Transportadora de Gas del Sur S.A. (TGS) Q2 FY2025 Earnings Call Transcript & Summary

Good morning, everyone. I'm Carlos Almagro, Head of Investor Relations. I would like to welcome everyone to TGS' Second Quarter 2025 Earnings Video Conference. TGS issued its earnings release yesterday. If you did not receive a copy of the release, please contact us at investor.tgs.com.ar. Before we begin the call, I would like to inform you that this event is being recorded. [Operator Instructions]. I would also like to remind you that forward-looking statements made during today's video conference do not account for future economic circumstances, industry conditions, or 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 Accounting Reporting Standards, IFRS, and are stated in constant Argentine pesos as of June 30, 2025, unless otherwise noted. Joining us today from TGS in Buenos Aires is Alejandro Basso, Chief Financial Officer. I will turn the video conference over to Mr. Basso. Alejandro, please begin.

Thank you, Carlos. Good morning, everyone, and thank you for joining us today to discuss TGS' '25 second quarter earnings and highlights. To begin the call today, I will start by sharing some of the most recent news about the company. In terms of our natural gas transportation business, following the completion of the 5-year tariff revision, with initial tariff charges beginning in May 2025, the Secretary of Energy modified the frequency of tariff inflation adjustments. In response to the ENARGAS' request, the rate will be now adjusted every month instead of every 6 months. As such, the ENARGAS will be adjusting the transportation tariffs every month considering the wholesale price and consumer price indexes monthly variations in equal proportions. As you remember, on March 7, we had a severe storm that flooded the Cerri Complex. Given the outstanding efforts made by our employees and suppliers, we managed to have the processing plant normally operating since early May. In terms of the private initiative submitted to the government back in June 2024 to expand the transportation capacity of the Perito Moreno pipeline by 14 million of cubic meters per day, ENARSA launched a tender offer in May. On July 28, we presented our bid with no other bidder. The project is scheduled to be awarded on October 13, and it involves the construction of 3 compressor plants as well as the expansion of the Tratayén compressor plant, totaling an additional 90,000 horsepower. In case we are awarded the project, we must commission the incremental capacity by April 2027, while operating and maintaining the Perito Moreno pipeline for a 15-year period. We will also be entitled to commercialize the incremental capacity for the same period, after which the facilities will revert to ENARSA. As you heard a couple of weeks ago, we are proud to announce that the National Executive Power has finally issued the Decree number 495 of the year 2025 and has officially extended our license for another 20 years from 2027 to 2047. Finally, and before we review the details of the quarter, on May 28, the Board of Directors approved a dividend payment of ARS 200 billion, which was equivalent to approximately $170 million and was paid on June 11. Moving to Slide 4. I will briefly highlight the key financial results for the second quarter of 2025. Please keep in mind that all figures presented for this quarter and comparisons made with the previous quarters are expressed in constant Argentinian pesos as of June 30, 2025, following the provisions established by the IFRS for financial reporting in hyperinflationary economies. As seen in the slide, we reported a total net income of ARS 40.3 billion during the second quarter of 2025 compared to ARS 119.7 billion reported in the same quarter of 2024. This decline was mostly explained by a negative variation of ARS 76 billion in financial results, mainly resulting from significant lower yields on the peso-denominated investments. Additionally, EBITDA decreased ARS 32 billion for the Natural Gas Transportation segment and another ARS 27 billion for the Liquids segment, both of which were partially offset by a ARS 10 billion EBITDA increase in the Midstream business segment. Moving on to Slide 5. EBITDA for Natural Gas Transportation business in the second quarter of 2025 totaled ARS 85.6 billion, which compares to ARS 119.2 billion recorded in the second quarter of 2024. The EBITDA reduction of ARS 32 billion in the regulated business segment was mainly due to the transitional tariff adjustment from August 2024 to March 2025 and the inflation adjustment in June '25, which resulted in a total of 25%, and ARS 23.7 billion revenues increase were insufficient to offset the 40% annual inflation, which generated a ARS 49 billion revenue reduction. In addition, operating expenses and PP&E maintenance costs rose by ARS 7.7 billion and ARS 1.9 billion, respectively. On Slide 6, you can see that the EBITDA for the Liquids business decreased by more than 50% to ARS 25.3 billion during the second quarter of 2025 compared to ARS 52.6 billion reported in the same quarter of '24. Most of the EBITDA decline was explained by the ARS 16.6 billion extraordinary expenses incurred as a result of the flood occurred on March 7, and which should be recovered from the insurance company. Monetary effects further reduced EBITDA by ARS 11.3 billion. In addition, and following the climate event, the processing plant was not in operation until mid-April and then gradually began operating until reaching normal capacity on May 7. As a result, the Liquids volume sales decreased by 39,000 metric tons from 250,000 metric tons sold in the second quarter of 2024 to 211,000 metric tons in the '25 second quarter, impacting our EBITDA nearly ARS 10 billion. Another factor which affected EBITDA ARS 6.3 billion was the impact of the natural gas price, which increased from $2.9 per million BTU to $3.3 per million BTU. These negative effects were partially offset by higher butane prices in the domestic market following the deregulation of the butane price under the Program Hogar starting January 25, which allows us to sell at export parity price. In addition, in terms of our ethane sale contract, this quarter, we had a higher annual take-or-pay compensation amounting to ARS 3.5 billion. Turning to Slide 7. EBITDA from midstream and other services rose to nearly ARS 52 billion compared to ARS 41.5 billion in the second quarter of '24. This increase was mainly driven by higher sales derived from the incremental bill volume of natural gas transported and conditioned in Vaca Muerta totaling ARS 19 billion. Transported natural gas billed volume rose from an average of 25 million cubic meters per day in the second quarter of '24 to 30 million cubic meters per day during this quarter. The natural gas conditioning volume also increased from an average of 16 million cubic meters per day to 27 million cubic meters per day. This effect was partially offset by ARS 6.2 billion in higher operating expenses and ARS 3.5 billion negative monetary effect as inflation outpaced the foreign exchange rate increase. As seen on Slide 8, we recorded a negative variation in the financial results amounting to ARS 76 billion. This was mainly due to a ARS 16 billion decline in income from financial assets given the much lower yields of the domestic financial investments. Additionally, we recorded a higher foreign exchange loss of ARS 15.7 billion in the second quarter of '25 following the Central Bank's decision to float the USD exchange rate, the dollar exchange rate in early April. This led to a 12% increase in the '25 period compared to 6% in the same quarter of '24 under the previous regime of 2% monthly crawling peg. These negative effects were partially offset by the ARS 4.2 billion lower inflation exposure loss. Finally, turning to the cash flow on Slide 9. Our cash position in real terms decreased by 33% or ARS 339 billion during the second quarter of '25 to ARS 676 billion, equivalent to approximately $565 million at the official exchange rate. EBITDA generation during the second quarter amounted to almost $163 billion, of which 53% was generated by the regulated transportation business and 47% by the nonregulated businesses. CapEx for the period amounted to ARS 55 billion. Working capital increased by ARS 19 billion, and we paid dividends amounting to ARS 103 billion and income tax payments of ARS 197 billion. This concludes our presentation. I will now turn it over to Carlos, who will open the floor for questions. Thank you.

Thank you. The floor is now open for questions. [Operator Instructions] The first question is from Florencia Mayorga with MetLife. She asks if we can confirm impairment in the second Q related to the climate event.

Florencia, as we said in the call, the impact on the quarter was ARS 16.6 billion extraordinary expenses incurred by the flood.

Second question from Julian Casas from Latin Securities. If we can share any update on timeline regarding the NGL project.

Okay. We are currently evaluating the cost and waiting for certain bids related to the assembling of the plants that are involved in that project. We are expecting to have results by the end of September.

Bruno Montanari from Morgan Stanley. His first question is regarding the current level of EBITDA. Emissions is sustainable at current levels?

Well, this quarter, we had a very good EBITDA in the Midstream services. Nevertheless, we expect that this business will continue to grow in the future.

The second question is regarding the full recovery of profitability in the [ NGL ] segment.

As we said, we started full operations on May 7. So from that moment on, we are having full operational activity in the plant.

Raul Ignacio from [indiscernible]. His first question is regarding the increase in the cost in general, if we could share more details about those changes this quarter?

Okay. You have to take into consideration that the tariff revision, the full tariff revision started in April 1, okay? So in this quarter, we are spending what we estimated in the tariff revision process. It is different than what we had last year, where we are under a transitional period regarding the transportation business.

His second question is regarding the insurance related to the incident at Complejo de Cerri covering both damages and loss of income. Is there any -- you will receive any compensation or what is the current status of the insurance?

Okay. The insurance people have been working in Cerri. They have reviewed the damages. Everything is okay up to now. We are expecting that they will come with their numbers maybe in 2, 3, 4 months. Nevertheless, we may have some advance of the recovery. As you may know, our insurance covered all the expenses above $1 million. In the case of the loss of income or business interruption, our business interruption was just 17 months that we have as deductible in the insurance policy. So we are not expecting a lot of recovery in that regard.

Matías Cattaruzzi from Adcap Securities. His question is regarding the outlook for the regulated transportation segment in the third Q '25. Considering the lagging tariff update, we expect the EBITDA to go back to the first Q '25 figures or stay similar to second Q '25 figures?

As I said, we currently are having the monthly inflation adjustments. So regarding revenues, it will depend on the level of adjustment that you know is 50% CPI and 50% wholesale price index as compared with the CPI that is the index used by the adjustment in financial statements. Regarding full EBITDA, as I said, the level of expenses is higher now that we are under the tariff revision process, okay?

His second question is regarding the Perito Moreno pipeline tender. As the early bidder, when we expect the contract to be awarded?

As I said in the call, we are expecting -- the scheduled date is October 13. Nevertheless, it could be earlier than that. I don't think so, but maybe later than that, okay? It's not a fixed date. But as we are the only bidders, it should be easier to go quicker with the award.

A more specific question regarding [ NGL ] project. How are discussions with President progressing? Are there any signals on the scale of potential timing of the financial investment decision?

Well, I cannot anticipate any results from the discussion. We are working with the gas producers. We are working with the cost of the project. We are expecting maybe at the end of this year to go ahead with the project.

The next question is from Santiago Reyna from Atalaya. His first question is regarding the past Bahia Blanca event. What was the total effect on cost for the maintenance tuning of the Cerri Complex?

Santiago, we are estimating a total cost of around approximately $40 million for all the expenses and also the impairments of assets.

His second question is regarding the ship-or-pay contract compensation. What was the amount received for that concept?

It was $7 million.

And his third question, which client caused the deterioration of account receivables for the regulated transportation segment?

It was Albanesi, the marketer, okay? So that's what we have to do to book the bad debt allowance. Nevertheless, we have recovered in cash 50% of that, which should be accounted for in the next 2 years, because it's related to an anticipation of revenue that they have.

Next question from Juan Ignacio Lopez from PUENTE. His question is regarding the status of the Perito Moreno pipeline. Well, the date for the project next schedule was explained, that will be on October 13. Regarding the CapEx, we also say that it's around $500 million, okay? In the case of the Perito Moreno pipeline [indiscernible], we have $200 million in the finance tranches. Mathieu's 2 questions regarding the same question that we answered before. His additional question is regarding exercising incremental capacity option and what are the drivers to check the [ decisions ]?

Regarding the optional additional capacity, it will depend on the open season that we are going to run once we are awarded, okay? So it will depend on that.

Well, another question from Florencia Mayorga from MetLife. What's our expectation in regulated EBITDA after tariff process done?

Florencia, see, we're expecting $300 million annually. Obviously, it will depend on inflation and effects on Argentina then.

Question from Guido Bizzozero from Allaria. How do we expect to finance the iniciativa privada project, which will be pipeline. Awarded cash and debt percentage?

We are expecting to finance the imports from that project that are around $70 million. And then beyond that, we are going to use our own cash. And nevertheless, it will depend on if we are going to have other projects like the NGL project, obviously. So in that case, we may decide to have additional financing for the private initiative project also.

His second question is regarding when we expect this project will start to generate cash flow considering the 18-month [indiscernible].

By April '27.

Well, there's no more questions. Thank you for attending the call. And this concludes the question-and-answer section. Now we will turn to Alejandro for final remarks.

Well, thank you all for participating in TGS' Second Quarter 2025 Conference Call. We look forward to speaking with you again when we release our 2025 third quarter results. If you have any questions in the meantime, please do not hesitate to contact our Investor Relations department. Have a good day.