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.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Thank you. Our first question comes from Jeremy Levy with Morgan Stanley. Please proceed with your question.

Hi. Good morning, and thank you for taking my questions. I guess the first one is on the impairment charge in the regulated business. If you can provide more color on that, perhaps if you can share with us the assumptions used on self-adjustment going forward to do these impairments. And the second one is on the liquid business. What should we expect in terms of EBITDA and profitability this year with the expected increase in natural gas prices in Argentina with the . Thank you.

Just a second, please. Sorry, can you repeat the first question?

Oh, sure, sure, sorry. Yeah, so my first question is on the impairment charge. I just would like to understand better the assumptions that were taken to do this charge. If perhaps you can share with us any assumptions of the areas of adjustment going forward that were used with the circulation, that would be great.

Okay, I understand that you wonder about the net tariff adjustment. Okay? Yes. Well, we have conversations with our GAFs during the last days of January and the first days of February. We have not arrived at any agreement with them. You know that we have to work with. They are proposing us to agree with them in a transition agreement, but we have not arrived at any agreement. So they started saying that we should lower a tariff by 15%, then 4%, and then they are right at a zero. But we have not, they said the numbers, the figures they use are not correct. They used a very low inflation for next year. And they have not taken into account some operation and maintenance expenses that we postponed last year for this year due to the pandemic and some other discussions. So, Currently, I should say that we have a zero adjustment, but with no agreement. That may change after the public hearing that is going to take place in March 16. Regardless, the no agreement, they should... work or we should work with an integral tariff revision the next year, during this year. So if we don't reach any agreement, we have the right to go through the tariff revision process. Do you understand? Okay for you? The gentleman? Thank you very much. Okay. Another question is about the natural gas price for our liquids business.

Yes, exactly. I just wanted to get a few, to get a little more sense of what to expect in terms of serviceability for this business in 2021.

Well, two things mainly. An increase in the natural gas price, obviously, due to the gas plan that the government has put in place. And the other one, we have very good international prices right now, and we expect that these prices may lower in the near future, but at the high level as compared with last year. Okay? We are expecting that the BTA for the liquid business may be around something similar to last year at the end of the day. Higher prices and higher volumes may remain. Thanks so much. Okay. Thank you.

Thank you. Our next question comes from Ezequiel Hernandez with balance. Please proceed with your question.

Good morning, everybody. Thank you for the materials. This is Ezequiel Fernandez from Balance. I have three questions. I would like to go one by one, if you don't mind. The first one is you were mentioning high International prices for propane, butane, natural gasoline. I was wondering if you were selling at the spot or in short-term or long-term contracts in each of these products?

Currently, we are selling at spot contracts. In the case of natural gasoline, we have signed a two-month contract.

Okay, mostly spot and short-term. That's great. My second question is related to the transitional tariffs on the regulated gas pipes business. We have the public hearing for March 16. Is there any other date? that we should be mindful or any other roadmap or obligation from the regulator to get this fixed in a certain amount of time?

Okay, Ezequiel. They should come with the new tariff for April the 1st, but they are not obliged to do that. Okay. And in fact, my opinion, the pass-through of the natural gas, the well-kept natural gas price is a problem right now. They have internal discussions in the government about the... Yeah, I know what you're referring to. So that may delay the process. Okay, got you. I don't think that transportation instruction studies should delay the process, but the natural gas... Yeah, the energy component, it's going to take longer, naturally.

Okay, perfect. And I don't know if you can give us an idea of where you saw gas prices in the industrial segment for January and February after the start of Plan Gap 4.

Well, they are quite low for January of 30. Higher than the December and November, but quite low.

Okay, so they did not catch up as much to Plan S4.

No, not so far.

Okay, that's right. That's all from my side. Very clear. Thank you very much.

Okay, see you at the kill. Thank you.

As a reminder, if you would like to ask your question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. Our next question comes from Constantino Popalis with Puente Fuente. Please proceed with your question.

Hi, hello. Thank you for this opportunity. I would like to ask two questions related to the Bahia Blanca Natural Gas Regustification Plant. First of all, does this bring, does this FSRU bring substantial revenues due to transport? And if there are any plans regarding the reversion of the of the northern pipeline, and how would that affect your business? I mean, if there is substantial volumes from Vaca Muerta, maybe there's an idea of reversing the pipeline, and then all the business changes substantially in the Buenos Aires province. Thank you very much.

Okay. I will start with a second question, then you can repeat me the first one. Regarding the probable reversion on the future of the northern pipeline, I think that we are not going to see any impact in the TCS business. It's just a question to replace Bolivian gas that is going down currently, and that's all, okay? The consumption and the supply of natural gas in the Buenos Aires point should remain the same. The first question was about?

The first question was about the Bahia Blanca floating storage gasification units. will it bring substantial revenues in terms of gas transport for TGS?

Thank you. No, no, no, because you know that we have long-term transportation contracts, more than 10 years on average, and these contracts provide for the transport from the south and from the west to Buenos Aires. And what the ratification in Vallablanca does is to replace the gas coming from the south that is lower than it should be under the contract. So there are no any additional revenues for this year.

Thank you. Thank you very much.

Thank you. Our next question comes from Robert Chang with Citi. Please proceed with your question.

Hey, guys. Thanks for the call. I was just wondering, can you guys provide any color updates on your offshore cash as far as the amount and the composition of those assets? Also, just to follow up, have you guys kind of been able to circumvent paying the coupons on your debt with that offshore balance?

Hi, Robert. Regarding our total cash, it's around $240 million in total. It's mostly offshore. And the second one, about the coupon payments, we don't have any specific plan just to pay them at the due date. That's what you want to know. Okay.

But you're paying your coupons with the official FX from the BCRA, correct?

Yeah, well, that may be a possibility in the future, yeah.

Okay. But in that eventuality, how are you kind of, able to avoid having to use your offshore cash balance for that?

Because if you have this cash unavailable, you are supposed to get the central bank authorization approval.

Okay. So just a last follow-up. Do you have any color on, you know, what that offshore cash balance is comprised of as far as You know, like long-term instruments or securities?

And tank deposits, mainly. Long-term tank deposits.

Okay. That's helpful. Thank you very much.

You're welcome.

Thank you. Our next question comes from Lorena Wright with Nucor. Please proceed with your questions.

Hi, good morning. Just a follow-up on the status that the first person asked. So right now there appears to be no agreement, so you go to the hearing and there's no agreement, and what happens until an agreement is reached? Does the status remain frozen until there's a negotiation and then there's a... is done, how does it work?

Well, the agreement, the draft of the agreement provided for an adjustment in one year term, an additional adjustment in one year term, if the tariff revision has not taken place at that moment, okay? If we don't sign an agreement, we should I don't know, but maybe we should wait for the tariff revision to have an adjustment of tariff.

Okay? So there's no agreement, so it could take up to a year for the tariff revision, and in the meantime, tariff will remain frozen at current level. Is that correct?

Yes, that may be the case.

Okay, and what's your expectation here in the ongoing

We require a 58% increase. Yes. The energy gas is 2.0. I don't know what is going to happen after the public hearing. Maybe we reach an agreement with some adjustment, positive adjustment for sugar. Okay. And then, in that case, we'll have the right to an additional adjustment in one year's time.

Okay, thank you. And then on the other services and telecommunication business, are you expecting that to grow or to remain a small part of your business?

In particular, as far as the new gas plant, we are expecting that the missing services may go up. in the near future. And the telecommunications, well, that's a slight growth. We are expecting.

Okay. And so the midstream, in the short or medium term, what's the expectation for the midstream as percentage of the total thickness? Because before it was split mostly half and half, more or less, on the regulated and non-regulated. then the equity business grew and then this one started to grow, so.

Well, our strategy is to make the non-regulated business grow. And so, and we have the target frozen, although with a slight increase in the near future, you can expect that the non-regulated portion of the business may grow at a relative level. But at the same time, the... The midstream services should grow at a total value, okay, at the same time. Okay, thank you.

Great. Thank you.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. There are no further questions at this time. I would like to turn the floor back over to Alejandro Abasso for any closing comments.

Thank you. Well, okay. Thank you for participating in this year's fourth quarter 2020 conference call. We look forward to speaking with you again when we release our first quarter 2021 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.

This concludes today's conference call. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful day.