Promigas CFO Aquiles Mercado González Discusses Construction of $224 Million Pipeline, Promioriente Bond
This article was originally published by Bonds & Loans. It has been reprinted with permission.
Bonds & Loans recently spoke with Aquiles Mercado González, chief financial officer at Promigas, about its distribution subsidiary’s hugely successful local market bond transaction, new opportunities for growth, and the company’s innovative non-bank financing program.
Bonds & Loans: Promigas subsidiary Promioriente saw impressive demand for its recent local market bond transaction in January. Can you give us some insight into that transaction, how pricing compared to previous deals, the strategy taken and how it fits into your broader funding strategy?
Aquiles Mercado González: This was very good deal for Promioriente in the local markets. We constructed the deal around three years ago, but at the time it was hard for us to get the financing through the capital markets. Since the construction risk was high, it was difficult to determine what the risk was given the nature of the project we were trying to finance — a pipeline in the mountains.
“It was difficult to determine what the risk was given the nature of the project we were trying to finance — a pipeline in the mountains.” – Aquiles Mercado González
But once it was constructed, we decided to first secure a credit rating for the company — and we secured a AA+ rating from Fitch. Because of its size, its robust and strategic nature, and the ease with which we could demonstrate fixed cashflows in order to meet obligations, the deal was successful.
During the roadshows we were able to generate a 1.8 bid-to-offer ratio, and rates were 50 basis points below what we expected during the release of initial price thoughts. We were able to replace much more expensive short-term loans.
Bonds & Loans: Promigas has proven itself to be a true innovator with the Brilla non-bank financing program. Over 10 years on, how has the program helped the economy, particularly lower income families, and Promigas’s business? Can the model be easily replicated by others in the region?
Aquiles Mercado González: The program, which sees us extend credit funding for energy purchasing to specific segments of our customer base, certainly benefits lower income families that would otherwise not have access to formal markets. They are typically workers in the informal economies, so those that may now always have a way of demonstrating income and have never declared taxes because they haven’t yet reached the scale sufficient to do so. We lent money to them and analyzed their behavior with the debt to develop this program, which has already been in the market for 10 years.
The income being generated from the business represents 17% of EBTDA of our distribution assets, so it is indisputably generating positive returns for the company. The program effectively helps us reduce dependence on the black market, which is popular among workers in the informal sectors but normally comes at a huge cost – black market loans, which typically involve paying extortionate interest rates. The Brilla program helps families avoid that, and generate more savings, which is good for them and good for the economy.
The extent to which the program can be replicated depends on how people manage their databases. We have maintained a rich database on households, payments trends, basic needs of appliances, and other elements. Our records of receivables behavior are much better than comparable entities operating in the markets. We are very happy and proud of this program and plan to keep working on improving and expanding it.
We have benefitted more than 2 million families so far, and we are reinventing the program regularly. Normally they would take black-market loans, with huge interest rates, and we want to replace that – and improve family savings, which before were used to pay interest, are now taken to improve the quality of life of these families.
Bonds & Loans: What are Promigas’ key strategic initiatives in 2018?
Aquiles Mercado González: Construction initiatives mainly. One is building the new pipeline drawing supply from new fields in the south of our system, and we will invest $224 million to transport this natural gas from Cordoba to Cartagena, that will be approximately 200 kilometers long. Conoco and other producers have been finding natural gas in this area. We also have the La Jahira fields in the north, minor fields in Cartagena, as well as ambitions in the FLNG space, so we have been able to transport the natural gas to the main areas in our markets.
Another key initiative is to connect as many households in the north of Peru as we can to the system. We were awarded the rights to connect seven cities in the north with LNG and distribute the gas through a pipeline distribution grid to the households. We started operations in December 2017, and have started receiving LNG near Lima, and through trucks we are going to service seven cities. Have already reached the most important milestones — having the trucks ready to be filled in Lima and having the LNG gasification plants in place.