Transportadora de Gas del Sur S.A. - Earnings Call - Q2 2025

Transcript

Speaker 0

Good morning. Good morning, everyone. I'm Carlos Almagro, Head of Investor Relations. I would like to welcome everyone to TGS Second Quarter 2025 Earnings Video Conference. TGS issued its earnings release yesterday. If you did not receive a copy of the release, please contact us at investors.tgs.com.ar. Before we begin the call, I would like to inform you that this event is being recorded and all participants are in listen-only mode. 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. 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 Financial Reporting Standards (IFRS) and are stated in constant Argentine pesos as of June 30, 2025, unless otherwise noted. Joining us today from TGS in Buenos Aires is Alejandro Basso, Chief Financial Officer. I will turn the video conference over to Mr. Basso. Alejandro, please begin.

Speaker 1

Thank you, Carlos. Good morning, everyone, and thank you for joining us today to discuss TGS's 2025 Second 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 our natural gas transportation business, following the completion of the five-year tariff revision with initial tariff charts beginning May 2025, the Secretary of Energy modified the frequency of tariff inflation adjustments. In response to ENARGAS's request, the rate will now be adjusted every month instead of every six months. As such, ENARGAS will be adjusting the transportation tariffs every month, constraining the wholesale price and consumer price indexes' monthly variations in equal proportions. As you remember, on March 7, we had a severe storm that flooded the Complejo Cerri.

Given the outstanding efforts made by our employees and suppliers, we managed to have the processing plant normally operating since early May. In terms of the private initiative submitted to the government back in June 2024 to expand the transportation capacity of the Perito Moreno pipeline by 14 million cubic meters per day, ENARGAS launched a tender offer in May. On July 28, we presented our bid with no other bidder. The project is scheduled to be awarded on October 13, and it involves the construction of three compressor plants as well as the expansion of the Tratayén compressor plant, totaling an additional 90,000 horsepower. In case we are awarded the project, we must commission the incremental capacity by April 2027 while operating and maintaining the Perito Moreno pipeline for a 15-year period.

We will also be entitled to commercialize the incremental capacity for the same period, after which the facilities will revert to ENARGAS. As you heard a couple of weeks ago, we are proud to announce that the National Executive Power has finally issued Decree No. 495 of the year 2025 and has officially extended our license for another 20 years, from 2027 to 2047. Finally, before we review the details of the quarter, on May 28, the Board of Directors approved a dividend payment of ARS 200 billion, which was equivalent to approximately $170 million, and was paid on June 11. Moving to slide four, I will briefly highlight the key financial results for the second 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 June 30, 2025, following the provisions established by the IFRS for financial reporting in hyperinflationary economies. As seen in the slide, we reported a total net income of ARS 40.3 billion during the second quarter of 2025, compared to ARS 119.7 billion reported in the same quarter of 2024. This decline was mostly explained by a negative variation of ARS 76 billion in financial results, mainly resulting from significantly lower yields on the peso-denominated investments. Additionally, EBITDA decreased ARS 32 billion for the natural gas transportation segment and another ARS 27 billion for the liquids segment, both of which were partially offset by a ARS 10 billion EBITDA increase in the midstream business segment.

Moving on to slide five, EBITDA for the natural gas transportation business in the second quarter of 2025 totaled ARS 85.6 billion, which compares to ARS 118.2 billion recorded in the second quarter of 2024. The EBITDA reduction of ARS 32 billion in the regulated business segment was mainly due to the transitional tariff adjustment from August 2024 to March 2025, and the inflation adjustment in June 25th, which resulted in a total of 25% and ARS 23.7 billion revenues increase, were insufficient to offset the 40% annual inflation, which generated a ARS 49 billion revenue reduction. In addition, operating expenses and PP&E maintenance costs rose by ARS 7.7 billion and ARS 1.9 billion, respectively.

On slide six, you can see that the EBITDA for the liquids business decreased by more than 50% to ARS 25.3 billion during the second quarter of 2025, compared to ARS 52.6 billion reported in the same quarter of 2024. Most of the EBITDA decline was explained by the ARS 16.6 billion extraordinary expenses incurred as a result of the flood occurred on March 7th, and which should be recovered from the insurance company. Monetary effects further reduced EBITDA by ARS 11.3 billion. In addition, and following the climate event, the processing plant was not in operation until mid-April, and then gradually began operating until reaching normal capacity on May 7th.

As a result, the liquids volume sales decreased by 39,000 metric tons from 250,000 metric tons sold in the second quarter of 2024 to 211,000 metric tons in the 2025 second quarter, impacting our EBITDA in nearly ARS 10 billion. Another factor which affected EBITDA in $6.3 billion was the impact of the natural gas price, which increased from $2.9 to $3.3 per million BTU. These negative effects were partially offset by higher butane prices in the domestic market following the deregulation of the butane price under the Programa OGARP starting January 25th, which allowed us to sell at export parity price. In addition, in terms of our ethane sale contract, this quarter we had a higher annual take-or-pay compensation amounting to $3.5 billion. Turning to slide seven, EBITDA from midstream and other services rose to nearly $52 billion, compared to $41.5 billion in the second quarter of 2024.

This increase was mainly driven by higher sales derived from the incremental build volume of natural gas transported and conditioned in Vaca Muerta, totaling $19 billion. Transporting natural gas build volume rose from an average of 25 million cubic meters per day in the second quarter of 2024 to 30 million cubic meters per day during this quarter. The natural gas conditioning volume also increased from an average of 16 million cubic meters per day to 27 million cubic meters per day. This effect was partially offset by a $6.2 billion increase in operating expenses and $3.5 billion negative monetary effect as inflation outpaced the foreign exchange rate increase. As seen on slide eight, we recorded a negative variation in the financial results amounting to $76 billion.

This was mainly due to a $16 billion decline in income from financial assets, given the much lower yields of the domestic financial investments. Additionally, we recorded a higher foreign exchange loss of $15.7 billion in the second quarter of 2025, following the Central Bank's decision to float the USD exchange rate, the dollar exchange rate in early April. This led to a 12% increase in the 2025 period compared to 6% in the same quarter of 2024 under the previous regime of 2% monthly crawling peg. These negative effects were partially offset by the $4.2 billion lower inflation exposure loss. Finally, turning to the cash flow on slide nine, our cash position in real terms decreased by 33%, or $339 billion, during the second quarter of 2025 to $676 billion, equivalent to approximately $565 million at the official exchange rate.

EBITDA generation during the second quarter amounted to almost $163 billion, of which 53% was generated by the regulated transportation business and 47% by the non-regulated businesses. CapEx for the period amounted to ARS 55 billion, working capital increased by ARS 19 billion, and we paid dividends amounting to ARS 103 billion and income tax payments of ARS 197 billion. This concludes our presentation. I will now turn it over to Carlos, who will open the floor for questions. Thank you.

Speaker 0

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 the questions. The first question is from Florencia Mayorga at Life. She asked if we can confirm the impairment of the second queue related to the climate event.

Speaker 1

Hi, Florencia. How are you doing? As we said in the call, the impact on the quarter was ARS 16.6 billion, okay? Extraordinary expenses incurred by the flow.

Speaker 0

Second question from Julián Casas. How are you? From Latin Securities. If we can share any update on our timeline regarding the NGL project.

Speaker 1

Okay. We are currently evaluating the cost and waiting for certain bids related to the assembling cost of the plants that are involved in that project. We are expecting to have results by the end of September.

Speaker 0

Hi, Bruno Montanari from Mora Stanley. His first question is regarding if the current level of EBITDA in midstream services is sustainable at current levels.

Speaker 1

Hi, Bruno. This quarter we had a very good EBITDA in the midstream services. Nevertheless, we expect that this business continues to grow in the future.

Speaker 0

His second question is regarding the full recovery of profitability in the shares segment.

Speaker 1

As we said, we started full operations on May 7th. From that moment on, we are having fully operational activity in the plant.

Speaker 0

Raúl Ignacio from IEP, Invertir en Bolsa. His first question is regarding the increase in the cost in general, if we could share more details about those changes during this quarter.

Speaker 1

Okay. You have to take into consideration that the full tariff revision started on April 1. In this quarter, we are spending what we estimated in the tariff revision process. It's different from what we had last year. We are under a transitional period regarding the transportation business.

Speaker 0

His second question is regarding the insurance related to the incident at Complejo Cerri, covering both damages and loss of income. If we receive any compensation or what is the current status of the insurance?

Speaker 1

Okay. The insurance people have been working in Cerri. They have reviewed the damages. Everything is okay up to now. We are expecting that they will come with their numbers maybe in two, three, four months. Nevertheless, we may have some advance of the recovery. As you may know, our insurance covered all the expenses above $1 million. In the case of the loss of income or business interruption, our business interruption was just the 17 months that we have as deductible in the insurance policy. We are not expecting a lot of recovery in that regard.

Speaker 0

Hello, Matías Catarusi from Adcap Securities. His question is regarding the outlook for the regulated transportation segment in the third quarter of 2025, considering the lagging tariff update. If we expect the EBITDA to go back to the first quarter 2025 figures or stay similar to second quarter 2025 figures?

Speaker 1

Hi. Regarding the, as I said, we currently are having the monthly inflation adjustments. Regarding revenues, it will depend on the level of adjustment that you know is 50% IPC CPI and 50% wholesale price index as compared with the CPI that is the index used by the adjustment in financial statements. Regarding full EBITDA, as I said, the level of expenses is higher now that we are under the tariff revision process.

Speaker 0

His second question is regarding the Perito Moreno pipeline tender. As the only bidder, when we expect the contract to be awarded?

Speaker 1

As I said in the call, we are expecting the scheduled date is October 13. Nevertheless, it could be earlier than that, or I don't see so, but maybe later than that. It's not a fixed date. As we are the only bidders, it should be easier to go quicker with the wording.

Speaker 0

A more specific question regarding the NGL project. How are discussions with producers progressing, and are there any signals on the scale or potential timing of the financial investment decision?

Speaker 1

I cannot anticipate any results from the discussion. We are working with the gas producers, and we are working with the cost of the project. We are expecting maybe at the end of this year to go ahead with the project.

Speaker 0

The next question is from Santiago Herrera from Alaria. Hello. Your first question is regarding the Paz by Bahía Blanca event. What was the total effect on cost for the maintenance tuning of the SERI complex?

Speaker 1

Hi, Santiago. We are estimating a total cost of around $40 million for all the expenses and also the impairments of assets.

Speaker 0

His second question is regarding the shipper pay contract compensation. What was the amount received for that concept?

Speaker 1

It was $7 million.

Speaker 0

The third question, which client caused the deterioration of account receivable for the regulated transportation segment?

Speaker 1

It was Albanesi, the marketer. That's what we had to do to book the bad DEVA loans. Nevertheless, we have recovered in cash 50% of that, which should be accounted for in the next two years because it's related to an anticipation of a revenue that they have.

Speaker 0

Next question from Juan Ignacio Lopez from Puente. His question is regarding the status of the Perito Moreno pipeline. The date for the next project schedule was explained. It will be on October 13th. Regarding the capex, it's around $500 million. In the case of the Perito Moreno pipeline expansion, we have $200 million in the financial transfers. By Matthews, the question is regarding the same question that we answered before. His additional question is regarding if we will exercise the incremental capacity option and what are the drivers to take the decisions.

Speaker 1

Regarding the optional additional capacity, it will depend on the open system that we are going to run once we are awarded. It will depend on that.

Speaker 0

Another question for Florencia Mayorga from Metal Life. What's our expectation of the new regulated EBITDA after the tariff process is done?

Speaker 1

Florencia, I think we're expecting $300 million annually. It will obviously depend on inflation and FX dynamics in Argentina.

Speaker 0

A question from Guido Bizocero from Alaria. How do we expect to finance the Iniciativa Privada project, the GPM pipeline, awarded cash and debt in %?

Speaker 1

We are expecting to finance the imports for that project that are around $70 million. After, and beyond that, we are going to use our own cash. Nevertheless, it would depend on if we are going to have other projects like the NGL project, obviously. In that case, we may decide to have additional financing for that, for the private initiative project also.

Speaker 0

His second question is regarding when we expect this project will start to generate cash flow, considering the 18-month labels.

Speaker 1

By April 27.

Speaker 0

There are no more questions. Thank you for attending the call. This concludes the question and answer section. Now we will turn to Alejandro for final remarks.

Speaker 1

Thank you all for participating in TGS's Second Quarter 2025 Conference call. We look forward to speaking with you again when we release our 2025 third quarter results.