Financing Mexico’s Energy Future Through Innovation, Trust

Q: How has CFECapital evolved since its creation, and what role is it now playing in financing Mexico’s national electricity expansion plan?

A: CFECapital was created at the end of 2017 to manage CFE’s nascent Fibra platform, which was launched in February 2018. That was the company’s original purpose, and it has fulfilled it very well, managing CFE’s Fibra in a responsible and transparent way and generating value for investors. Now, the new administration launched the National Electricity Sector Strategy. As part of that strategy, it also rolled out the plan to strengthen and expand the national electricity sector, which includes a series of investments that, as you have likely seen, span the entire system.

We are talking about US$7.5 billion in transmission, over US$20 billion in generation, and nearly US$4 billion in distribution. From the outset, CFECapital was tasked with working closely with other areas of CFE, primarily the finance division, to develop financial schemes and vehicles that can help materialize these projects. 

To do this, we have been working since January in strengthening all areas in the team: we brought in people with experience issuing bonds and other instruments for the finance department; lawyers seasoned in designing financial trusts and vehicles to host infrastructure projects; a technical team familiar with power plants and electricity markets; and experts in sustainable investments to design and implement CFECapital’s ESG strategy, given the growing importance of the topic. To wrap it up, we re-organized the administrative team and provided them with new tools to do their work more efficiently.

Within CFE’s Fibra E, we have designed a series of operations that began with its inaugural bond issuance, launched on Sept. 11 of this year. That was the first step in a series of transactions we plan to carry out in the coming years within the Fibra, aimed at two main objectives: on one hand, to finance the transmission projects the country needs, and on the other, to generate value for the Fibra’s holders. We are always balancing both goals.

We were also asked to participate in financing generation projects, including firm generation, which ensures reliability and stability across the system, allowing the incorporation of intermittent technologies, as well as renewables. We are working hand in hand with CFE and its various divisions, designing financial vehicles and operations that will finance these projects at the lowest possible cost.

Q: What factors drove the strong demand for CFE’s recent bond issuance, and how did your team work to build investor confidence?

A: The bond was a hit: we had demand nearly 10 times greater than the amount we originally announced. This level of demand, even after we tightened the interest rate by 50 basis points, was founded on two important things. First, the stability of the Mexican environment across several fronts, particularly macroeconomic stability. Compared to other emerging economies, Mexico stands out for its strong fundamentals: healthy public finances, an independent monetary policy, and financial instruments that allow the government to respond to emergencies.

A related key supporting factor at a macro level is political and policy stability, which investors consistently highlight. They tell us how clear the country’s direction is under President Sheinbaum’s administration. There is a defined roadmap and clarity about where the country is headed, and that provides investors with great confidence.

Second, at the micro level, there was significant work from my team to convince investors to put their money into our country and specifically into CFE’s Fibra E. We made sure we fully understood the transmission business model, since it generates all the cash flows that ultimately feed the Fibra, and communicated how its advantages translate into predictable and low-risk revenue streams.

Among other things, we showed how transmission is constitutionally protected, setting it apart from any other business in Mexico. We also explained that its operations are carried out exclusively by the largest electric utility in Latin America, the CFE, with nearly 90 years of experience running an efficient transmission network. We illustrated the unparalleled diversification of the business and how it means steady returns for Fibra CFE holders, since the asset base reaches all regions, economic sectors, consumers, and producers of energy. Finally, we clarified how the transmission business does not depend on contracts and their renewal, since every energy producer and consumer is required to pay for transmission.

In parallel, we strengthened CFE Fibra’s governance. The technical committee had a vacancy for almost four years for an independent member, so we worked to complete it with three independents as originally designed, strengthening our decision-making. 

We also replaced our trustee, since the previous one had been flagged by the U.S. Treasury Department for certain issues. We switched to a globally solid institution, giving investors greater confidence. Lastly, we brought in the International Finance Corporation (IFC) of the World Bank as an anchor investor. That was crucial, it reassured others that our operations align with IFC’s environmental and social standards and that CFE’s work is done properly and transparently.

Q: What can we expect next from CFECapital in terms of new financial operations, transmission projects, and collaboration with the private sector?

A: In transmission, there will be more CFE Fibra issuances. As I mentioned, the bond was the first in a series of transactions we are designing and planning. The total amount we expect to raise will depend on CFE, but since we achieved roughly 10% of the US$7.5 billion total we discussed, we are probably thinking about another 20%, maybe 30% at most. This is preliminary, it may come through CFE’s Fibra via capital or new bond issuances.

We want to involve the local market as well. The recent issuance was done internationally to broaden our investor base and to tell the story of CFE’s expansion and strengthening plan globally, to attract investment into Mexico and its power sector. However, the main holders of CFE’s Fibra are the Afores, which represent Mexican workers’ retirement savings, so we also want to do something in the local market that further benefits them directly.

We also aim to continue attracting anchor investors like IFC and others. Besides drawing more investors, they challenge us to improve, both at CFECapital and at CFE itself, especially regarding infrastructure and how it interacts with surrounding communities. That has been important for us, as it helps improve project development and operations.

In generation, CFECapital is participating in two types of projects. One is combined-cycle plants, which provide firm capacity and allow more renewables into the system. We are helping CFE structure financial vehicles and trusts to host and develop those projects under the most suitable financial arrangements. The other is through public-private mixed development schemes, an innovation from the new law enacted in March of this year. These allow CFE to jointly develop renewable projects with private participants. We are helping CFE design the financial and contractual frameworks to make those truly win-win partnerships. We expect to share updates on these projects in the coming months.

In all of this, we are always seeking the best financial terms for CFE, optimizing maturities, conditions, and costs. 

Q: How do you envision CFECapital’s long-term role within Mexico’s power sector and its relationship with CFE and investors?

A: I would love for CFECapital to consolidate itself as CFE’s financial arm, a company systematically working for the utility developing new vehicles that finance the electrical infrastructure Mexico will need in the coming years. That means structuring financial schemes, designing vehicles such as trusts or investment partnerships, and attracting investors to share in the investments, risks, costs, and of course, the benefits.

I envision CFE’s Fibra going to the markets regularly with transactions as successful as our recent bond, supported by responsible and prudent management that consistently generates value for investors, for Fibra holders, and of course, for CFE. I also see CFECapital helping CFE develop both firm generation projects, like combined-cycle plants, and renewable projects, including those developed jointly with the private sector.

In doing so, we will continue to attract new participants, generate new projects, and supply the energy this country will need over the next 30 years. I believe CFECapital has two major advantages that set it apart: first, working alongside the largest electricity operator in Latin America, and doing so in some of the most important projects in one of the world’s leading economies: Mexico. That makes its work unique among energy financiers.

With that comes responsibility: a commitment to prudent, transparent management, and continuous communication with investors, keeping them informed every step of the way. That already distinguishes us, but we want to build on it. We also want to make sure these investments translate not only into more infrastructure, but into infrastructure that strengthens community relations, expands energy access to more Mexicans currently disconnected, and supports their broader development.

CFECapital is a Mexico-based company specialized in investment in the electrical sector. The company promotes investments in CFE’s key infrastructure projects related to the generation, transmission and distribution of electricity in Mexican territory.