Energy companies would likely be made to pay for Alberto Fernández’s move to slow hikes in electricity and natural gas prices.
Under business-friendly President Mauricio Macri, companies – especially those focused on transport and distribution – have returned to profitability after years of price freezes. But Fernández, the opposition Peronist candidate who’s the favourite to win Argentina’s October 27 presidential election, is expected to reel in the increases.
After struggling to make ends meet under Macri, voters would hand Fernández a mandate to address their economic plight, with one of the biggest burdens being the cost of utilities.
In his tenure, Macri curbed subsidies for utilities, lifted caps on consumer bills, and gave companies regular price increases in a process called the “integral tariff revision.” While it’s still unclear who’d run Fernández’s energy policies, his comments during the campaign seem to boil down to this: if voters need help but the government can’t afford to let subsidies soar, companies will have to take the hit.
“Everyone, including the government, left something on the table during difficult times, but everything points more toward the companies in 2020,” Santiago Wesenack, head of equity research for AR Partners in Buenos Aires, wrote in a note to clients.
Fernandez has repeatedly said he would “un-dollarise” utilities. That’s led investors and analysts to scramble to interpret the phrase based on meetings with his advisers, past interventions in the sector, and what running mate Cristina Fernández de Kirchner, did while she was president from 2007 to 2015.
Here’s a summary of the general consensus:
TRANSPORT & DISTRIBUTION
- Natural gas producers and electricity generators are expected to be largely protected, so middlemen would bear the brunt of the cost.
- Fernández would likely mitigate increases that transporters like TGS SA and TGN SA, and distributors like Metrogas SA get under periodic price revisions based on a wholesale inflation index.
- Power transporter Transener SA, and distributors like Edenor SA and Edesur SA would suffer a similar fate. “The distributors are likely to suffer from the highest level of intervention as they are the ones facing the consumers,” Wesenack wrote.
- Payments for what’s known as “legacy” power generation, which is produced at older plants and sold in the spot market in dollars, may be fixed in pesos. The main companies that would be affected are Italy’s Enel SpA and AES Argentina. Central Puerto SA and Pampa Energía SA currently have a large share of legacy production. But they’d be shielded to a point, Wesenack said, because that share will fall over the next couple of years, with power purchase agreements becoming more prevalent in their generation plans.
- Those PPAs, which have been signed since the mid-2000s between state electricity wholesaler Cammesa and generators, are unlikely to see a switch to pesos from dollars because that may be ruinous for Argentina’s reputation with energy investors. One option, however, is to restructure the contracts, with Cammesa extending them by a few years so consumers pay less in the near-term. In this scenario, as long as enough cash flows to generators like Pampa, MSU Energy and Stoneway Capital Corp., their bondholders should be safe
NATURAL GAS PRODUCTION
- Production of natural gas is in dollars, though the government can set the rate at which they’re turned into pesos. These prices are likely to remain favourable for drillers to ensure investments in the Vaca Muerta shale play. Vaca Muerta is so important that should the government choose to quash gas prices for consumers by letting the exchange rate that drillers receive lag the peso market, it may be willing to plug the gap by widening subsidies. The need to fulfill Argentina’s shale potential also gives Fernandez cause to respect PPAs because much of drillers’ gas is supplied to thermal power plants, according to Roger Horn, a senior emerging-markets strategist at SMBC Nikko Securities America in New York. “It wouldn’t make sense for the new administration to cancel PPA contracts at a time they need to give assurances to attract investment in Vaca Muerta,” Horn said.
A spokesman for Fernandez didn’t reply to a request for comment. A spokesman for Pampa Energía declined to comment. Press offices for Edenor, Edesur, TGS, TGN, MSU Energy, Stoneway Capital, Central Puerto and AES did not immediately reply to requests for comment.
by Jonathan Gilbert, Bloomberg