman Sachs.

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Unidentified Analyst, [7]

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One of the things I wanted to focus on and was wondering, is after the obvious change in government and also a change in policy with respect to convertibility, there's a limitation to exporters holding on to dollars from new sales. However, I understand that TGS as an exporter and also probably preparing for some of the political transitions has probably kept some cash offshore. So wondering what the cash offshore portion is of the total that was reported and kind of a composition of that cash? For the time being, it seems like offshore cash doesn't have to be repatriated. So that is an important point.

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Alejandro Mario Basso, Transportadora de Gas del Sur S.A. - CFO & VP of Administration, Finance & Services [8]

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Okay. You know that all our exports shall be -- must be sold. They don't -- you -- we have to sell the dollars and convert it into pesos in Argentina, okay? So regarding our cash balance, it's almost all offshore. Okay?

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Unidentified Analyst, [9]

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Okay. That's very helpful. And then, I guess, in terms of -- second question here, in terms of the Dow Chemical plant incident and the issues there that have affected the fuel business, is there kind of an update on when that's back online and when that would be fixed, I think, for the fourth quarter?

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

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Okay. Well, their program started at the end of June. They were able to start producing at the end of September, and by the end of last month, October, they were at full capacity. So we're -- you know that we have a take-or-pay that is our pay agreement. So we're going to negotiate the compensation for this stoppage. It's not a full compensation because the agreement provides for some days for maintenance. At the same time, we have insurance to cover us for this kind of loss when the program is longer than 60 days, okay? So we have some remedies. It's for the future -- in the future.

At the same time, we're negotiating with Dow and an extension or maybe higher volumes for the contract. So this negotiation may include this take-or-pay clauses -- the application of the take-or-pay clauses for the recent event.

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Operator [11]

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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 [12]

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I was looking at the liquid prices that has been declining for the past 3 quarters. And I was wondering if you could give us some insight of what were today the main drivers behind this movement and what we could expect going forward? Do you see prices keeps coming down or they could pick up in the next month?

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Alejandro Mario Basso, Transportadora de Gas del Sur S.A. - CFO & VP of Administration, Finance & Services [13]

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Okay. Well, the main -- the key drivers for the reduction of -- decrease in the liquids prices, we think that our -- the production -- the higher production of shale gas in the U.S., okay? So the future of these prices may depend on this -- on the evolution of the -- of shale gas in U.S.

Nevertheless, currently, the prices have recovered some part of the reduction. Maybe it's for -- its winter. We're approaching the winter season and in the Northern Hemisphere, so maybe the case for this recover. But we cannot predict the price.

Nevertheless, the reduction has been partially compensated by a reduction on the natural gas price down here in Argentina for higher production also.

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Operator [14]

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(Operator Instructions) At this time, I will turn the floor back to Mr. Basso for closing remarks.

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

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Okay. Well, thank you for participating in TGS Third Quarter 2019 Conference Call. We look forward to speaking with you again when we release our fourth 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 [16]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.