Business Context and Reporting Period
Company: Transportadora de Gas del Sur S.A. (TGS) / Gas Transporter of the South Inc.
Reporting Period: Year ended December 31, 2016.
Business Overview: TGS operates a natural gas transportation pipeline system connecting southern/western Argentina to the Buenos Aires area and processes natural gas liquids (ethane, propane, butane, natural gasoline) at the Cerri Complex. The company also provides midstream services and telecommunications.
Key Event: In July 2016, control of the company's parent entity (CIESA) shifted to national capital groups (Pampa Energía, Grupo Inversor Petroquímica, WST, PCT) following the acquisition of Petrobras Argentina's stake.
Key Financial Metrics
| Metric | 2016 (Ps. Millions) | 2015 (Ps. Millions) |
|---|---|---|
| Net Revenues | 7,402.1 | 4,226.6 |
| Operating Income | 2,231.8 | 688.2 |
| Net Comprehensive Income | 930.6 | (172.1) Loss |
| Total Indebtedness | 3,917.0 | 3,335.2 |
| Net Cash Flow from Operations | Positive (Increased Ps. 1,674.6M vs 2015) | N/A |
Note: All figures are in Argentine Pesos (Ps.). The 2016 results reflect significant currency devaluation effects and tariff adjustments.
Material Changes vs. Prior Period
- Revenue Surge: Total net revenues increased by approximately 75% (Ps. 3,175.5 million) compared to 2015. This was driven by a 200.1% transitory tariff increase in the Natural Gas Transportation segment (effective October 2016) and a 64% increase in Liquids revenues due to exchange rate effects and higher volumes sold on own account.
- Profitability Turnaround: The company moved from a net comprehensive loss of Ps. 172.1 million in 2015 to a net comprehensive income of Ps. 930.6 million in 2016. Operating income rose by Ps. 1,543.6 million.
- Segment Performance:
- Natural Gas Transportation: Revenues rose to Ps. 2,087.2 million (from Ps. 1,014.0 million). Operating income turned positive (Ps. 658.9 million) from a loss of Ps. 298.2 million in 2015, aided by the partial implementation of the 200.1% tariff hike.
- Liquids: Revenues reached Ps. 4,768.3 million (from Ps. 2,907.8 million). Operating income increased to Ps. 1,317.2 million despite lower international prices for most of the year, offset by peso devaluation and improved logistics.
- Other Services: Revenues grew to Ps. 546.6 million (from Ps. 304.8 million) due to new compression and maintenance contracts.
- Debt Management: Total indebtedness increased to Ps. 3,917.0 million. The company redeemed all Class 1 Bonds (US$ 30.8 million) in November 2016 and entered a new US$ 74.8 million financial lease with Pampa Energía.
Guidance, Outlook, Risks, and Contingencies
- Tariff Review: A comprehensive tariff review process (RTI) was initiated in late 2016. Management expects new tariff charts to be effective in April 2017, which are crucial for long-term sustainability and funding a five-year investment plan (2017-2021) estimated at an average of Ps. 1,400 million annually.
- Regulatory Risks:
- Legal Challenges: A Supreme Court ruling in August 2016 initially invalidated tariff increases for residential users, delaying full implementation until October 2016. The company estimates a negative impact of Ps. 423 million due to these delays.
- Subsidized Programs: Participation in government-mandated programs (New Stabilization Program and Propane for Networks Agreement) forces sales below market prices, resulting in negative operating margins for those specific volumes. Compensation from the government is often delayed; in 2016, the company received BONAR 2020 bonds to settle receivables from 2015.
- Commodity Price Risk: The Liquids segment remains exposed to volatile international prices for propane, butane, and natural gasoline. While prices recovered in late 2016, the segment faces high natural gas input costs in Argentina.
- Arbitration: The ICSID claim against the Argentine Government (originally filed by Enron/Ponderosa) was suspended until April 2017 as part of the tariff renegotiation framework.
- Outlook: Management anticipates continued growth in natural gas demand and aims to enhance the product mix in the Liquids segment. The company plans to focus on asset efficiency and liquidity management to mitigate exchange rate risks.
Investor Verification Checklist
- Tariff Implementation: Verify the final approval and effective date of the Comprehensive Tariff Review (RTI) results expected in April 2017 and their impact on future cash flows.
- Government Receivables: Monitor the collection status of outstanding compensations for the "New Stabilization Program" and "Propane for Networks Agreement," including the liquidity of the BONAR 2020 bonds received.
- Debt Covenants: Review compliance with financial covenants in the 2014 Notes (e.g., debt-to-EBITDA ratio) and restrictions on dividend payments until the Investment Plan is completed.
- Legal Proceedings: Track the status of the ICSID arbitration suspension and the outcome of the Turnover Tax disputes with provincial authorities (e.g., Buenos Aires, Santa Cruz).
- Exchange Rate Exposure: Assess the impact of continued Argentine Peso devaluation on the company's USD-denominated debt versus its mixed revenue base (USD for Liquids, Pesos for Transportation).