Financing Gas Pipeline Expansions in Argentina
By Ignacio J. Randle
Argentina is hoping that a new “financial trust” mechanism can be used to finance expansion of gas pipelines and distribution networks.
The idea is to put licenses and other assets needed to operate the expansion project in a trust that would issue debt or certificates of participation in the capital markets. The government would authorize the trust to charge users of the new pipeline or distribution lines special tariffs above the regular tariffs in order to ensure that investors in the project will be repaid. Running the money through a trust is supposed to make the cash flow more secure. Federal, provincial and municipal governments would be barred from taxing away the cash from the extra tariffs. After the funds raised in the capital markets have been repaid, then the trust assets would be turned back over to the gas company that originally formed the trust.
The program is off to a slow start, but two gas pipeline projects are now underway using the financial trust mechanism.
Argentina is suffering currently from gas and electricity shortages. The energy crisis had been expected not to worsen until later in the year, but the increase in demand generated by growing economic activity, the lack of investment and frozen tariffs have accelerated the problem.
The gap between energy supply and demand is mainly due to three factors. First, there is still price distortion caused by the freeze in gas prices to regulated customers that occurred when Argentina devalued the peso and broke from the link with the US dollar in late 2001. Second, there has been little new investment in gas transportation and distribution equipment due to the weak financial situation of the companies, low prices, low tariffs and regulatory uncertainty. Third, there has been a strong increase in natural gas and electricity demand — of 25% and 9% respectively — in the first months of 2004 compared to the same period in 2003.
From 1946 until 1992, the transportation and distribution of natural gas in Argentina was under the exclusive control of Gas del Estado, a gas pipeline company owned by the Argentine government.
In 1992, Gas del Estado was privatized under federal Law No. 23696 and No. 24076 and federal Decree Nos. 1189/92 and 1738/92. The assets of Gas del Estado were distributed at privatization among two gas transportation companies and eight gas distribution companies. The transportation assets were split into two pipeline companies, north and south, organized to connect the gas fields with the main consumption centers, including the metropolitan area of Buenos Aires.
The main legal framework governing the production, transportation, distribution, storage and trading of gas in Argentina is found in four places: the Hydrocarbons Act, federal Law No. 24076, the bidding documentation for the privatization of Gas del Estado, and the transportation and distribution license and transfer agreements entered into between the federal government and each of the operators.
Natural gas transportation and distribution companies operate under an open access system. Producers, large consumers and distributors have a right to free access to transportation and distribution pipelines under the licenses granted to privatized companies. Furthermore, under the Hydrocarbons Act, producers enjoy a concession regime for the transportation of their own gas output.
Under the current legal framework, there are certain limits on cross-ownership among large consumers, producers, distributors and transportation companies.
The Ente Nacional Regulador del Gas or “Enargas” is the federal enforcement authority that oversees compliance with the applicable laws and regulations.
One measure the Argentine government has taken to address the energy crisis is to create trust funds to finance gas and electricity investments, especially for transportation and distribution. Under federal Decree No. 180/04, such investments must be arranged with and approved by the Ministry of Federal Planning, Public Investment and Services.
The Argentine government wants financing for gas and electricity investments to come from the capital markets. Resolution No. 185/04 authorized the formation of financial trusts, subject to the terms and conditions of federal Law No. 24,441, that will issue securities representing debt or certificates of participation in the financial trusts up to a maximum of $3 billion.
Formation of a trust and the issuance of securities require authorization from the Comisión Nacional de Valores — the Argentine equivalent of the US Securities and Exchange Commission. Public offerings of securities require commission approval. Authorization must also be received from either the Buenos Aires Stock Exchange or the Mercado Abierto Electrónico S.A. — the Argentine over-the-counter securities market — before the securities can be listed.
The administrator for the financial trust program is the Ministry’s secretary of energy and the co-administrator is the under-secretary of fuel. The administrator and co-administrator may modify non-essential terms of the prospectus and determine the procedures that will govern the negotiation and execution of the agreements for the work to be performed under the financial trusts.
The administrator will also execute agreements with different private or public entities in order to fulfil the aims of the program and provide clear, simple and efficient performance procedures. In addition, the administrator selects the trustee for each financial trust.
Resolution No. 185/04 provides the following terms and conditions for the program.
The “settler” of a financial trust can be any gas transportation or distribution licence holder, or any cooperative or other player in the gas industry. The “settlor” is the company that puts licenses and other assets that will needed for the expansion project in trust to form the trust.
A trustee is then appointed to run the trust. The trustee enters into all the necessary contracts for the expansion project — for example, purchase agreements for materials and equipment, service and lease agreements, transportation or distribution service agreements, and operation and maintenance agreements.
The trust then borrows against its assets in the capital markets. Such borrowing is permitted exclusively to finance projects enlarging gas transportation and distribution systems. The debt or certificates of participation are gradually repaid or redeemed out of operating earnings from the trust.
Each trust will be given special tariffs to be paid by the users of its regulated transportation or distribution services. Special credit programs are also envisaged with national or international institutions as another source of funds.
The trustee does not have to assume responsibility for the transportation or distribution of gas; the licence holder who formed the trust by contribution of its assets can choose to remain responsible by entering into an operation and maintenance agreement with the trustee, in which case it will remain the operator of the new installations and be paid a fee for its services.
Once the trust has repaid the capital markets debt or redeemed the certificates of participation, then the trust will be dissolved and the assets transferred back to the licence holder who originally put its assets in the trust.
Financial trusts are supposed to be a tool mainly for financing expansion of gas transportation and distribution facilities of the two transportation and eight distribution companies that emerged at privatization of Gas del Estado.
However, Resolution No. 185/04 does not prohibit the use of financial trusts for the construction of gas pipelines and the extension of existing gas systems owned by other private companies, provided that they secure the necessary approvals.
The financial trust program is in an early stage of implementation. It has not yet contributed to the financing of expansion of the transportation and distribution of gas industry as expected. The slow start for the program is due, among other reasons, to the heavy government role in the design of financial trusts, and the fact that gas distribution and transportation companies are still awaiting regulatory approval for an adjustment in their tariffs, which have remained frozen since abrogation in late 2001 of the convertibility regime that had pegged the Argentine peso to the US dollar.
Two pipeline expansion projects have been announced recently. One is expansion of the pipeline for the southern region operated by Transportadora de Gas del Sur S.A., or “TGS,” to be financed by the Brazilian bank Banco Nacional de Desarrollo Económico y Social, or “BNDES,” for $142 million. The other project is a pipeline the northern region operated by Transportadora de Gas del Norte S.A., or “TGN,” at a cost of $100 million to be provided by the Spanish oil company Repsol YPF S.A. and another $70 million to be contributed by BNDES, TGN itself and by means of an advanced reimbursement of the value added tax, called Impuesto al valor agregado.
The Argentine government must now figure out what “extra tariff charges” to allow the financial trusts undertaking these projects to collect to repay the above-mentioned investments and identify the customer categories that would be subject to such tariff increases. Preliminary calculations done by the gas enforcement authority Enargas suggest that both pipelines would be authorized to collect extra tariff charges of 30% to 47% above the current gas transportation tariff.
Investors in the two projects are demanding that the extra tariff charges be ratified by Congress so as to avoid the risks that could arise from potential attachments or threatened litigation against such extra cash flow. Investors want an assurance the additional tariffs can only be used to repay their investments.
The financial trust mechanism is a good first step toward raising capital to finance gas infrastructure investments. However, the program could be improved by allowing more active involvement by the private sector and a more flexible framework to allow for tailor-made measures that address the needs of each specific project.