Transportadora de Gas del Sur S.A. - Earnings Call - Q4 2024

Transcript

Gastón Di Luise (Head of Investor Relations)

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 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 December 31st, 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, 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 cu m per day. The works lasted more than two years, with a total CapEx of $350 million, which was used for the construction of the two modules. As you remember, the first module was commissioned in October 2024. This incremental capacity will allow us to transport through the gathering pipeline and put into specification additional shale gas volume needed to replace the continuous decline of conventional natural gas production.

LNG and gasoil imports unfulfilled the demand from the Northwest Argentina following the commissioning of the new compressor plant at the end of the Perito Moreno pipeline in Salliqueló in October 2024, the commissioning of the compressor plant in the Mercedes-Cardales pipeline in last December, the La Carlota-Tío Pujio new pipeline commissioned in November, as well as the reversal of the Norte 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 2024, last January we were also granted a 2.5% tariff increase and in February 1.5%.

As per the five-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. ENARGAS issued a favorable technical and legal internal report in last June, followed by a non-binding 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 a 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 Number 15, which was issued last month. From the issuance date of the 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 2024 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 Number 169, which delegates to the Secretary of Energy and ENARSA to carry out the bidding process.

Finally, earlier this month, S&P Global Ratings upgraded TGS's rating to B- from CCC, as the credit agency revised upward its transfer and convertibility assessment on Argentina. Turning now to slide four, I will briefly address some of the key highlights for the fourth quarter of 2024. 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 December 31, 2024, 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 129.6 billion during the fourth quarter of 2024, compared to a net loss of ARS 51 billion reported in the same quarter of 2023.

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 2023 associated to the almost 120% foreign exchange rate increase in December 2023. 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. Sorry. Are you hearing me?

Gastón Di Luise (Head of Investor Relations)

Yes.

Alejandro Basso (CFO)

Yes? Okay. 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 reversal of the residual internal 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 their income tax impacts. Moving to slide five, EBITDA for natural gas transportation business in the fourth quarter of 2024 totaled ARS 81.4 billion, which compares to a negative EBITDA of ARS 4.2 billion recorded in the last quarter of 2023. The EBITDA variation of ARS 85.3 billion in the regulated business segment was mainly explained by the ARS 675 transitional tariff increase that became effective in the beginning of April 2024, 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, interrupted and ED transportation services revenues decreased by ARS 10.8 billion, and we recorded the higher ARS 5 billion turnover tax, mainly due to the incremental revenues mentioned before. As we mentioned before, and out of the 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 six, you can see that the EBITDA for the liquids business increased to ARS 77.5 billion during the fourth quarter of 2024, compared to ARS 48 billion reported in the same quarter of 2023.

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 increase 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 2024, from 148,000 tons in the same quarter of 2023. In addition, higher international LPG prices of approximately 20% contributed to a 7.8 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 seven, 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 an 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 billed volume from natural gas transported unconditioned in Vaca Muerta in the amount of ARS 3.8 billion. Transported natural gas billed volume rose from an average of 23 million cu m per day in the fourth quarter of 2023 to 28 million cu m per day in the 2024 fourth quarter. The natural gas conditioning volume also increased from an average of 15 million cu m per day to 19 million cu m. As seen on slide eight, we recorded a positive variation in the financial results amounting to ARS 154 billion.

This positive variation was mostly explained by a much lower foreign exchange rate loss amounting to ARS 14 billion in 2024, as a result of a 2% monthly crawling peg. Meanwhile, in the fourth quarter of 2023, 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 2023. In addition, we recorded a lower inflation exposure loss of ARS 92 billion, given that the inflation rate in the quarter of 2024 reached 8%, while it was 53% in the same period of 2023.

These positive effects were partially offset by a lower financial asset income totaling ARS 170 billion 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 2024 than in the same quarter of 2023. Finally, turning to the cash flow on slide nine, our cash position in real terms increased 9%, or ARS 65 billion during the fourth quarter of 2024 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 non-regulated 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. Thank you.

Gastón Di Luise (Head of Investor Relations)

Thank you. The floor is now open for questions. If you have questions, please send them through the 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 pull for questions. We have the first question from Luisa Belén. Thank you for your question, Luisa. The question is, if adjustments in the 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 the 2025-2029 period? And should we expect lower CapEx in 2025 and/or any relevant changes in the pace of ongoing projects?

Alejandro Basso (CFO)

Hello, Luisa. 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.

Gastón Di Luise (Head of Investor Relations)

Okay, we have some questions from Daniel Guardiola. Thank you for your questions. The first one is related to the new regulatory framework. If we can confirm the RAP of the natural gas transportation business.

Alejandro Basso (CFO)

Hi, Daniel. How are you doing? Regarding the rate that's based for the transportation business, we presented, we filed before ENARGAS a rate base of more than $2 billion. Okay.

Gastón Di Luise (Head of Investor Relations)

The second question from Daniel is, how is it progressing the private initiative to expand the Presidente Néstor Kirchner Gas Pipeline, and when are we expecting this project to be finally awarded?

Alejandro Basso (CFO)

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.

Gastón Di Luise (Head of Investor Relations)

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

Alejandro Basso (CFO)

The license, the frequency is each six months. Nevertheless, we know that ENARGAS is thinking to make a more frequent adjustment, and the indicator that they proposed was CPI and wholesale price indexes by half, as I said in the call.

Gastón Di Luise (Head of Investor Relations)

The last question from Daniel is, are the tariffs of the non-regulated midstream businesses set in Argentine pesos?

Alejandro Basso (CFO)

No, the tariffs of the non-regulated 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 everything.

Gastón Di Luise (Head of Investor Relations)

We have a question from Andrés Cardona. Thank you for the question, Andrés. The question is, is the Gasoducto of 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 not regulated? Is it something of our interest?

Alejandro Basso (CFO)

Okay, regarding the time for the startup of the GPM expansion, well, it will depend on the bidding process. We may have some part of the capacity by the 2026 winter, but it depends on the process. About the larger project, it's not the case. We propose a 14 million cu m per day expansion with an option for us or for the company that is going to be awarded the project to extend it for another 6 million cubic meters per day. The decree, the resolution talks in that way. Okay, is this expansion regulated or not regulated? No, it's non-regulated. The tariffs are not going to be regulated by ENARGAS, okay? It's a tariff that we are going to offer in dollars. The regulation for the transportation expansion in the JPM is under the hydrocarbon laws.

It's an interesting project, obviously, for us, as we propose it.

Gastón Di Luise (Head of Investor Relations)

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

Alejandro Basso (CFO)

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

Gastón Di Luise (Head of Investor Relations)

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

Alejandro Basso (CFO)

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.