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

Good morning. Good morning, everyone. I'm Carlos Almagro, Head of Investor Relations. I would like to welcome everyone to TGS' Second Quarter 2026 Earnings Video Conference. TGS issued its earnings release yesterday. If you didn't receive a copy of the release, please contact us at inversores@tgs.com.ar. Before we begin the call, I would like to inform you that this event is being recorded [Operator Instructions] Following the company's remarks, we will host a Q&A session. [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, 2026, 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, and thank you for joining us today to discuss TGS' 2026 second quarter earnings and highlights. To be in the call today, I'd like to share some of the most recent corporate developments. First of all, the most relevant news is the FID for the NGL project announced a few weeks ago, with key commercial agreements representing more than 90% of the project's total capacity already executed as of today. This is a $3 billion CapEx project, and the construction is expected to take about 45 months period, with the COD expected in March 2030. In addition, we have also requested that this project be approved under the [ Re ]. The project consists of a new building pipeline in Vaca Muerta, a processing plant to be built in [indiscernible] and 475 kilometers polyduct extraction in planting survey and storage facilities in Porto [indiscernible]. In terms of the natural gas transportation expansion, which is currently under construction, and following the open season launch last February, and after the allocation of 5 million of [ cubics ] per day under a fully prepaid basis in the first round, last June, we received bids for over 100 million meters per day capacity in order to allocate the remainder capacity of 9 million [ cubics ] per day. We submitted our capacity allocation to our regulators some weeks ago and are waiting for its approval. It is important to highlight that last May, the Perito Moreno pipeline expansion was approved by the Ministry of Economy to be included in the [ re ], which will result in tax benefits for the process. Finally, in June, S&P upgraded the long-term local and foreign currency debt ratings from B- to B, following the revision for Argentina's transfer and convertibility be successful. Similarly, in July, Moody's upgraded the rating of our notes from B2 to B1 as a consequence of the Argentina's sovereign rating upgrade. Moving to Slide 4, I will briefly highlight the key financial results for the second quarter of 2026. Please keep in mind that all figures presented for this quarter and comparisons made with the previous quarter are expressed in constant Argentine pesos as of June 30, 2026, following the provisions established by IFRS for the financial reporting in the hyperinflationery economics. As seen in the slide, we reported a total net income of ARS 133 billion during the second quarter of 2026 compared to ARS 53.8 billion reported in the same quarter of '25. This relevant net income increase is mainly explained by the ARS 60.2 billion positive variation in our financial results as well as the important liquids EBITDA growth of ARS 48.4 billion and to a lesser extent, to the ARS 12.3 billion increase related to the natural gas transportation EBITDA. Moving on to Slide 5. EBITDA for natural gas transportation business in the second quarter of '26 totaled ARS 132 billion, which is above the almost ARS 120 billion recorded in the second quarter of '25. It is worth noting that tariff increases generating higher revenues by ARS 50.2 billion, which was more than let ARS 48.6 billion negative effect of inflation. In addition to negative events in the second quarter of '25, also explained partially the higher EBITDA in the second quarter of '26 of ARS 19.2 billion. The first event was related to a trade to similar write-off of ARS 11.2 billion, and the second one was the climate event occurred in March '25, which damaged some natural gas transportation assets and generated a positive revaluation of ARS 8 billion [indiscernible]. Finally, the revenues generated by field transportation contracts decreased by ARS 9.3 million, following the natural gas transportation system reconciliation, which became effective starting as of May '26, whose initial negative effect will be partially offset by future small monthly tariff adjustments. On Slide 6, you can see our EBITDA for the Liquids segment increased to ARS 82.3 billion during the second quarter of '26 compared to now ARS 33.9 billion reported in the same quarter of '25. The increase in EBITDA was mainly attributed to higher volume sales, which flows from 211,000 metric tons to 330,000 metric tons, and was mainly explained by the low volume sales in the '25 quarter due to the processing plant shutdown caused by the flooding suffered on March [ 7 ], 2025. The plant started to operate but mid-April with low level of production and increase its production to reach normal levels in the beginning of May. The higher volume sales generated a high EBITDA of BRL 46.7 billion. Moreover, high international reference prices, as a consequence of the geopolitical conflict in the Middle East, raised EBITDA by ARS 23.2 billion. These positive effects were partially offset by the ethane take or pay annual compensation collected in the second quarter of 2025 of ARS 8.5 billion. Together with the negative monetary effect of ARS 7.4 million. The lower ethane price, we generated lower revenues of ARS 5.8 billion and a higher average natural gas price which increased to $3.4 per million BTU from $3.3 and generated higher cost by 2.5 billion. Turning to Slide 7. EBITDA from midstream and other services decreased slightly to ARS 54.1 billion compared to ARS 69.3 billion in the second quarter of 2025. Revenues generated by the midstream services trend in Vaca Muerta increased by ARS 13.2 million. Transported natural gas build volume growth from an average of 30 million [ cubits ] per day in the second quarter of '25 to ARS 35 million of [ cubits ] per line during this quarter. The natural gas commissioning volume also increased from an average of 27 million to 30 million [ cubits ] per day. However, this higher revenue was more than offset by the negative monetary effect of ARS 10.5 billion as inflation was higher than the foreign exchange rate increase, along with higher operating expenses of ARS 5.6 billion. As seen on Slide 8, we recorded a positive variation in the financial results amounting to ARS 60.2 billion. This was mainly due to ARS 130.1 billion increase in income from financial assets, given the higher yields recorded for the domestic financial investment and to a lesser extent, to a higher level of financial investments. This positive effect was partially offset by a ARS 46.7 billion higher foreign exchange change loss, ARS 15.2 billion in higher interest changes, most of which are mainly attributed to the $500 million bond issued in November of '25 as well as the ARS 7.6 million higher inflation exposure loss. Finally, turning to the cash flow on Slide 9. Our cash position increased by ARS 274 billion in real terms during the second quarter of '26 to 2,206 billion, equivalent to approximately $1.5 billion at the official exchange rate. EBITDA generation in the second quarter was ARS 278.4 million, of which 53% was generated by nonregulated businesses, even after considering the full normalization of the natural gas transportation segment. These results highlights the increased relevance of the nonregulated activities within the company's overall reset. CapEx amounted to ARS 165 billion, largely driven by investments in the pipeline expansion project. Working capital decreased by ARS 186 million, primarily due to the collection of the first repayment installment of approximately ARS 140 million from customers that contracted 5 million cubits per day of incremental firm transportation capacity. We also paid ARS 31.3 billion in income taxes and ARS 30.8 billion in interest, and we incur new debt amounted to ARS 20.8 billion. This concludes our presentation. I will now turn it over to Carlos who will open the floor for questions. Thank you.

Thank you, Alec. The floor is now open for questions. [Operator Instructions] Well, first question is from Bruno Montanari from Morgan Stanley. I'll call you, Bruno. The first question is regarding the [ GPN ] expansion. How much CapEx is still left to execute in the coming quarters?

Bruno, well, as of June 30, '26, we have already invested around $180 million. So we have $600 million left for the remainder quarters until May 1 -- until May next year.

The second question is regarding the new liquidity project. How should we think about the CapEx distributions over the years?

Well, we have for this year around $500 million, $800 million for '27, 1 billion in '28, and 600 million in '29, approximately -- in the first quarter of [ 2030 ].

Third question is regarding the financing of the project. If TGS already secured all the finance requirements.

We have signed agreements with banks for the import financing for around approximately $300 million for the first year, and we are working with a group of banks for the financing of the remaining of the MGS -- MGS is the second BPO with a total investment of $2 billion, and we are working with this group of banks to finance 60% of the total investment of this $2 billion. The tenure of the import facilities -- finance facilities is 3 years. The cost is approximately 8.5% [indiscernible].

And now we have a question from Matthew Tostes -- Mateus. His questions regarding the Transportation segment revenues or EBITDA, and how is the EBITDA of the second quarter? How -- why it was weaker in dollars [ sans ] compared to the first Q even as we have a real gain in tariffs.

Mateus, as you may know, we have a reconfiguration regulation -- a new regulation of the capacity in the whole Transportation system in Argentina as the natural gas currently is coming from the West, from Vaca Muerta from [indiscernible], replacing the gas that used to come from the north, from the Bolivian Basin from the Northern Basin and also from the South. So some contracts were transferred from one system to the other. So TGS has an impact there because of the important position that we have in the south -- the transportation contracts coming from [ Tierra Alfuego ]. So you are going to see this loss of volumes or lower volumes in the future. Also, this reconfiguration has made more efficient system, so lower IT services, interrupt services are rendered by TGS and [ PGN ]. At the same time, we have a compensation in tariffs, but the compensation of tariffs is calculated in the future. So you may see a small compensation for this weakness in the Transportation revenues, but it's not significant.

And the second question is regarding the liquid business, which are the drivers of higher cost versus the first Q.? Just explain why margin and EBITDA were weaker with -- by good energy prices?

Well, that has to do with the cost of natural gas in the winter season that starts on May every year, you have -- you may see higher natural gas prices than obviously in the summer season, the first Q. At the same time, the cost of gas is higher than the previous year in -- especially in the spot market. That's compared with the same quarter of last year, '25.

Now we have a question from [indiscernible] from Latin Securities. But the question that was answered in the first -- in the previous one, regarding the Transportation revenues compared with [indiscernible] '26. The second question is also -- was explained regarding the financing of the initial project, the [ 100 planes ] specifically. Well, now we have a question from Juan Ignacio Lopez [indiscernible]. His first question is regarding CapEx deployment in the -- for the second half of 2026 regarding the GPM, the Perito Moreno pipeline and the [indiscernible] project.

Okay, regarding the Perito Moreno expansion, we are estimating for the remainder of this year, around $400 million. And a similar amount higher than that, a bit higher than that for the [indiscernible] project for this year.

The second question is regarding the strong cash flow print supported by a positive working capital. His question is regarding what is the reason of this strong cash flow.

Okay. Juan Ignacio, as I said in the call, we -- 5 million out of 14 cubic meters per day or out of 12 cubic meters per day from the Perito Moreno expansion for the transportation a -- this year's transportation system on expansion were collected as prepaid. They were prepaid by the clients. It's an option that we have in the -- and the clients also have in the open season. 40% of the total capacity may be offered and sold at TGS under prepaying scheme. So they prepaid the capacity for the 15 years -- 15-year contracts. And so that's $100 million, almost collected in the second quarter, which is the important impact -- favorable impact in our working capital.