Good morning. My name is Doug, and I will be your conference operator today. At this time, I'd like to welcome everyone to TGS' Q1 2021 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 the 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 March 31, 2021, unless otherwise noted. Joining us today from TGS in Buenos Aires is Alejandro Basso, Chief Financial Officer Leandro Perez Castellano, Finance Manager and Carlos O'Megro, Investor Relations Officer. And now, I'd like to turn it 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 2021 Q1 earnings and highlights for Transporta Bora de Jardens Sur. To begin the call today, I would like to share with you some relevant news that have occurred since our last quarterly earnings call 2 months ago. Firstly, on addressing the COVID-nineteen pandemic, the 2nd wave started few weeks ago. As such, the executive power tightened the restrictions trying not to compromise the partial economy recovery, which is expected to be around 6% in 2021 after the 10% decline persisted in 2020.
DGS as essential service provider has continued to run its operations while complying with all the protocols to keep its employees and suppliers safe. Secondly, on addressing the transportation tariffs on March 16, a public hearing was held sponsored by Enargas in order to define transitional tariff adjustments for the distribution and transportation companies. During such public hearing, TCS placed a request to get a 58.6% tariff increase just to meet our financial needs to pay operating and financial costs, CapEx and taxes without considering any profitarities. On April 28, TGS received a renegotiation transitional agreement from Generagas in accordance with Decree number 20 20, establishing the following. In the 1st place, no tariff adjustment for TGS since May 2021.
2nd, Enargas will define a new transitional tariff adjustment starting April 2022 in case there is no definitive renegotiation agreement in place then. In 3rd place, no mandatory investments are requested. And finally, it forbids any dividend payments, prepayment of loans and trade payables with shareholders, acquisition of other companies and grant of receivables. On April 30, through a letter sent to the Energas, TCS stated that considering the current context in which TCS operates and the terms and conditions proposed by the Energas, it's not feasible that TCS signs the transitional agreement as no tariff increase was granted. Turning to Slide 4, I will now briefly address some of the highlights in our 2021 Q1 results.
To remind you, all figures presented in this quarter and comparisons made with the previous quarters are expressed in constant pesos as of March 31, 2021, following the provisions established by the IFRS for financial reporting in hyperinflationary economies. As seen in the slide, we reported a net income of ARS 3,900,000,000 during the Q1 of 2021 compared to a net income of almost $4,900,000,000 reported in the same quarter of 2020. Even when total EBITDA increased by $1,400,000,000 supported by a 100% increase of $2,900,000,000 in the liquids business and a 34% decrease of $1,800,000,000 in the transportation business, higher negative financial results and income stats, which both totaled a negative variation of $2,400,000,000 were the main drivers of the $1,000,000,000 net income decrease. Moving on to Slide 5, EBITDA for natural gas transportation business decreased by $1,800,000,000 This decline is basically explained by the $2,200,000,000 revenue loss generated by the annual inflation of 43%, which was not compensated by any tariff adjustment. This revenue decrease was partially offset by lower PP and E main expenses amounting to 283,000,000 dollars and lower operating expenses of $399,000,000 It is important to bear in mind that almost 80% of revenues are generated by field transportation capacity contracts with an average life of more than 10 years, which allows for predictable and stable revenues.
However, without any tariff adjustments in place since April 2019, as seen in the slide, the revenue stream measured in real terms has been decreasing due to the negative effect of inflation. In terms of collections, past due receivable balance of end of March remained stable at $1,900,000,000 the same level we have had since June 2020. On Slide 6, you can see that the EBITDA generated by the liquids business grew during Q1 of 2021 increasing approximately $2,900,000,000 to almost $5,800,000,000 This significant increase is mostly explained by higher reference international prices, which increased by almost 50% in average and generated additional revenue amounting to $1,900,000,000 In addition, higher export volumes of 25,000 metric tons contributed to higher sales of 1,000,000,000 dollars Another positive effect was the lower price of natural gas, which reduced variable cost by $1,200,000,000 Average price was $1,500,000 in Q1 of 2021 compared to $2.3 per 1,000,000 of BTU in the Q2 2020. Our price of natural gas will increase from the Q2, especially considering the new gas plant launched by the government last October through which natural gas producers will be paid an average price of $3.5 per million of ETU. In addition, another factor that may push prices up is the reduction of our production at the Neuquen Basin, given the social protest, which blocked routes and roads leading to the fields for 3 weeks last month.
Other positive variation was generated by a $231,000,000 insurance compensation for lost earnings due to operating problems suffered by PVB polysilicon in 2019, which lowered dramatically our sales of ethane mainly in the Q3. All of these positive variations were partially offset by a lower price of ethane, resulting in a revenue reduction of $742,000,000 This lower price of ethane was related to the lower price of the natural gas. Finally, lower volumes of ethane at 22,000 metric tons impacted revenues in $498,000,000 This decrease is related to maintenance works carried out by PV Polisur in its facilities. Turning to Slide 7, other services EBITDA increased from $674,000,000 to $1,000,000,000 Part of the EBITDA increase in this business segment is explained by higher revenues of $356,000,000 generated by midstream services. This is mainly attributable to the increasing revenues generated by the gathering pipeline and conditioning plant built in Vaca Muerta between 2018 2019.
On Slide 8, we can see that the financial results recorded a negative variation of $1,300,000,000 This variation was mainly displayed by a $1,400,000,000 loss generated by financial assets as well as 2 gains recorded in the Q1 of 2020. The first, a $601,000,000 gain generated by financial derivative instruments and the second, a $451,000,000 gain attributable to the purchase of $17,000,000 face value TGS components. All these negative effects were partially offset by a $784,000,000 higher gain generated by inflation exposure, a lower exchange rate loss of $299,000,000 and higher interest income of 118,000,000 Finally, turning to Slide 9, you can see the cash flow for the Q1 of 2021. Our cash position increased by $4,500,000,000 or almost 20%. EBITDA amounted to 10 $400,000,000 of which 66 percent was generated by non regulated business.
CapEx amounted to $1,400,000,000 and our working capital increased by 1,700,000,000 dollars Once again, I should highlight that our financial situation looks pretty good considering the higher level of cash of around $300,000,000 Furthermore, we have no debt amortization in the following 4 years and we expect to be positive free cash flow for the rest of 2021 despite the current decline of natural gas transportation EBITDA. This concludes our presentation. I will now turn the call back to the operator who will open the floor for questions. Thank you.
Thank you. You. Our first question comes from the line of Konstantinos Papalios with Fuente. Please proceed with your question.
Thank you. Thank you very much. Have a good day. I'd like to ask you regarding the liquids segment. What can we expect from oil prices going up?
And how will that affect your revenues? And since there is expected to be a lack of natural gas in Argentina, could we expect the Secretariat of Energy to force a higher quarter of regulated LPG volumes obliging you to maybe sell more volume of LPG to the internal market at lower prices? Thank you very much.
Hi, Constantino. How are you doing? Good. Well, in reference to the prices are you hearing me? Hello?
Yes, yes, I am here. Yes, yes, of course.
Okay. Perfect. Well, regarding the prices of liquids, well, we cannot speculate about that. The futures are somehow lower than current prices, but they are in pretty good shape for us. And regarding the lack of natural gas and higher quota of domestic LPG, they are 2 different things.
The lack of natural gas could impact us on the availability of gas to produce the liquids. We may have some problems in the near future because of the fact of the social conflict that we have in Nokeng and well that will be a problem. Nevertheless, we are currently performing some maintenance work in our 3 plants, so we don't have the full supply of natural gas. And regarding the higher quarter of product, while we already have received this higher quarter of butane as compared with the previous year because of the fact that we produce our portion of production was higher in 2020 than in 2019. It was around 20,000 tons, an additional 20,000 tons compared with 2020.
Going to the for the future, we cannot anticipate any increase. It will depend on the production of any producer. In our participation on the whole production of this year.
Okay. Thank you. Thank you very much. Have a great day. Thank you.
Thank you.
Our next question comes from the line of Martin Arcek with Valens Capital. Please proceed with your question.
Hello. Well, first of all, thank you for the materials and congratulations on the strong results. I have two questions. Well, as you mentioned, DBS has a sizable cash position and cash flow outlook received. What can we expect for cash leases for the rest of this year?
Maybe more share upon repurchases or any project that seems closer to development for the manuel? And my second question will be, what we estimate and you mentioned that your gas purchases cost is close to $2 per NN Btu, well below the seasonal foreign gas price of the China's quarter. Do you expect to buy in below the gas coming to the PV4 price throughout the winter months? And more specifically, have you already contracted more of most of the winter gas volumes? Or do you expect to wet sand at spot trends?
Okay. Hi, Martin. Regarding the first question, the second, I didn't get the question fully. So I will look on the business, it will be good for us. Regarding the first question of the use of the cash, well, we don't have any program right now for repurchase share, for repurchasing share or other.
So we just it will depend on the projects that can appear in the near future, okay? We are working obviously in Vaca Muerta, but it will depend on the if the producers go ahead with increasing their production in Vaca Muerta. And the second question, I would if you can repeat it, please.
Yes, of course. Well, you mentioned that your gas purchase cost was below Plano's quarter. And do you expect this cost to increase in the next quarters? I wanted to know what do you expect, if you can give us some further notice on this.
Okay. Well, we are in the process of signing new contracts for natural gas. And these prices are going to be below slightly below Plan Gas Cuatro. The spot prices, we cannot speculate. It will depend on supply and demand.
But they may be in the winter higher than the quarter. Nevertheless, as I mentioned before, as we are performing some maintenance works, we don't expect for this winter to need much spot contracts for that. Okay? Is it clear?
Okay. Thank you. Yes. Thank you, sir.
You're welcome.
Our next question comes from the line of Loretta Wright with Loop Corp Analytics. Please proceed with your question.
Hi, good morning. Thanks for the call. Just wanted to get a sense of I don't know if you explained it at the beginning of the call. If so, I'm sorry. What's the expectation in terms of tariff increases in the transportation business?
You mentioned what happened, but going forward, what's the expectation? The other question is on cash. Those the 300,000,000 are those in dollars or in pesos locally? And finally, if you can just give us some detail on the Neuquen situation. Thank you.
Okay, Lorena. Perfect. Regarding tariff, please, we already explained that we received a proposal, an agreement proposed by the Enel Gas with a 0% increase.
So that's what we want
to get this year, I guess. For the next year, we the NRGAS has already started the tariff revision process. So we should have a tariff revision, renegotiation of current tariff. And if this revision is delayed to the end of the year, we should have an tariff increase in the Q1 of next year, okay, maybe in April 2022.
Okay. But because you rejected what was offered for 2021, that means you I mean, that ended the negotiation and then you get knowing the business?
The majority one has already ended. Okay. Yes. Okay. Okay.
Regarding the cash, we have more than 2 thirds in dollars and the other one in pesos invested in different
things.
Okay.
And regarding the Neuquen situation, you mean the social conflicts, they are already finished by you don't know if they can. I think that most of the people are okay with the proposal of the province government offer, but in some places there are still some conflicts, but those conflicts don't have any impact in the production. They are far from the production side.
Okay, great. Thank you.
You're welcome, Lorena.
Our next question comes from the line of Guillermo Leju with Morgan Stanley. Please proceed with your question. I'm sorry, he fell out of queue. There are no more questions in the queue. I'd like to hand the call back to management for closing remarks.
Okay. Well, thank you for participating in TCS Q1 2021 conference call. We look forward to speaking with you again when we release our Q2 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.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have
a
wonderful day.