All-Round Presence in Natural Gas

Q: What have been the main strategic objectives for IEnova in the last 15 years?

A: The company started as a gas distributor in the north of Mexico and has continuously expanded through the development of gas and electricity projects. Our philosophy has remained the same since the beginning and it has always been successful. We build and operate large infrastructure projects provided that we have a longterm contract to sell the natural gas or electricity. We take a proactive approach and we seize opportunities as they arise, rather than waiting for the perfect project to come along. Our development in Mexico has been twofold. We have a power generation company in Mexicali that had a contract with the US, but that has now ended so we are looking for a new contract, and we also distribute natural gas. The number of opportunities here in Mexico has increased substantially, and we expect that this increase in activity will also attract increasing competition.

Q: The natural gas market has seen rapid changes in recent years with the shale gas boom and the resulting reduction in the natural gas price. As you operate in the US and Mexico, how do these changes influence your strategic direction?

A: The drop in the natural gas price has had a profound impact on both the US and Mexican markets, and it seems that the price of gas will remain low for the foreseeable future, which is a great opportunity for Mexico. We have to produce more natural gas in Mexico, but we must also continue to import gas from the US. Having cheap electricity will help Mexico to become more competitive against other countries that compete for the US market. Our main commercial partner is the US, and the fact that many companies and factories that were moving to China for cost reasons are now returning to the US or Mexico, can greatly benefit the Mexican economy. IEnova’s role in this process will be very important as we can build the necessary pipelines and storage facilities. Using that expertise, we want to expand into other areas of the transportation business, such as oil pipelines as well as constructing transmission lines for CFE. Should the Energy Reform achieve the objective of increasing oil and gas production in Mexico, this will provide us with a huge opportunity as that oil and gas will have to be transported to the US and Central America. We are analyzing all potential opportunities to enter into the electricity market in order to create a more balanced portfolio rather than remain only a transportation company.

Q: What roles can the public and the private sector play in ensuring that the construction of the planned pipelines is finished on budget and on time?

A: Mexico has the advantage that pipelines are covered by a strong regulatory framework, which helps provide certainty to investors. Public tenders are held to build and operate natural gas pipelines, which has translated into a lot of kilometers of pipeline currently being built, not just by us but also by other companies. The Energy Reform will introduce even stronger regulation, which is vital for opening up new markets. This means now is the perfect time to build our pipeline network. The market is clamoring for it and there is huge liquidity in Mexico that needs to be invested in sectors that offer good returns. We have to take advantage of the fact that financing is now available to build up the network as fast as possible.

Q: IEnova’s IPO on the Mexican Stock Exchange showed a real commitment to Mexico. Has this move lived up to your initial strategic and financial objectives?

A: Yes, it has as we had a clear strategy to keep the company growing. In 2012, IEnova invested US$2.4 billion and we invested another US$1.1 billion from June to November 2013. The second goal was to access the credit market. We secured our AAA credit rating and placed a 10-year bond, which had the lowest rate ever for a private company in that market. Third, we wanted to increase our capital base by including local partners, such as pension funds, to guarantee access to the necessary resources to continue our expansion. The next step will be to increase our low leverage. Listing on the stock exchange gave us visibility and the opportunity to accelerate our growth, and resulted in people approaching us with new ideas and new projects.

Q: How much room is there in the Mexican market for IEnova to expand, both in terms of access to financing and your execution capacity? 

A: If you have a good project, you will always find financing, but you have to prove to the market that you have the ability to execute the project. By carefully picking projects that we can build within budget and on time, we have not yet experienced limitations on our activities. We have the ability to raise US$1 billion without any problem, so the critical success factor is finding the right projects. 2014 will present a lot of opportunities as CFE and PEMEX both need new pipelines. We also want to play a part in the electricity field as CFE will need to put a few new plants into operation soon. In addition, we are developing our first wind project, Energía Sierra Juárez in Baja California, and further growth is expected there as we find the right off-takers.

Q: How realistic would it be to reconfigure your Energía Costa Azul LNG for gas exports rather than imports?

A: There is a huge opportunity to change the terminal’s configuration to exports. It is the first terminal on the Pacific coast of North America and we could use the natural gas not just for exports, but also to fulfill the needs of the Mexican market. We are studying this at length to see the opportunities. The gas would still have to come from the US since Mexico’s gas reserves are not in Baja California. However, this would not pose a problem since the North American grid is becoming better integrated.

Q: How would such a move impact Mexico’s energy market, which might experience a shortage of natural gas?

A: The shortage is due to a lack of infrastructure. This problem will be solved but it could take a couple of years, and we are determined to play an important role in this process. We are building an 840km pipeline in Sonora and Sinaloa that will provide gas to CFE and other companies, and we are also developing Stage I of Los Ramones, which is a relatively short pipeline but with a huge capacity. In the future, we will see more gas production in Mexico as well as the construction of infrastructure to transport and store that gas.

Q: Why did IEnova decide to invest in a wind farm?

A: Sempra Energy, which owns IEnova has invested a lot in wind power generation in the US, where it is considered part of their core business. This meant we already had the know-how to enter this market, so when the opportunity came we took it. The whole idea is that this allows us to develop a more diversified portfolio. Mexico also has a lot of potential for solar energy, so it seems like our time to invest in solar may also be drawing near.

Q: What are the main differences between constructing a wind project in California and in Baja California?

A: First, it is cheaper to construct a wind farm in Baja Califoria. The problems are the same as in the rest of the country, but the needed investment is lower in Baja. The permitting process here may not be that easy, but it is less complicated and time consuming than in California, where for example it can take two years to get a permit for a transmission line.

Q: If IEnova develops renewable energy projects in Baja California and exports the energy to the US, should those projects count toward Mexico’s renewable energy targets?

A: The US-Mexico border should be an integrated energy border. It makes sense to have electricity flowing more freely and more efficiently in that area. California has huge demand but it is difficult to build plants and generate the energy there because of the permits issue.

Q: In addition to wind and solar, what role would you potentially want to play in Mexico’s geothermal sector?

A: We have done little so far but we have evaluated potential sites in Mexicali and Michoacan. The government should move faster to develop this sector. Cerro Prieto has been producing for many years, but it is reaching its production limit and that system needs to rest. Mexico has huge potential for geothermal and with the Energy Reform, the sector should be promoted. We will be present in the geothermal market.

Q: How will IEnova evolve over the next few years?

A: IEnova is the only company that operates in all the energy fields that are open to private participation. One of our strengths is that we have been in Mexico for many years, we have a team that knows how to build energy infrastructure and we have a good relationship with the regulators. We have to take advantage of that expertise and continue to grow toward a more balanced portfolio.