Transportadora de Gas del Sur S.A. (TGSU2) Earnings Call Transcript & Summary

Good morning everyone. I am Carlos Almagro from Investor Relations. I would like to welcome everyone to this year's second quarter 2024 results video conference. TGS issued its earnings release yesterday. We would like to inform you that this event is being recorded. [Operator Instructions] Before we begin the call today, I would like to remind you that forward-looking statements made during today's video conference 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 June 30, 2024, unless otherwise noted. Joining us today from TGS in Buenos Aires, is Alejandro Basso, Chief Financial Officer. I will now turn the video conference over to Mr. Basso. Alejandro, please begin.

Thank you, Carlos. Good morning, everyone. Thank you for joining us today to discuss TGS' 2024 2nd quarter earnings and highlights for the TGS. To begin the call today, I will start by sharing some of the most recent news about the company. In July, we successfully completed the issuance of a new 7-year bond for $490 million at run rate cost of 8.75% and a coupon of 8.5%. The only purpose of the issuance was to refinance the outstanding 2025 $470 million bond, which was totally canceled. Regarding our natural gas transportation business ENARGAS, the first ENARGAS issued Resolution #411 through which the transportation tariffs increased by 4% effective from this month. In June, we announced a $700 million natural gas transportation expansion project proposal which was submitted to the Argentine Ministry of Economy as a private initiative with the aim to be operational by the winter of 2026. The goal is to make 14 million cubic meters per day of natural gas available and the little we have to substitute LNG and diesel imports with natural gas from Vaca Muerta and to ensure energy supply reliability in addition to boosting portable surpluses to the region. The plan includes urgent works in 2 systems with different regulatory frameworks. On one hand, we proposed a $500 million project in the Tratayén Salliqueló section of Néstor Kirchner pipeline under the Hydrocarbons Law. The project is under the plugged initiative regime, which requires a bidding process in order to receive offers from interested parties. Additionally, these projects will be complemented by a $200 million expansion in the regulated TGS system, which TGS will finance and execute under the terms of its license. This expansion project proposal, together with the transportation capacity expansions to be commissioned this year by ENARSA in its Néstor Kirchner and the Mercedes-Cardales pipelines, both of which are operated by us and the North pipeline reversal will permit us to go on growing in our midstream business through our existing and operating facilities. And the 2 new models, which will increase our commissioning capacity during the 14.8 million cubic meters per day to 28 million cubic meters per day after their commissioning before year-end. Regarding the process of extension of our license, which expires in 2027, in June, ENARGAS issued a favorable technical and legal internal report, which is key to the license extension approval. The next steps are first public hearing then the approval by the ENARGAS controller and lastly executed power [indiscernible] which will effectively grant us extension for 28 months following the recent enactment of the Bases Law spanning 2047. Turning now to Slide 4, I will briefly address some key highlights for the second quarter of 2024. Please keep in mind that all figures presented for this quarter are comparisons made with the previous quarter's are expressed in constant pesos as of June 30, 2024, following the provisions established by the IFRS or Financial Reporting in Hyperinflationary Economies. As seen in the slide, we reported a net income totaling ARS 85.7 billion during the second quarter of 2024 compared to a net income of ARS 45 billion reported in the second quarter of '23. This increase in net income was mostly explained by higher natural gas transportation EBITDA amounting to ARS  65.6 billion, which was partially offset by the income tax return. Moving on to Slide 5. EBITDA for natural gas transportation business increased sharply from ARS  19 billion to ARS 84.6 billion in the second quarter of 2024. EBITDA for this regulated business segment increased by ARS 94.3 billion as a result of the transitional 675% tariff increase. ENARGAS granted the transitional tariff increase to bring tariffs closer to the levels established under 2017 internal tariff revision. As you know, starting October 2019, the inflation adjustments were suspended and only 2 [indiscernible] were granted, one in 2022 and another in 2023, which were much lower than the accumulated inflation in the period. This positive effect was partially offset by the negative monetary effect of ARS 32.4 billion. In addition, the 95% tariff increase granted in May of 2023 and lower PP&E maintenance expenses contributed to increased EBITDA by ARS 2.3 billion and ARS 1.4 billion, respectively. On Slide 6, you can see EBITDA from the Liquids business decreased to ARS 37.7 billion during the second quarter of 2024 compared to ARS 40.2 billion reported in the same quarter of 2023. This slight EBITDA decrease of 6% is mostly explained by lower ethane revenues. Average ethane price went down, generating a lower EBITDA of ARS  9.2 billion, given the natural gas price reduction and lower sales volume of 18,000 tons made the EBITDA decline by ARS  5.2 billion. In addition, lower volume of propane by 14,000 tons decreased EBITDA by ARS 3.9 billion. These lower liquid sales were partially offset by the lower average cost of natural gas, which declined from an average of  $3.9 per million BTU to $2.9, allowing for a reduction in variable cost of ARS 13.6 billion. Turning to Slide 7. EBITDA from midstream and other services rose 27% to ARS 29.7 billion compared to ARS 23.3 billion. Higher revenues were explained by the incremental volume from natural gas exported on condition Vaca Muerta in the amount of ARS 6.7 billion. Transported natural gas volume rose from an average of 21 million of cubic meters per day in the second quarter of 2023 to 25 million of cubic meters per day in '24's 2nd quarter. The natural gas conditioning volume also increased for an average of 13 million to 16 million of cubic meters per day. In addition, during the second quarter of 2024, ARS 1.2 billion revenues were generated by the service provided to ENARSA related to the operational maintenance of the Néstor Kirchner and Mercedes-Cardales pipelines as well as for the construction of the compressor plant placed in Mercedes. These positive effects were partially offset by a monetary loss of ARS 1.5 billion. On Slide 8, as seen on the slide, the financial results registered a negative variation of ARS 7.8 billion. This variation mainly explained by a lower financial asset income totaling ARS 25.3 billion, mostly resulting from the lower yield of the financial investment denominated in pesos. In addition, we had a higher inflation exposure loss of ARS 14.3 billion. These effects were partially offset by a lower foreign exchange rate loss of ARS 35.5 billion due to that fact that during the second quarter of '24, the Argentine Central Bank continued with its 2% [indiscernible] policy or 6% in the quarter compared to 23% in 2023 second quarter. Finally, turning to the cash flow on Slide 9. Our cash position in real terms increased slightly during the second quarter of 2024 by ARS 4 billion to ARS 572 billion, which is roughly equivalent to $629 million at the official exchange rate. EBITDA generation in the second quarter amounted to ARS 152 billion, of which 56% was generated by transportation business and the additional 44% came from the nonregulated businesses. CapEx for the period amounted to ARS 50.8 billion, working capital increased by ARS 24.4 billion, mainly due to the 675% tariff increase. We canceled loans amounting to ARS 14 billion and paid interest of ARS 17 billion. Income tax payments were reviewed. Finally, the financial income ARS 141 billion negative impact resulting from the 18% quarterly inflation adjustment in our initial cash position as of March 31, 2024 compared to a 6% annual increase of the foreign exchange rate considering that most of our cash position is dollar dominated. This concludes our presentation. I will now turn it over to Carlos, who will open the floor for questions. Thank you.

Thank you, Alejandro. [Operator Instructions] Well, the first question is from Carlo [indiscernible] from Morgan Stanley. His first question regarding the natural gas monthly tariff adjustment, what we think about in the coming months of this year.

Regarding the Monthly adjustment, we are -- we cannot assure any further developments on this side. The good news is that we have received this 4% increase for August. And then obviously, we can expect additional adjustment, but we cannot give any assurance about that.

His second question is regarding the liquid volumes in the third quarter, the volume will be higher than the same quarter of 2023 or will decrease that we saw in this last quarter.

Okay. We are currently running a major maintenance these months. So our expectations could be lower than the -- it will depend on the winter temperature, also the weather. I would say that the volumes can go down and some slight down I would say.

Now next question is from Marina Martin from Latin Security. He wants to know about an update on the status of the comprehensive tariff review if we expected that we will be implementing in 2025.

Regarding the tariff review, the higher tariff review, the ENARGAS has already started the process. We have had several meetings with them. Their expectation is to put in place a public hearing by the beginning of January and have the new tariffs implemented by the first quarter. They say, February, maybe March '25.

Next question regarding the project to expand the transportation capacity. In case, if it is approved, when will we begin to deploying CapEx? When the CapEx will start?

We propose the government to run -- to approve the public initiative by October or something like that and run a bid process before the end of the year. So in that case, the CapEx deployment should start at the first quarter of '25, but it will depend on the sector of energy process.

Another question from Carlos Moraes regarding the expansion project, would be the remuneration scheme would be under the regulatory framework with tariff [indiscernible] Argentine pesos.

As we said in the call, the part that is going to be under the Hydrocarbon Law, it should be in dollars under this regulatory framework, the current law and the $200 million proposed investment in our transportation existing facilities, it's an expansion in our transportation facilities should be in the [indiscernible] pesos for them.

Now a question from [indiscernible] regarding the public hearing and the resolution of the concession extension, and it will be in 10 or 20 years?

No, it's just for 20 years right now because we have the new Bases Law implemented. So the only chance is for 20, no more no less. And the other question was about what we expect the public hearing under resolution of the concession extension? Well that's a political decision that has to be carried out in ENARGAS. A good opportunity to run the public hearing would be at the same time the 5-year tariff review but we cannot give any assurance regarding that.

Now the question is from [ Adrian Bulat ] from [indiscernible] His question is regarding the transportation expansion. It will be run under the [indiscernible] facing on the CapEx, the CapEx we will explain that will be about $700 million. But regarding the [ Rihi ], we know that in the case of the first -- in the expansion of the Néstor Kirchner pipeline will be under the [ Rihi ] scheme. A question from [ Francisco Vertin ] regarding the transportation segment, where it was explained that increase was because the 675% tariff increase that was effective from April 3. Yes. The next question is from the [ Florencia Mashorda ] If we have received any answer from the government in the $700 million project.

Well, regarding this project, we have had several meetings with some of the government authorities, and we are discussing with them how we can go ahead with the project. It's going to be their decision one way or another. They have the decision to [indiscernible] expansion of the Néstor Kirchner pipeline, but what we cannot right now how it's going to be, is it our proposal or other.

Next question from [ Francisco Vertein ] his concern is about the -- how the transportation target will evolve in the future. I think that it was explained. We see that during 2024, we'll have this transitional tariff increase starting with 675% tariff increase and now in August 4, tariff increased 4%, and we will see in the next month and in the future in 2025, was expected the better tariff revision. We expect we are working right now in this process. Next question is from Fernández López. He is from [indiscernible] his question regarding the expansion plans that we have representing and the location of the LNG plant for the YPF and Petronas [indiscernible] modifies our medium-term outlook for the Downstream segment.

I think that it's a very good. It's a very good project for Argentina; for TGS, it's also -- it's a good project. We can benefit from this project with the additional gas to be condition process in Vaca Muerta and also to provide them with some additional services. It's [indiscernible] by YPF and Petronas with additional services if the opportunity comes.

Next question from [ Fernando Patagan ]. His question is regarding the government, we provide funds for the $500 million Néstor Kirchner pipeline expansion or will be fully funded by private?

It's a private initiative scheme, what we propose. So the funds should be provided by the company or the consortium that is going to be awarded in the bidding process.

Next question is from [ Claudio Morkat ]. The question is regarding about the -- our high level of cash that we don't have any debt maturity in the following years. So if we have any destiny of this cash in the next years.

Well, you may know that we have an NGL's process to go ahead with. We are analyzing right now the engineering and estimated cost to be able to come with an FID next year for NGL's process. So the use of our cash and the existing cash generation next year could be applied in that project plus the $700 million project that we already announced.

The next question is from [ Santiago Hoved ]. His question is about the percentage currently represent the service of the operating and maintenance of the Néstor Kirchner pipeline within the midstream business. Santiago the impact is 4% -- to less than 2% because the revenue is just only the fee that we collect from operating and maintaining the -- sorry we don't collect the tariff. The tariff is collected by ENARSA. We don't have any more questions. This concludes the question-and-answer section. Now we will turn to Alejandro for final remarks.

Well, thank you for your participation, participating in this year's second quarter 2024 conference call. We look forward to speaking with you again when we release our 2024 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.

Goodbye.