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

I would like to welcome everyone to TGS Fourth Quarter 2024 Results Video Conference. TGS issued its earnings release yesterday. If you didn't receive a copy of the release, please contact us at [email protected]. Before we begin the call, we 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 December 31, 2024, unless otherwise noted. Joining us today from TGS in Buenos Aires is Alejandro Basso, Chief Financial Officer; I will now turn the conference over to Mr. Basso. Alejandro, please begin.

Thank you, Gastón. Good morning, everyone, and thank you for joining us today to discuss TGS 2024 fourth 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 the Tratayén conditioning plant, I would like to state that the second module was finally commissioned this month, reaching a total conditioning capacity of 28 million cubic meters per day. The works lasted more than 2 years with a total CapEx of $350 million, which was used for the construction of the 2 modules. As you remember, the first module was commissioned in October '24. This incremental capacity will allow us to transport through the gathering pipeline and put into specification additional gas volume needed to replace the continuous declination of conventional natural gas production, LNG and gas oil imports and fulfill the demand from the northwest of Argentina, following the commissioning of the new compressor plant at the end of the Perito Moreno pipeline in Salliqueló in October '24, the commissioning of the compressor plant in the Mercedes-Cardales pipeline in last December, the Carlota-Tío Pujio new pipeline commissioned in November, as well as the reversal of the North Pipeline, which will be fully completed in the coming month. All these transportation capacity expansions are being implemented by ENARSA, the state-owned company. Regarding our natural gas transportation business, in addition to the first transitional tariff increase of 675% received in last April and the subsequent adjustments that impacted positively our revenues of '24, last January, we were also granted a 2.5% tariff increase and in February, 1.5%. As per the 5-year tariff revision, a public hearing was held on February 6, during which ENARGAS put forward a real weighted average cost of capital of 7.18% after that and a periodical tariff adjustment using the consumer and wholesale price indices. On the other hand, TGS requested a real weighted average cost of capital of 9.98% after that as well as a 22.7% increase on the tariffs. Lastly, we are now in the final stage of the process of the 20-year license extension. The ENARGAS issued a favorable technical and legal internal report in last June, followed by a nonbinding public hearing which was held on October 21. As of today, we are waiting for the national executive power to announce, in the coming months, the license extension through the issuance of the decree. Another highlight in the quarter was the elimination of the regulated prices of LPG under the Plan Hogar. These prices had generated losses for many years and have now finally been eliminated by the Secretary of Energy through the Resolution #15, which was issued last month. From the issuance date of resolution, TGS is now able to sell butane in the domestic market at the export price parity. Regarding the private initiative presented by us to the government in June '24 to expand the transportation capacity of the Perito Moreno Pipeline by 14 million cubic meters per day, the Ministry of Economy issued this week the Resolution #169, which delegates to the Secretary of Energy and ENARSA to carry out a bidding process. Finally, earlier this month, Standard & Poor's rating agency upgraded TGS's rating to B minus from CCC as the credit agency revised upward its transfer and convertibility assessment on Argentina. Turning now to Slide 4. I will briefly address some of the key highlights for the fourth quarter of '24. Please keep in mind that all figures presented for this quarter and comparisons made with the previous quarters are expressed in constant Argentine pesos as of December 31, '24, following the provisions established by IFRS for financial reporting in hyperinflationary economies. As seen in the slide, we reported a total net income of ARS 129.6 billion during the fourth quarter of '24 compared to a net loss of ARS 51 billion reported in the same quarter of '23. This large positive variation was mostly explained by the ARS 152 billion positive variation of the financial results which was generated by a huge financial loss in the fourth quarter of '23 associated to the almost 120% foreign exchange rate increase in December '23. In addition, we recorded an EBITDA increase of ARS 85.5 billion for the Natural Gas Transportation segment together with the ARS 39.6 billion. [Technical Difficulty] Okay. In addition, we recorded an EBITDA increase of ARS 85.5 billion from Natural Gas Transportation segment together with the ARS 39.6 billion reversal of the residual impairment loss registered in 2020 and a ARS 29.6 billion increase in the Liquids EBITDA, all of which contributed to explain this positive variation in the net income, which were partially offset by the income tax impacts. Moving to Slide 5. EBITDA for Natural Gas Transportation business in the fourth quarter of '24 totaled ARS 81.4 billion, which compares to a negative EBITDA of ARS 4.2 billion recorded in the last quarter of '23. The EBITDA variation of ARS 85.3 billion in the related business segment was mainly explained by the 675% transitional tariff increase that became effective in the beginning of April '24, which has contributed to recording a ARS 111 billion higher revenue. In addition, transportation tariffs have been adjusted on a monthly basis since August. Those smaller monthly adjustments have generated additional revenues totaling ARS 14 billion. These positive effects were partially offset by the negative monetary effect on revenues amounting to ARS 23 billion. In addition, interruptible and ED transportation services revenues decreased by ARS 10.8 billion, and we recorded a higher ARS 5 billion turnover tax, mainly due to the incremental revenues mentioned before. As we mentioned before and out of EBITDA, during the quarter, we reversed the ARS 39.6 billion residual impairment loss registered in the fourth quarter of 2020. This reversal took place following the transportation tariff recovery. On Slide 6, you can see that the EBITDA for the Liquids business increased to ARS 77.5 billion during the fourth quarter of '24 compared to ARS 48 billion reported in the same quarter of '23. Most of the EBITDA increase was explained by higher LPG volume exports, which were partially offset by lower volume sales in the domestic market. Higher LPG volume sales contributed to increased EBITDA by ARS 29.4 billion. In terms of volume, the increase by 62,000 metric tons jumping to 210,000 tons in the quarter of '24 from 148,000 tons in the same quarter of '23. In addition, higher international LPG prices of approximately 20% contributed to a ARS 7.9 billion EBITDA increase. These positive effects were partially offset by a lower average ethane price, which resulted from the pass-through of the average natural gas price decline and negatively impacted our EBITDA by ARS 7.5 billion. Turning to Slide 7. EBITDA from Midstream and Other Services decreased 18% to ARS 33.8 billion compared to ARS 41.4 billion. This decrease was mostly attributed to a ARS 8.9 billion negative monetary effect as inflation was much higher than the foreign exchange rate increase. This effect was partially offset by higher sales derived from the incremental bid volume from natural gas transported and condition in Vaca Muerta in the amount of ARS 3.8 billion. Transported natural gas volume rose from an average of 23 million cubic per day in the fourth quarter of '23 to 28 million of cubic meters per day in the '24 fourth quarter. The natural gas conditioning volume also increased from an average of 15 million of cubic meters per day to 19 million. As seen on Slide 8, recorded positive variation in the financial results amounted to ARS 154 billion. This positive variation was mostly explained by a much lower foreign exchange rate loss amounting to ARS 14 billion in '24 as a result of the 2% monthly crawling peg. Meanwhile, in the fourth quarter of '23, we recorded a huge loss totaling ARS 246 billion, which was derived from the one-shot devaluation of the Argentine pesos of more than 50% soon after the new administration took office in December '23. In addition, we recorded a lower inflation exposure loss of ARS 92 billion, given that the inflation rate in the quarter of '24 reached 8% while it was 53% in the same period of '23. These positive effects were partially offset by a lower financial asset income totaling ARS 170 million and was mostly associated to a lower yield based on the financial investment denominated in pesos as interest rate and increase of the foreign exchange rate were much lower during the fourth quarter of '24 than in the same quarter of '23. Finally, turning to the cash flow on Slide 9. Our cash position in real terms increased 9% or ARS 65 billion during the fourth quarter of '24 to ARS 797 billion, which is roughly the equivalent to $775 million at the official exchange rate. EBITDA generation during the fourth quarter amounted to ARS 192.7 billion, of which 42% was generated by the Transportation business and the additional 58% came from the nonregulated businesses. CapEx for the period amounted to ARS 85 billion. Working capital increased by ARS 19 billion. We canceled short-term import loans during the quarter by ARS 21 billion and we also paid interest of ARS 1.5 billion. Income tax payments were very low. This concludes our presentation. I will now turn it over to Gastón who will open the floor for questions.

[Operator Instructions] And we have the first question from [ Luiza Belem ]. Thank you for your question, Luiza. The question is if adjustments in tariff review are below the request amount by us, by TGS, how should we see CapEx deployment going forward versus the ARS 334 billion guidance for 2025-2029 period? And should we expect lower CapEx in 2025? And any relevant changes in the pace of ongoing projects?

Hello, Luiza. Welcome to our conference. We are expecting to maintain this level of maintenance investment because they are maintenance investment. Nevertheless, I think that our tariffs are not going to move a lot in the tariff review as they are in the correct level right now.

Okay. We have some questions from Daniel Guardiola. The first one is related on the new regulatory framework if we can confirm the wrap of the Natural Gas Transportation business.

Daniel, how are you doing? Well, regarding the rate base for the Transportation business, we presented -- we filed before ENARGAS a rate base of more than $2 billion. Okay.

The second question from Daniel is, how is it progressing the private initiative to expand the Perito Moreno pipeline? And when are we expecting this project to be finally awarded?

Okay. Well, as we said in the call, this week, an important step was made by the government, by the Ministry of Economy. They delegated in the Secretary of Energy and ENARSA the bidding process. So right now, we are expecting for the pliego, for the conditions of the bidding to be in the street. And then after that, the award may last, I would say, 75 days, something like that.

And Daniel has another question is, what is the expected frequency at which regulated natural gas tariffs will be adjusted and based on which indicator?

Well, the license, the frequency is each 6 months. Nevertheless, we know that ENARGAS is thinking to make a more frequent adjustment. The indicator that they proposed was CPI and wholesale pricing indices by halves as I said in the call.

The last question from Daniel is, are tariffs of the nonregulated Midstream business is set in Argentine pesos?

No. The tariffs of the nonregulated Midstream business are mostly in dollars, which has had some small contracts for operation and maintenance of certain plants in pesos, but they are mostly in dollars.

We have a question from Andres Cardona. Thank you for the question, Andres. The question is, is the Gasoducto Perito Moreno still likely to be ready by the 2026 winter? Also, the government seems to be proposing a larger project than one we are proposing. Is this suspension regulated or nonregulated? Is it something of our interest?

Okay. Regarding the time for the start-up of the GPM expansion, well, it will depend on the bidding process. We may have some part of the capacity by the '26 winter but it depends on the process. About the larger project, that's not the case. We proposed 14 (sic) [ 14 million ] cubic meters per day expansion with an option for us or for the company that it's going to be awarded, the project to extend it for another 6 cubic meters per day. The resolution is talks in that way. Okay, is the suspension regulated or nonregulated? No, it's nonregulated. The tariffs are not going to be regulated by ENARGAS, okay? It's a tariff that we are going to offer in dollars, and the regulation for the transportation expansion in the JBM is under the hydrocarbon laws. And it's an interesting project, obviously, for us that we proposed it.

We have a question from Mateus Tostes. Thank you for your question. After the recent deregulation, what upside impact can TGS estimate from better LPG prices?

At current prices, we estimate an upside impact of $30 million annually.

Okay. We have no more questions. This concludes the questions-and-answer section. Now we'll turn to Alejandro for final remarks.

Thank you for participating in TGS Fourth Quarter 2024 Conference Call. We look forward to speaking with you again when we release our 2025 first quarter results. If you have any questions in the meantime, please do not hesitate to contact our Investor Relations department. Have a good day.