Transportadora de Gas del Sur SA TGS

Good morning.

My name is Paul, and I will be your conference operator today. At this time, I would like to welcome everyone to TGS's fourth quarter 2020 results earnings conference call. TGS issued its earnings report yesterday. If you did not receive a copy via email, please do not hesitate to contact TGS's 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, 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 stated in constant Argentine pesos as of December 31st, 2020, unless otherwise noted. Joining us today from TGS in Buenos Aires is Alejandro Basso, Chief Financial Officer, and Carlos Almagro, Investor Relations Officer. I would now turn the call over to Mr. Basso. Sir, please begin.

Thank you. Good morning, everyone, and thank you for joining us today on this conference call to discuss the 2020's four quarter roundings and highlights for transport area . To begin the call today, I would like to share with you some relevant events that occurred since our last quarter roundings call in November of 2020. Firstly, addressing the COVID-19 pandemic, As you may be aware, the situation in Argentina has been improving. Due mainly to the fact that we are going through the summer season, the number of cases reported have lowered in general. Thus, many restrictions were lifted, mainly during the last months of 2020, and the Argentine economy partially recovered after the collapse experienced in the second quarter. which on an annual basis contracted by 10% and is expected to rebound of more than 4% for 2021, based on the assumption that massive vaccination program will succeed in reducing the COVID-19 reported case. Moving on to address the tariff adjustment, last December, the Argentine government issued decree number 1020, which established, first, the start of integral tariff revision with a two-year deadline. Second, the suspension of the current integral tariff revision agreement, which was signed in 2017. And in third place, the authorization for General Gas to transitionally adjust tariffs while the integral tariff revision takes place. As for the transitional tariff adjustment, the Secretary of Energy summoned a public hearing to be held on March 15th to define the subsidy that the government will pay the gas producers under the new gas plan, which was launched in October 2020, as well as the price portion difference to be paid by the consumers. In addition, the Energas called to a public hearing to be held on March 16, to establish tariff increases for the distribution and transportation companies. The tariff adjustments will be defined after the public hearings. What is worth noting for this fourth quarter is the recognition of a 3.1 billion Argentine pesos in impairment of the natural gas transportation assets accounting value. Considering that this accounting value is being adjusted by inflation and the tariff remained without any increase in April 2019, accumulating a 75% increase which has not been granted by General Gas, Changing into account the semi-annual tariff adjustment contemplated in the Federal Tariff Revision Agreement signed in 2017. In addition, the uncertainty of future tariff increase coupled with expected high inflation underlies this impairment. During our last earnings call, we mentioned how important is the gas plan launched by the Argentine government in October for TCS, as it impacts across all our business segments. Even though this plan pushed natural gas prices upward and at the cost of our liquids business, we know this gas plan is necessary to stop the production decrease, given that previous prices were not enough to repay the investment made by the gas producers, mainly in the non-conventional production. Gas producers offer a total of 67 million cubic meters per day, slightly below the 70 million cubic meters minimum volume per day defined by the government. with an average price of $3.5 per million BTU under contracts for four years. An incremental volume of 3.6 million cubic meters per day was to be offered during the winter season. As a result of the local shortage and the lower gas production in Bolivia, which will imply lower Bolivian natural gas imports for this year, The government launched a second bidding under the gas plan to receive new offers from gas producers for additional volumes to be delivered in the winter season with the same price cut of $3.7 per million of EQ and some flexibility in the volumes to be offered in each month and the following three years. In this second bidding, a total volume of 4.5 million cubic meters per day was offered by the gas producers. which, together with the 3.6 million offered in the first bidding, totaled 8 million trimmings per day as incremental volume for winter season. In addition, the government called for an international bidding to hire a second regratification shift to be located in Vallablanca to regratify LNG from June to August. Turning to slide four, I will now briefly talk about some highlights in our 2020 fourth quarter results. By the way, all figures presented in the quadrant comparisons made in the previous quarters are expressed in constant pesos as of December 31st, 2020, following the provision established by the IRS for the financial reported in hyperinflationary economy. As seen in the slide, we reported the net loss of 3.5 billion during the fourth quarter of 2020, compared to a net income of 5.9 billion reported in the same quarter of 2019. And the bottom line negative variation is only explained by a 6.2 billion negative variation of the financial results and the PP&E impairment of 3.1 billion, which I mentioned before. Moving on to slide five, the PTA for natural gas transportation business decreased by 300 million. This decline is basically explained by the 1.9 billion revenue loss generated by the annual inflation of 36%, which was not compensated by any tariff adjustment. This revenue decrease was partially offset by lower PP&E main expenses of 824 million and lower rate expenses of 589 million. It's important to bear in mind that more than 80% of revenues are generated by firm transportation capacity contracts with an average life of more than 10 years, which allows for predictable stable revenues. However, without any tariff adjustments in April 2019, as it is shown in the slide, the revenue stream measured in real terms has been decreasing due to the negative effect of inflation. In terms of collection, past year fuel balance as of end of December remains stable at 1.8 billion, the same level we had during the last semester. On slide six, you can see that the VDI generated by the liquids business in the last quarter of 2020 decreased by approximately 300 million, declining from 3.6 billion to almost 3.3 billion. The main explanation for the negative variation is related to a lower volume of LPG sold in the fourth quarter of 2020, at around 31,000 tons, which generated lower revenues of almost 1 billion. S4 volumes fell by 48,000 metric tons, from 115,000 to 67,000 tons. Local sales increased by 17,000 metric tons from 71,000 to 88,000. It is important to mention that LPG production increased by 5% in the fourth quarter of 2020. In addition, the average price decline of methane and natural gasoline of 31% and 35%, respectively, claimed another 1 billion decrease in total revenue. These two negative effects were partially offset by a $1.3 billion cost reduction, of which $1.1 billion is due to the average lower price natural gas, which fell from $2.22 to $1.45 per million of ITU, and the other $200 million decline corresponded to the lower volume of natural gas purchased. Another positive variation, which helped to partially compensate the revenue decrease, is the lowers for tax of $334 million, as in the fourth quarter of 2019, the tax rate was 12%. And in the same quarter of 2020, the monthly variable tax rates were between 0 and 1.4%. Turning to slide 7, other services, the BTA increased from $450 million to $707 million. Part of the DBA increase in this business segment is explained by higher revenues of $313 million generated by midstream services. This is mainly attributable to increasing revenues generated by the gathering pipeline and conditioning plant built in Bacamorta between 2018 and 2019. We expect to continue growing this project in 2021. by deploying additional capital increasing revenues which will be generated by new agreements signed with gas producers. On slide eight, we can see that financial results experienced a negative variation of 6.2 billion. This negative variation was explained by a 4.6 billion loss generated by financial assets. A 1.5 billion lowered gain generated by inflation exposure and a higher exchange rate loss of 719 million, which is explained by 10% dollar foreign exchange rate increase recorded in the fourth quarter of 2020, compared to the 3% increase in the same quarter of the previous year. All these negative effects were partially upset by the 449 million positive variation generated by a same amount loss recorded in the fourth quarter of 2019, associated with the financial rate derivative instrument valuation. Finally, turning to slide nine, you can see the cash flow for the fourth quarter of 2020. Our cash decreased slightly by almost 900 million, less than 5%, where our DTA amounted to 7.5 billion, of which 53% was generated by non-regulated business. CAPEX amounted to 1.3 billion, and we paid interest of 1.4 billion and our revenue capital increased by almost 500 million. Once again, I should highlight that our financial situation looks pretty good considering the high level of cash of around $240 million, our maturity profile without maturities in the following four years, and that we expect to have a positive pre-cash flow for 2021, despite the current decline of natural gas transportation, EVTA. This concludes our presentation. I will now turn the call back to the operator, who will open the floor for questions.