IMPACT OF THE FINANCIAL STRUCTURE OVER NATURAL GAS DISTRIBUTION COMPANIES INVESTMENT’S IN BRAZIL Marcelo Colomer Ferraro Edmar de Almeida Grupo de Economia da Energia da Universidade Federal do Rio de Janeiro V Congreso Latinoamericano y del Caribe de Gas y Electricidad

Content 1.Introduction 2.Theoretical aspects about financing 3.Financing of natural gas sector 4.Brazilian financial system 5.Barriers on the investment increase in the natural gas distribution network.

Introduction Barrier to the development of new markets of natural gas: Low development of the distribution infrastructure. Barrier to the development of new markets of natural gas: Low development of the distribution infrastructure. Law n° 9.478: Natural gas distribution is of exclusive use of states, directly or through concession. Law n° 9.478: Natural gas distribution is of exclusive use of states, directly or through concession. Construction of 200,000 quilometers of network distribution are necessary, according to estimatives. Construction of 200,000 quilometers of network distribution are necessary, according to estimatives.

Introduction (cont.) Characteristics of the natural gas distribution sector condition a financing pattern dependent on borrowed funds. Characteristics of the natural gas distribution sector condition a financing pattern dependent on borrowed funds. Great difference between the investment levels of private and state companies. Great difference between the investment levels of private and state companies. Existence of non financial barriers to the development of the sector. Existence of non financial barriers to the development of the sector.

Distribution Network in 2004 (km) Fonte: Strat/RG

Extension of the Distribution Network of the Most Important Brazilian Companies Fonte: BNDES

Theoretical Aspects About Financing Basic sources of Financing: Basic sources of Financing: a) New Share Issues; b) Debentures and Bank Loans; c) Retained profit Determination of excellent financial pattern. Determination of excellent financial pattern. Theory of Modigliani and Miller. Theory of Modigliani and Miller.

Theoretical Aspects About Financing (cont.) Increasing financial risk (Kalecki). Increasing financial risk (Kalecki). a) Investment associated to the capacity of profit generation of the firm. Different types of risk(Minsky) Different types of risk(Minsky) a) Risk of the Creditor; b) Risk of the Entrepreneur.

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

Financing of Natural Gas Sector Characteristics of the natural gas distribution sector: Characteristics of the natural gas distribution sector: a) Capital intensity; b) Existence of scope and scale economies; c) Long period of maturation of the investments;

Financing of Natural Gas Sector (cont.) d) Specific assets; e) Territorial exclusiveness in the supply of the service. Dependence of borrowed funds Dependence 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 Bahiagás Cegas Copergás Sergás PB Gás Potigás Gasmig BR Distribuidora 77nd Compagás Sulgás Scgás Msgás Total

Empresas Privadas 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) Ceg Ceg Rio Comgás Gás Natural SPS Gás Brasiliano 3754nd Total

Financing of natural gas sector (cont.) Great difference between the levels of investment of private and state- owned companies. Great difference between the levels of investment of private and state- owned companies. The financing structure does not explain the low level of investment of the companies. The financing structure does not explain the low level of investment of the companies. Existence of non financial barriers to the development of the sector. Existence of non financial barriers to the development of the sector.

Level of Indebtedness The level of financial indebtedness of public companies of gas distribution is extremely below the level of indebtedness of the private companies. The level of financial indebtedness of public companies of gas distribution is extremely below the level of indebtedness of the private companies. Up to 2004, only 3 state-owned companies had any banking debt. Up to 2004, only 3 state-owned companies had any banking debt. General indebtedness following level of financial indebtedness. General indebtedness following level of financial indebtedness.

Level of Indebtedness (cont.) Participation of borrowed funds on the total capital of the company: Participation of borrowed funds on the total capital of the company: a) Private companies: 19.11% in 1999 to 59,23% in 2004; b) State-owned companies: 31.69% in 1999 to 6,16% in High levels of liquidity. High levels of liquidity.

Level of Financial Indebtedness of the Distribution Companies

Level of Financial Indebtedness of the Distribution Companies without Sulgas

Level of Financial Indebtedness X Level of General Indebtedness

Liquidity Ratio of the Most Important State-owned Companies

Indebtedness Capacity Used methodology: methodology of credit risk analysis of BNDES (ALMEIDA, 2004). Used methodology: methodology of credit risk analysis of BNDES (ALMEIDA, 2004). Financing of 80% of the Projects that totalize [(3 x EBITDA) - banking debts]. State-owned companies: Capacity of indebtedness above the leverage level: Existence of idle capacity of financing. State-owned companies: Capacity of indebtedness above the leverage level: Existence of idle capacity of financing.

Private companiesState-owned companies Capacity of Indebtedness X Level of Indebtedness

Economies of Scale and Scope Asset turn ratio: Revenue divided by average assets. Asset turn ratio: Revenue divided by average assets. The increasing of the asset turn ratio: Revenue has grown more than investments in asset. Existence of scale economies. The increasing of the asset turn ratio: Revenue has grown more than investments in asset. Existence of scale economies. Return on fixed asset: Revenue divided by fixed asset. Return on fixed asset: Revenue divided by fixed asset. Increasing ROFA indicates existences of scale economies. Increasing ROFA indicates existences of scale economies.

Asset Turn Ratio

Return on Fixed Asset (ROFA)

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

Conclusions of the Analysis of the Financial and Economic Pointers of Distribution Companies. The analysis of the asset turn ratio and the ROFA suggests that the state- owned companies operate in an sub- excellent level of indebtedness. The analysis of the asset turn ratio and the ROFA suggests that the state- owned companies operate in an sub- excellent level of indebtedness. There are non financial barriers to the expansion of the investments of the public companies of gas distribution. There are non financial barriers to the expansion of the investments of the public companies of gas distribution.

Financing of Long Run in Brazil Main sources of resources of long run: Main sources of resources of long run: a) Public resources (BNDES); b) Self-financing; c) External resources.

Financing of Long period in Brazil Recent financial innovations: Recent financial innovations: a) Asset securitization; b) Derivatives Market; c) Institucional investors.

Obstacles to the Increase of the Investment in the Distribution Network Credit contingency to public sector: Resolution 2827 of the Central Bank. Credit contingency to public sector: Resolution 2827 of the Central Bank. In 2005, R$ 6 billion in projects are stopped in the state-owned companies waiting for money release. In 2005, R$ 6 billion in projects are stopped in the state-owned companies waiting for money release. Potential debt: R$ 345 million - increase of 43% of the current debt of Potential debt: R$ 345 million - increase of 43% of the current debt of 2003.

Level of Potential Indebtedness of the State-owned companies

Obstacles to the Increase of the Investment in the Distribution Network Lack of an integrated energy planning. Lack of an integrated energy planning. Risk of Supply: Risk of Supply: a) Uncertainties regarding the reserves of Santos; b) Political crisis in Bolivia.

Brazilian Natural Gas Importation Importação de gás natural (milhões m 3 ) Países Total Argentina Bolívia

Importation Needs

Conclusions The development of the gas industry in Brazil depends on the overcoming of the bottleneck created by the low level of investment of the state- owned distribution company. The development of the gas industry in Brazil depends on the overcoming of the bottleneck created by the low level of investment of the state- owned distribution company. Development of solutions for the resources limitation to the public distribution companies: Process of securitization, stock market, changes in the patrimonial structure. Development of solutions for the resources limitation to the public distribution companies: Process of securitization, stock market, changes in the patrimonial structure.

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

Thank You ! Marcelo Colomer Ferraro Universidade Federal do Rio de Janeiro Av. Pasteur, 250 Urca Rio de Janeiro, RJ – Brasil Tel.: + 55 (21) (21)