Transportadora de Gas del Sur S.A. - Q2 2024
August 6, 2024
Transcript
Carlos Almagro (Head of Investor Relations)
Good morning, everyone. I'm Carlos Almagro, Head of Investor Relations. I would like to welcome everyone to TGS second quarter 2024 results video conference. TGS issued its earnings release yesterday. We would like to inform you that this event is being recorded, and all participants will be in listen only mode during the presentation. Following the company's remarks, we will host a Q&A session. All questions will need to be submitted in writing through the Q&A chat box. 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 or 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.
Alejandro Basso (CFO)
Thank you, Carlos. Good morning, everyone. Thank you for joining us today to discuss TGS's 2024 second quarter earnings and highlights for 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 seven-year bond for $490 million at an annual cost of 8.875% and a coupon of 8.5%. The only purpose of this issuance was to refinance the outstanding 2025 $470 million bond, which was totally canceled. Regarding our natural gas transportation business, on August 1, ENARGAS issued resolution number 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 at the Litoral hub to substitute LNG and diesel imports with natural gas from Vaca Muerta, and to ensure energy supply reliability, in addition to boosting exportable surpluses to the region. The plan includes expansion works in two systems with different regulatory frameworks. On one hand, we proposed a $500 million project in the Tratayén section of the Néstor Kirchner pipeline under the Hydrocarbons Law. The project is under the private initiative regime, which requires a bidding process in order to receive offers from interested parties.
Additionally, this project 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 ENARGAS in its Néstor Kirchner-Mercedes-Cardales pipelines, both of which are operated by us, and the Northern Pipeline reversal, will permit us to go on growing in our existing business through our existing and operating facilities. The two new modules, which will increase our compression capacity from the 14.8 million cubic meters per day to 28 million cubic meters per day after their commissionings before year end. Regarding the process of extension of our license, which expires in 2027, in June, ENARGAS issued a thorough technical and legal internal report, which is key to the license extension approval.
The next steps are first, a public hearing, then the approval by the ENARGAS controller, and lastly, the Executive Power decree, which will effectively grant us the extension for 20 years more, following the recent enactment of the Bases Law, expiring in 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 and comparisons made with the previous quarters are expressed in constant pesos as of June 30, 2024, following the provision established by the IAS, IFRS, for 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 same quarter of 2023.
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 effect. 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 level established under the 2017 integral tariff revision. As you know, starting October 2019, the inflation adjustments were suspended and only two annual increases 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 and spending expenses contributed to increase 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 14.2 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 MMBtu to $2.9 , allowing for a reduction in variable cost of ARS 13.6 billion. Turning to slide seven, EBITDA from midstream and other services rose 27% to ARS 29.7 billion, compared to ARS 23.3 billion. Higher revenues were explained by an incremental volume of natural gas exported and conditioned in Vaca Muerta in the amount of ARS 6.7 billion.
Transported natural gas volume rose from an average of 35.2 million cubic meters per day in the second quarter of 2023 to 25 million cubic meters per day in 2024's second quarter. The natural gas conditioning volume also increased from an average of 13.16 million cubic meters per day. In addition, during the second quarter of 2024, ARS 1.2 billion revenues were generated by the service provided to ENARGAS, 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 incomes totaling ARS 25.3 billion, mostly resulting from the lower yield of the financial investment denominated in pesos. In addition, we had a high 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 the fact that during the second quarter of 2024, the Argentine Central Bank continued with its 2% crawling peg policy, or 6% in the quarter, compared to 23% in 2023's same 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 the transportation business, and the additional 44% came from the non-regulated 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 regular. Finally, the financial income had a ARS 41 billion negative impact resulting from the 18% quarter inflation adjustment in our initial cash position as of March thirty-first, 2024, compared to a 6% quarter increase of the foreign exchange rate, considering that most of our cash position is dollar-denominated. This concludes our presentation. I will now turn it over to Carlos.
We will open the floor for questions. Thank you.
Carlos Almagro (Head of Investor Relations)
Thank you. Thank you, Alejandro. The floor is now open for questions. If you have questions, please send them through our Zoom chat. We will read and answer the questions in the order in which they are received. Please make sure to state your name and company so we can introduce you to the audience... Should any participant need assistance, please send us a message in the chat box. Please hold while we poll for questions. Thank you. Well, the first question is from Carlos Morales, from Morgan Stanley. Hi, Carlos, how are you? His first question regarding the natural gas monthly tariff adjustment, what would do we think about in the coming months of this year?
Alejandro Basso (CFO)
Hi, Carlos, how are you doing? Regarding the monthly adjustment, 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.
Carlos Almagro (Head of Investor Relations)
His second question is regarding the liquid volumes, if in the third quarter the volume will be higher than the same quarter of 2023, or will decrease, as we saw in this last quarter.
Alejandro Basso (CFO)
Okay. We are currently running a major maintenance these months. So, our expectations could be lower than the... It will depends on the winter, on temperature, also the weather. I would say that the volumes can go down in some slight way, I would say.
Carlos Almagro (Head of Investor Relations)
Now, next question is from Marina Marti, from Latin Securities. Hello, Marina, how are you? He wants to know about an update on the status of the comprehensive tariff review, if we expect it, that it will be implemented in 2025.
Alejandro Basso (CFO)
Okay. Hi, hi, Marina. How are you doing? Well, regarding the tariff review, the five-year tariff review, 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 tariff implemented by the first quarter. They say February, maybe March 2025.
Carlos Almagro (Head of Investor Relations)
The next question is regarding the project to expand the transportation capacity. In case it is approved, when would we begin the deploying CapEx? When the CapEx will start?
Alejandro Basso (CFO)
We propose the government to approve the public initiative by October, 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 2025, but it will depend on the Secretary of Energy process, okay?
Carlos Almagro (Head of Investor Relations)
Another question from Carlos Morales, regarding the expansion project, would be, would we, would we the remuneration scheme, would we, under the regulatory framework, we charge the nominated Argentine pesos?
Alejandro Basso (CFO)
As we said in the call, the part that is going to be under the Hydrocarbons Law, it should be in dollars, under this regulatory framework, the Hydrocarbons Law. And the $200 million proposed investment in our transportation existing facilities, it's an expansion in our transportation facilities, should be charged in ARS, okay?
Carlos Almagro (Head of Investor Relations)
Now, a question from Eliseo Daneri. Hello, Eliseo. Regarding the public hearing and the resolution of the concession extension, and if it will be in 10 or 20 years.
Alejandro Basso (CFO)
Hi, Eliseo. No, it's just for 20 years right now because we have the new Bases Law implemented, so the only chance is for 20 years, no more, no less.
Carlos Almagro (Head of Investor Relations)
Um, um, uh-
Alejandro Basso (CFO)
... The other question was about what we expect [for] the public hearing and resolution of the concession extension. Well, that's a political decision that has to be carried out by the year, I guess. A good opportunity to run the public hearing would be at the same time as the five-year tariff review. But we cannot give any assurance beyond that.
Carlos Almagro (Head of Investor Relations)
Now the question is from Adrian Charchir from Facimex. Hello, how are you? His question is regarding the transportation expansion. It will be run under the RIGI. And well, some insight on the phasing on the CapEx, but the CapEx, we explained that it will be about $700 million. But, regarding the RIGI, we know that, in the case of the first expansion of the Néstor Kirchner pipeline, will be under the RIGI scheme. Okay. Well, in... A question from Francisco Berti. Hi, how are you? Regarding the transportation segment, well, it was explained that the big increase was because the 675 tariff increase that was effective from April 3.
So, the next question is from Florencia Mayorga. Hi, how are you, Florencia? If we have received any answer from the government in the $700 million project?
Alejandro Basso (CFO)
Hi, Florencia. How are you doing? 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 go ahead with, well, an expansion of the Néstor Kirchner pipeline, but what we cannot right now how it's going to be, if it's our proposal or other.
Carlos Almagro (Head of Investor Relations)
Next question from Francisco Berti. His concern is about how the transportation tariff will evolve in the future. And I think that it was explained that during 2024, we have this transitional tariff increase that started with the 675 tariff increase, and now in August, a 4% tariff increase. And we will see in the next month and in the future, in 2025, what is expected is the tariff revision. So, we expect. We are working right now in this process. The next question is from Juan Ignacio López. Hello, how are you? He's from Puente.
He questioned regarding the expansion plans that we have been presenting and if the location of the LNG plant for the YPF and Petronas project modifies our medium-term outlook for the downstream segment.
Alejandro Basso (CFO)
Well, I think that it's a very, very good... Hi, Ignacio. It's a very, very good project for Argentina. For TGS, it's also a good project that we can benefit from this project with the additional gas to be conditioned and processed in Vaca Muerta, and also to provide them with some additional services, to provide YPF and Petronas with additional services, if the opportunity comes.
Carlos Almagro (Head of Investor Relations)
Next question is from Fernando Polledo. Hi, Fernando. His question is regarding if the government will provide funds for the $500 million Néstor Kirchner pipeline expansion, or will it be fully funded by private?
Alejandro Basso (CFO)
Hi, Fernando. No, 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. Okay. Right.
Carlos Almagro (Head of Investor Relations)
Next question is from Claudio Mohadeb. Hello, Claudio. How are you? From Copernico. His question is regarding our high level of cash, that we don't have any big debt maturity the following years, so if we have any destiny of this cash in the next years.
Alejandro Basso (CFO)
Hi, Claudio. Well, you may know that we have an NGLs project to go ahead with the... We are analyzing right now the engineering and estimated cost... to be able to come with an FID next year for NGLs project. So the use of our cash and the existing cash and generation next years could be applied in that project. Plus the $700 million project that we already announced.
Carlos Almagro (Head of Investor Relations)
Next question is from Santiago Jove. Hi, Santiago, how are you? This question is about the percentage currently represent the service of the operating and maintaining of the ENARSA pipeline within the midstream business. Santiago, in fact, it represents less than 2%, because the revenue is just only the fee that we collect from operating and maintaining the service. We don't collect the tariff. The tariff is collected by ENARSA. Okay? Well, we don't have any more questions. This concludes the question and answer section. Now, we will turn to Alejandro for final remarks.
Alejandro Basso (CFO)
Well, thank you for 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.