IMPACT OF THE FINANCIAL STRUCTURE IMPACT OF THE FINANCIAL STRUCTURE OVER NATURAL GAS DISTRIBUTION OVER NATURAL GAS DISTRIBUTION

COMPANIES INVESTMENT’S IN BRAZILCOMPANIES INVESTMENT’S IN BRAZIL

Marcelo Colomer FerraroMarcelo Colomer FerraroEdmar de AlmeidaEdmar de Almeida

Grupo de Economia da Energia da Universidade Federal do Rio de Janeiro

V Congreso Latinoamericano y del Caribe de Gas y Electricidad

ContentContent

1.1. IntroductionIntroduction

2.2. Theoretical Theoretical aspectsaspects about financing about financing

3.3. Financing of natural gas sectorFinancing of natural gas sector

4.4. Brazilian financial systemBrazilian financial system

5.5. Barriers on the investment increase Barriers on the investment increase in the natural gas distribution in the natural gas distribution network.network.

IntroductionIntroduction

Barrier to the development of new Barrier to the development of new markets of natural gas: Low markets of natural gas: Low development of the distribution development of the distribution infrastructure.infrastructure.

Law n° 9.478: Natural gas distribution Law n° 9.478: Natural gas distribution is of exclusive use of states, directly is of exclusive use of states, directly or through concession.or through concession.

Construction of 200,000 quilometers Construction of 200,000 quilometers of network distribution are necessary, of network distribution are necessary, according to estimatives. according to estimatives.

Introduction (cont.)Introduction (cont.)

Characteristics of the natural gas Characteristics of the natural gas distribution sector condition a distribution sector condition a financing pattern dependent on financing pattern dependent on borrowed funds. borrowed funds.

Great difference between the Great difference between the investment levels of private and investment levels of private and state companies.state companies.

Existence of non financial barriers to Existence of non financial barriers to the development of the sector.the development of the sector.

Distribution Network in 2004 (km)Distribution Network in 2004 (km)

0

20.000

40.000

60.000

80.000

100.000

120.000

Argentina ReinoUnido

Colombia Brasil

Fonte: Strat/RG

Extension of the Distribution Network of Extension of the Distribution Network of the Most Important Brazilian Companiesthe Most Important Brazilian Companies

67

75

135

160

170

207

250

311

311

409

425

434

479

2717

3503

PBGAS/PB

MSGAS/MS

ALGAS/AL

CEGAS/CE

POTIGAS/RN

CPERGAS/PE

GASMIG/ MG

BAHIAGA/BA

SULGAS/RS

COMPAGAS/PR

GAS NATURAL/SP*

CEG RIO/RJ*

SCGAS/SC

CEG/RJ*

COMGAS/SP*

Fonte: BNDES

Theoretical ATheoretical Aspectsspects About About FinancingFinancing

Basic sources of Financing:Basic sources of Financing:

a)a) New Share Issues;New Share Issues;

b)b) Debentures and Bank Loans;Debentures and Bank Loans;

c)c) Retained profit Retained profit

Determination of excellent financial Determination of excellent financial pattern. pattern.

Theory of Modigliani and MillerTheory of Modigliani and Miller..

Theoretical ATheoretical Aspectsspects About About Financing (cont.)Financing (cont.)

Increasing financial risk (Kalecki).Increasing financial risk (Kalecki).

a)a) Investment associated to the Investment associated to the capacity of profit generation of the capacity of profit generation of the firm. firm.

Different types of risk(Minsky)Different types of risk(Minsky)

a)a) Risk of the Creditor;Risk of the Creditor;

b)b) Risk of the Entrepreneur.Risk of the Entrepreneur.

Theoretical ATheoretical Aspectsspects About About Financing (cont.)Financing (cont.)

Theoretical conclusion: The Theoretical conclusion: The investment depends on the capacity investment depends on the capacity of the firm in gathering resources of the firm in gathering resources that, however, are limited by the that, however, are limited by the existence of different types of risks existence of different types of risks that raises with the increase of the that raises with the increase of the participation of borrowed funds on participation of borrowed funds on proper capital. proper capital.

Financing of Natural Gas SectorFinancing of Natural Gas Sector

Characteristics of the natural gas Characteristics of the natural gas distribution sector:distribution sector:

a)a) Capital intensity;Capital intensity;

b)b) Existence of scope and scale Existence of scope and scale economies;economies;

c)c) Long period of maturation of the Long period of maturation of the investments;investments;

Financing of Natural Gas Sector Financing of Natural Gas Sector (cont.)(cont.)

d)d) Specific assets;Specific assets;

e)e) Territorial exclusiveness in the Territorial exclusiveness in the supply of the service.supply of the service.

Dependence of borrowed fundsDependence of borrowed funds

Principais Empresas Estatais

Nº de cidades na área de concessão

Nº de cidades atendidas

Nº de clientes

Extensão da rede de

distribuição

(km)

Vendas em 2005

(1000/m³ dia)

Algas 22 5 155 106 399

Bahiagás 417 7 144 300 3.976

Cegas 184 7 110 180 714

Copergás 185 13 89 211 813

Sergás 75 5 35 63 201

PB Gás 223 6 56 70 253

Potigás 166 8 53 140 291

Gasmig 853 13 169 185 1.804

BR Distribuidora 77 nd 33 150 1.790

Compagás 399 7 106 402 586

Sulgás 467 16 83 370 2.301

Scgás 293 17 74 409 884

Msgás 78 2 10 58 605

Total 3.439 106 1.117 2.644 14.617

Empresas Privadas

Nº de cidades na área de concessão

Nº de cidades

atendidasNº de clientes

Extensão da rede de

distribuição

(km)

Vendas em 2005

(1000/m³ dia)

Ceg 16 16 606.766 2.560 4.101

Ceg Rio 75 65 1.500 383 3.265

Comgás 177 44 404.256 3.400 9.873

Gás Natural SPS 93 6 7.230 150 334

Gás Brasiliano 375 4 nd 124 128

Total 736 135 1.019.752 6.617 17.701

Financing of natural gas sector Financing of natural gas sector (cont.)(cont.)

Great difference between the levels Great difference between the levels of investment of private and state-of investment of private and state-owned companies.owned companies.

The financing structure does not The financing structure does not explain the low level of investment of explain the low level of investment of the companies.the companies.

Existence of non financial barriers to Existence of non financial barriers to the development of the sectorthe development of the sector..

Level of IndebtednessLevel of Indebtedness

The level of financial indebtedness of The level of financial indebtedness of public companies of gas distribution public companies of gas distribution is extremely below the level of is extremely below the level of indebtedness of the private indebtedness of the private companies.companies.

Up to 2004, only 3 state-owned Up to 2004, only 3 state-owned companies had any banking debt.companies had any banking debt.

General indebtedness following level General indebtedness following level of financial indebtednessof financial indebtedness..

Level of Indebtedness (cont.)Level of Indebtedness (cont.)

Participation of borrowed funds on Participation of borrowed funds on the total capital of the company:the total capital of the company:

a)a) Private companies: 19.11% in 1999 Private companies: 19.11% in 1999 to 59,23% in 2004;to 59,23% in 2004;

b)b) State-owned companies: 31.69% in State-owned companies: 31.69% in 1999 to 6,16% in 2003.1999 to 6,16% in 2003.

High levels of liquidity.High levels of liquidity.

Level of Financial Indebtedness of Level of Financial Indebtedness of the Distribution Companiesthe Distribution Companies

0%

5%

10%

15%

20%

25%

30%

35%

40%

1998 1999 2000 2001 2002 2003 2004 2005

Nível de end. Empresas Priv Nível de end. Empresas Esta.

Level of Financial Indebtedness of the Level of Financial Indebtedness of the Distribution Companies without SulgasDistribution Companies without Sulgas

0%

5%

10%

15%

20%

25%

30%

35%

40%

1998 1999 2000 2001 2002 2003 2004 2005

Nível de end. Empresas Priv Nível de end. Empresas Est

Level of Financial Indebtedness X Level Level of Financial Indebtedness X Level of General Indebtednessof General Indebtedness

0%

10%

20%

30%

40%

50%

60%

70%

1998 1999 2000 2001 2002 2003 2004 2005

Endiv. Financeiro Endiv. Geral

Liquidity Ratio of the Most Important Liquidity Ratio of the Most Important State-owned CompaniesState-owned Companies

0,00

0,50

1,00

1,50

2,00

2,50

3,00

3,50

4,00

1998 1999 2000 2001 2002 2003 2004 2005

Algas Bahiagas Copergas Compagas Sulgas Scgas

Indebtedness CapacityIndebtedness Capacity Used methodology: methodology of Used methodology: methodology of

credit risk analysis of BNDES credit risk analysis of BNDES (ALMEIDA, 2004).(ALMEIDA, 2004).

Financing of 80% of the Projects that Financing of 80% of the Projects that totalize [(3 x EBITDA) - banking totalize [(3 x EBITDA) - banking

debts].debts].

State-owned companies: Capacity of State-owned companies: Capacity of indebtedness above the leverage indebtedness above the leverage level: Existence of idle capacity of level: Existence of idle capacity of financing.financing.

0%

5%

10%

15%

20%

25%

30%

35%

40%

1999 2000 2001 2002 2003 2004 2005

Cap End/Ativo Nível de Endividamento

0%

5%

10%

15%

20%

25%

30%

35%

1999 2000 2001 2002 2003 2004

Cap End/Ativo Nível de Endividamento

Private companies State-owned companies

Capacity of Indebtedness X Level Capacity of Indebtedness X Level of Indebtedness of Indebtedness

Economies of Scale and ScopeEconomies of Scale and Scope Asset turn ratio: Revenue divided by Asset turn ratio: Revenue divided by

average assets.average assets.

The increasing of the asset turn ratio: The increasing of the asset turn ratio: Revenue has grown more than Revenue has grown more than investments in asset. Existence of investments in asset. Existence of scale economies scale economies ..

Return on fixed asset: Revenue Return on fixed asset: Revenue divided by fixed asset. divided by fixed asset.

Increasing ROFA indicates existences Increasing ROFA indicates existences of scale economies.of scale economies.

Asset Turn RatioAsset Turn Ratio

0,00

0,10

0,20

0,30

0,40

0,50

0,60

0,70

0,80

0,90

1,00

1998 1999 2000 2001 2002 2003 2004

Return on Fixed Asset (ROFA)Return on Fixed Asset (ROFA)

0%

10%

20%

30%

40%

50%

60%

1999 2000 2001 2002 2003 2004 2005

Empresas Privadas Empresas Estatais

Conclusions of the Analysis of the Conclusions of the Analysis of the Financial and Economic Pointers of Financial and Economic Pointers of

Distribution Companies.Distribution Companies.

The low level of indebtedness and the The low level of indebtedness and the raised liquidity ratios indicates that in raised liquidity ratios indicates that in the case of the state-owned the case of the state-owned companies, is not the financial companies, is not the financial obstacles that limit the captation of obstacles that limit the captation of resources, what it is perceived if we resources, what it is perceived if we analyze the capacity of indebtedness analyze the capacity of indebtedness of these companies. of these companies.

Conclusions of the Analysis of the Conclusions of the Analysis of the Financial and Economic Pointers of Financial and Economic Pointers of

Distribution Companies.Distribution Companies.

The analysis of the asset turn ratio The analysis of the asset turn ratio and the ROFA suggests that the and the ROFA suggests that the state-owned companies operate in an state-owned companies operate in an sub-excellent level of indebtedness. sub-excellent level of indebtedness.

There are non financial barriers to the There are non financial barriers to the expansion of the investments of the expansion of the investments of the public companies of gas distribution.public companies of gas distribution.

Financing of Long Run in BrazilFinancing of Long Run in Brazil

Main sources of resources of long Main sources of resources of long run:run:

a)a) Public resources (BNDES); Public resources (BNDES);

b)b) Self-financing;Self-financing;

c)c) External resources.External resources.

Financing of Long period in BrazilFinancing of Long period in Brazil

Recent financial innovations:Recent financial innovations:

a)a) Asset securitization;Asset securitization;

b)b) Derivatives Market;Derivatives Market;

c)c) Institucional investorsInstitucional investors..

Obstacles to the Increase of the Obstacles to the Increase of the

Investment in the Distribution NetworkInvestment in the Distribution Network Credit contingency to public sector: Credit contingency to public sector:

Resolution 2827 of the Central Bank.Resolution 2827 of the Central Bank.

In 2005, R$ 6 billion in projects are In 2005, R$ 6 billion in projects are stopped in the state-owned companies stopped in the state-owned companies waiting for money release. waiting for money release.

Potential debt: R$ 345 million - increase of Potential debt: R$ 345 million - increase of 43% of the current debt of 2003.43% of the current debt of 2003.

Level of Potential Indebtedness of Level of Potential Indebtedness of

the State-owned companiesthe State-owned companies

0

50

100

150

200

250

300

350

400

1999 2000 2001 2002 2003 2004

Milh

ões

Díivida Bancária Dívida Bancária Potencial

Obstacles to the Increase of the Obstacles to the Increase of the

Investment in the Distribution NetworkInvestment in the Distribution Network Lack of an integrated energy Lack of an integrated energy

planning.planning.

Risk of Supply: Risk of Supply:

a)a) Uncertainties regarding the reserves Uncertainties regarding the reserves of Santos; of Santos;

b)b) Political crisis in BoliviaPolitical crisis in Bolivia..

Brazilian Natural Gas ImportationBrazilian Natural Gas Importation

Importação de gás natural (milhões m3)

 Países1999 2000 2001 2002 2003 2004

Total 400 2.211 4.608 5.269 5.947 8086

Argentina 0 106 753 492 350 451

Bolívia 400 2.105 3.855 4.777 5.597 7.635

Importation NeedsImportation Needs

0

20

40

60

80

100

120

1999 2000 2001 2002 2003 2004 2005 *2006 *2007 *2008

Milh

ões

de m

³/dia

Gás Produzido Internamente Importação Capacidade de Importação

ConclusionsConclusions

The development of the gas industry The development of the gas industry in Brazil depends on the overcoming in Brazil depends on the overcoming of the bottleneck created by the low of the bottleneck created by the low level of investment of the state-level of investment of the state-owned distribution company. owned distribution company.

Development of solutions for the Development of solutions for the resources limitation to the public resources limitation to the public distribution companies: Process of distribution companies: Process of securitization, stock market, changes securitization, stock market, changes in the patrimonial structure. in the patrimonial structure.

Conclusions (cont.)Conclusions (cont.)

Definition of an integrated energy Definition of an integrated energy politics, that diminishes the politics, that diminishes the uncertainties regarding the external uncertainties regarding the external natural gas suppliment and that natural gas suppliment and that determines the role of the gas in the determines the role of the gas in the energy sector, mainly through the energy sector, mainly through the definition of the role of the thermals definition of the role of the thermals in the Brazilian electric sector. in the Brazilian electric sector.

Thank You !Thank You !

Marcelo Colomer Ferraro

Universidade Federal do Rio de Janeiro

Av. Pasteur, 250 Urca

Rio de Janeiro, RJ – Brasil

Tel.: + 55 (21) 3873-5269

+ 55 (21) 8638-0044