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

Good morning, everyone. I'm Carlos Almagro, Head of Investor Relations. I would like to welcome everyone to TGS First Quarter 2025 Earnings Video Conference. TGS issued its earnings release yesterday. If you didn't receive a copy of this release, please contact us at [email protected]. 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 may be made during today's video conference do not account for future economic circumstances, industry conditions, our 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 the International Accounting Reporting Standards, IFRS, and are stated in constant Argentine pesos as of March 31, 2025, 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. In the call today, we will start the call by sharing some of the news about the company. In terms of our Natural Gas Transportation business, as we disclosed this week, the ENARGAS finalized the 5-year tariff revision and granted us a weighted average tariff increase of 3.67%, which will be reflected in 31 monthly adjustments. Regarding the inflation tariff adjustment scheme, given that the license rules state to be every 6 months, ENARGAS submitted to the Secretary of Energy to change the terms to a monthly inflation tariff adjustment. In addition, ENARGAS considers that wholesale price and consumer price indexes should be used for inflation tariff adjustments. Talking about the severe storm that flooded the Cerri Complex last March 7, the flood caused a reduction in the Natural Gas Transportation capacity and the Liquids production to halt. We can probably say that after great work done by TGS employees and our suppliers, the Natural Gas Transportation services was gradually restored by the end of March without any relevant impact on revenues. And by mid of April, the processing plant operations were partially resumed at the low production level, which has subsequently been increased. Meanwhile, we have been implementing the recovery tasks of damaged equipment, aiming to have the processing plant back to normal probably this month. Finally, the Annual Shareholders Meeting held on April 30, a week ago, approved a capital reduction through the cancellation of 41,734,225 ordinary shares representing a 5.25% of the capital stock. Such shares were repurchased by the company in the market during 2019 and 2020. Turning now to Slide 4. I will briefly address some of the key highlights for the first 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 Argentine pesos as of March 31, 2025, 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 107.3 billion during the first quarter of 2025 compared to ARS 87.2 billion reported in the same quarter of '24. This positive variation was mostly driven by the Natural Gas Transportation EBITDA increase of ARS 116 billion and was partially offset by liquids EBITDA decline of [ ARS 32 billion ] and the ARS 17.7 billion negative variation of the financial results. During the quarter of '25, we registered the property plant and equipment impairment amounting to ARS 10.9 billion related to the damage caused by the flood at the Cerri Complex. Moving on to Slide 5. EBITDA for the Natural Gas Transportation business in the first quarter of '25 totaled ARS 104.8 billion, which compares to a negative EBITDA of ARS 11 billion recorded in the first quarter of '24. The EBITDA variation of ARS 116 billion in the regulated business segment was mainly explained by the 675% transitional tariff increase that became effective at the beginning of April '24 and has contributed to recording a ARS 116 billion higher revenue. In addition, transportation tariffs were adjusted on a monthly basis from August '24 to March '25. The smaller monthly adjustment contributed with additional revenues totaling ARS 26 billion. These positive effects were partially offset by the negative monetary effect on revenues amounting to ARS 8.6 billion. In addition, structural and other transportation services revenues decreased by ARS 12 billion, and we recorded a higher ARS 4.7 billion turnover tax, mainly due to the incremental revenues mentioned before. On Slide 6, you can see that the EBITDA for the Liquids business decreased 50% to ARS 51.4 billion during the first quarter of '25 compared to ARS 103.4 billion reported in the same quarter of '24. Most of EBITDA decrease was explained by lower liquids volume sales, which declined by 80,000 metric tons, dropping from 290,000 metric tons sold in the first quarter of '24 to 210,000 metric tons in the '25 first quarter. This 27% increase was mainly related to the flood occurred in March 7, which completely halted operations of the processing plant for the rest of the quarter. This effect was reflected in a lower EBITDA of ARS 35.3 million. In addition, the monetary effects contributed to reduce EBITDA in ARS 8 million, while the variable cost increased by ARS 6.8 million and lower sales prices resulted in a revenue decline of ARS 4.5 billion. Turning to Slide 7. EBITDA from Midstream and Other Services decreased to ARS 36 billion compared to ARS 45 million. This decrease was mostly attributed to a ARS 17 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 billed volume of Natural Gas Transported and conditioned in Vaca Muerta in the amount of ARS 9.8 billion. Transported Natural Gas billed volume rose from an average of 22 million cubic meters per day in the first quarter of '24 to 28 million cubic meters per day in the '25 first quarter. The natural gas conditioning volume also increased from an average of 16 million cubic meters per day to 21 million cubic meters per day. As seen on Slide 8, we recorded a negative variation in the financial results amounting to ARS 17.7 billion. This negative variation was mostly explained by a lower financial asset income totaling ARS 20 billion, which was mainly associated to the lower yield of the financial investment denominated in pesos. Both interest rates and increase of the foreign exchange rate were much lower during the first quarter of '25 than in the same quarter of '24. In addition, we recorded a high inflation exposure loss of ARS 6.7 billion. These negative effects were partially offset by a lower foreign exchange rate loss amounting to ARS 5.4 billion in the first quarter of '25, given the reduction of the mostly [ crawl ] impact from 2% to 1% beginning last February. Finally, turning to the cash flow on Slide 9. Our cash position in real terms increased 10% or ARS 91 million during the first quarter of '25 to ARS 956 billion, which is roughly the equivalent to $882 million at the official exchange rate. EBITDA generation during the first quarter amounted to ARS 192 million, of which 55% was generated by the Transportation business and the additional 45% came from the nonregulated businesses. CapEx for the period amounted to ARS 55 billion. Working capital increased by ARS 24 billion. We paid interest amounting to ARS 23 billion, and we canceled debt by ARS 654 million. No income tax payment was made in the first quarter of '25. This concludes our presentation. I will now turn it over to Carlos. We will open the floor for questions. Thank you.

Thank you. The floor is now open for questions. [Operator Instructions] If the first question comes from Julian Casas from Latin Securities. When do you expect the government to launch the bidding process for the expansion of the Perito Moreno pipeline? Given these delays, when should we expect it to be operational?

We are waiting for the launch of the bidding process. We -- hopefully, we can have some news next week -- on the next 2 weeks. And to be operational, well, it should be 18 months after the bid of the -- after the award of the bid. So hopefully, in '27, we are going to have some new volumes thanks to this expansion.

Second question, given our strong cash position, if we are considering paying dividends this year or we will allocate cash mainly to the project and mandatory investment plan in the Transportation segment?

Well, we cannot give any advice on that. It's going to be our shareholders' decision. So I cannot anticipate anything about this.

A new question from [ Mateus Catarusi ] from [indiscernible]. His question regarding the CPM, if we expect some partial commissioning by winter 2026?

Well, I already answered that question to Julian that we are not expecting very spongy, it's going to be very complex to have some partial commissioning by winter '26.

His second question is regarding the flooding at the Cerri Complex. How is the recovery progressing? I think that he explained through the presentation. If we expect any material operational or financial impact to continue into the second quarter of 2025?

Well, as we said in the call, we started partial operations by mid-April, we have been increasing the output of the plant. And today and 2 days before today, we are at full operational production. Nevertheless, we can expect to have some problems in the plant because it's not stable. The reliability of the plant, we are working on. So we are going to have an impact in the second quarter very soon -- Very important in April and additional impact, hopefully a small one in May.

Daniel Guardiola from BTG. One of his question is regarding that considering the new tariff framework online for the next 5 years, what is the expected annual EBITDA and free cash flow generation in this business segment?

Well, EBITDA established by around $300 million or more than that. It will depend on inflation and [indiscernible] variation.

Question is regarding what is needed for the company to stop applying the hyperinflation adjustment to your financial statement?

Well, we need 3 years with inflation lower than 100%. So we are not so close to that, maybe in the next 3 years, [indiscernible] 4 year counting since then.

Another question from Daniel. What is the outlook for 2025 in terms of volumes sold of the Liquids business, if this risk covered with insurance?

Well, we are going to have an impact -- estimated impact of 2 months, okay, from March 7 up to March -- May 7 with something lower than this 2 months and the liquids volumes. And about insurance, we are covered. We have a deductible of 2 months. So the first 2 months of without operations, we are going to suffer in our financials. And regarding expenses, the deduction is just $1 million. So all of the expenses over this $1 million should be recovered.

Last question from Daniel. We are considering to enter into the LNG infrastructure business either via new export pipelines or via LNG facilities.

Well, we are working with the LNG projects, providing some services to the partners there. And we may consider entering in new export pipelines, not in the LNG facilities but in the pipelines. But that's not -- we don't have any decision on that now.

Andreas from [ Balance ], he made the same question regarding the CPM project. It was answered. Andres Cardona from Citi. Yes. Well, the question is regarding with the LNG project. Regarding the Liquid expansion project or the NGL project, how it is evolving and what we expect to reach the FID?

And regarding the NGL project, expansion [indiscernible] we are working with the gas producers with our offtakers to have agreements with them to ahead with the project. So we have to reach agreements with them before reaching the FID. I cannot give an exact timing for that. We are working hard.

A question from [ Augustini Cedro ] from BBVA Asset Management regarding the Liquids event, what is the situation after the flooding for those clients that are located in Bahia Blanca? And if we -- may this generate further impact?

Well, our clients [indiscernible] mainly down, they have some impact. In fact, they cannot take all during the last days. But right now, they are taking all the volumes. About other impacts, well, I cannot give any assurance because we have put all the plant in process right now in operations, but we are -- the reliability of the plant, we are working on that right now. So we may have some small impact in the next month and 2 months.

Another question from Augustina, which is the tariff increase granted for May? Is this 3.67% divided by 31 months. And the latter will be adjusted by 50 [indiscernible] and 50% by IPC of consumer by index for each of the preceding months?

Regarding the tariff increase, it was calculated 3.67% as it were effective in May. As it was calculated in 31 months, we are going to have more than this 3.67% because of the financial effect, okay? Obviously, it's not going to be a lot more because 3.77% is very low. Regarding the adjustment, the monthly adjustment, well, as we said, we are expecting the decision of the Secretary of Energy and Executive Power. The ENARGAS proposes 50-50 increase monthly increase. So we are waiting for maybe May. Hopefully, June 1 could be effective. And it's not going to be retroactive because the tariff were in place in May. So we have this adjustment in June. It's going to be calculated with the inflation of the previous 2 months. So in June, we are going to have the inflation of April. We should have the inflation adjustment in place.

Valentino Caramutti from Criteria. Are we planning on raising more debt through bonds in the short term?

Well, it will depend on the projects, the GPM and the NGL projects.

Guido Bizzozero from Allaria. Do we expect to continue this firm capacity in Transportation segment increase to 89.4% remain for the future? This level will remain in the future?

No, not other [indiscernible] Capacity related to the final tranches, which is part of the expansion of the GPM from Salliqueló to [indiscernible] that would be capacity increase in 2 years time.

Diego Portela. TGS was granted a 5-year tariff review, but not sure if the concession was already extended. Is extension a key factor that delayed dividend distribution for 2025, '26 -- okay. It's another question.

Okay. We are waiting right now for the final decision of the extension of the license. And -- but I would say that it has nothing to do with the decision. The expansion process is okay. Secretary of Power needs the opinion of -- legal opinion of the lawyers and the audit body also. But they are working on that process.

Another question from Diego is regarding the CapEx plan for 2025 and 2026.

Well, our maintenance CapEx projected for this year is around $90 million, more than $60 million, $67 million from the regulated business. And then you have to add to that the projects. It depends on the project, okay? GPM project and NGL project. In that case, CapEx plan could be increased.

Another question from Augustini Cedro. What was the main driver of the increase in firm contracted capacity?

It is related to the new GPM pipeline as we provide services in the final tranches, we have increased our capacity for the expansion that was built by and paid by ENARSA, but we have this additional capacity for the O&M of the new facilities in the tranche from to Salliqueló to [ GBL ].

Juan Ignacio from [indiscernible] made a question that we have seen -- we have answered. Matthews from Citibank. His question is that this incremental [indiscernible] capacity offer upside to the full year EBITDA expectation for Transportation.

Incremental capacity I already talked about is a small root. So it's very, very -- it's actually very nonmaterial effect on EBITDA [indiscernible]. And it's just an O&M [indiscernible].

Well, there is no more questions. This concludes the question-and-answer section. Now we'll turn to Alejandro for final remarks.

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