TGS Receives Tariff Increase from Argentina Regulators, a Credit Positive
Last Monday, Argentina’s gas regulator, Ente Nacional Regulador del Gas (Enargas), approved an extraordinary tariff increase for Transportadora de Gas del Sur S.A. (TGS, Caa1 positive) equal to 200% over the previous regulated tariff. The tariff increase is credit positive for TGS because it will translate into additional regulated revenues of approximately ARS2 billion per year, or 50% of the company’s 2015 total revenues. Including this most recent increase, TGS has received approval to raise tariffs beyond the inflation rate in Argentina for the third consecutive year and following 13 years of frozen tariffs. Regulated tariffs will account for 45% of TGS’ total revenues in 2016. Enargas’ decision will also bring credit-positive structural changes to Argentina’s energy framework by opening a one-year period for the government to put forward a more transparent and predictable framework for tariff reviews. The government’s resolution mandates that Enargas undertake an integral review of the current system and propose changes to increase transparency and predictability. Once in place, we expect the revised framework to set a clear path for future tariff revisions and for the timely recovery of increased costs and expenses, while providing enough returns to allow the required investments in network expansions. TGS’ business model will change significantly and become more predictable. During the period that TGS received no regulated tariff increases, the company depended on its unregulated business of selling ethane and propane. Those products’ high prices resulted in TGS’ unregulated revenues constituting an average of 70% of the company’s total revenues, and 90% of its operating profits until 2014, when those products’ international prices declined significantly as oil prices fell. During 2015, unregulated revenues were down to 68% of total revenues from 75% the previous year. Assuming prices in 2016 are similar to those prevailing in 2015, and accounting for the tariff increase, we expect the revenue contribution from regulated revenues to be 45%, while revenues from the unregulated businesses will contribute 55% to total revenues (see exhibit).
Enargas’ resolution also sets a mandatory minimum of required investments that must reach ARS750 million this year, significantly above the ARS370 million that TGS spent in 2015. Nevertheless, the tariff increase will allow TGS to fund the required investments from internally generated sources. TGS’s controlling shareholder is Compañía de Inversiones de Energía S.A. (CIESA, unrated), which holds 51% stake. CIESA is controlled by Petrobras Argentina S.A. (50%), the CIESA Trust (40% of which, pending regulatory approval, will belong to Pampa Energia S.A.) and PEPCA S.A., a fully owned subsidiary of Pampa Energia (10%). The remaining 49% in TGS is held by Anses, the national pension fund (23%), and public shareholders (26%). Last month, Pampa announced its intention to acquire the 67% stake that Petrobras (Brasil) owns in subsidiary Petrobras Argentina. Pampa plans to partially finance the acquisition with proceeds from the sale of its indirect stake in TGS. The sale will provide the funding to acquire Petrobras Argentina, but will also allow the transaction to occur given the regulatory limitations in place in Argentina that prohibit a gas producer from holding a majority interest in a gas transportation or distribution company. If and when the announced transactions take place, TGS’ ownership structure will change, although Pampa is likely to continue as TGS’ indirect majority shareholder.
