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Analysis

A New Era For Productive State Enterprise

Mon, 02/25/2019 - 12:20

A new era dawned for CFE on Dec. 1, 2018, when Director General Jaime Hernández officially passed the torch to Manuel Bartlett, who wasted little time in outlining the productive state company’s priorities for the next six years of President López Obrador’s term. In line with the government’s priorities and armed with a bigger budget, CFE will pursue coal, geothermal and hydropower as it moves to supply a rising demand for energy.
AMLO intends for CFE to use its muscle, along with fellow state company PEMEX, to put the country on the path to energy self-sufficiency. CFE’s budget for 2019 has been pumped up to MX$434.7 billion, giving it an extra MX$20 billion. Bartlett, a Mexican lawyer who has held various political positions, has announced investments in coal, with MX$10.4 billion pledged to rehabilitate coal plants, and MX$980 million and MX$340 million committed to geothermal and hydroelectric plants, respectively.
Hydropower, in particular, is a mainstay of AMLO’s National Electricity Program, announced in December. At the same time, Bartlett outlined CFE’s strategy to modernize the country’s hydroelectric plants. “In close collaboration with CFE and CONAGUA, we have studied the possibility of increasing hydro-energy capacity in the mix with an additional 3,300MW,” he said. “We have significant feasibility projects to install 2,000MW by taking advantage of 363 hydroelectric structures used for irrigation.”
The beefy budget for CFE was a concern for ratings agency Moody’s, which had improved its outlook for the company in April to stable from negative. Writing in a report following the budget announcement, sovereign analyst Jaime Reusche said the importance placed on CFE and PEMEX in the 2019 budget “generates concern around the possibility that the parastatals become a recurrent burden for the federal government that potentially deteriorates the sovereign credit profile in the medium term.”
Fernando Zendejas, former Deputy Minister of Electricity at the Ministry of Energy, says, however, that a stronger CFE is not a problem. “The Constitution provides the guidelines for a competitive industry. CFE is the national electricity company and we are proud of it. Having a CFE that is efficient and more competitive every day does not close the doors to other participants."
for his part, Bartlett maintains that the company’s energy capacity and its human organization had suffered during the last few administrations. “Financial limitations, tariff insufficiency and the nontransfer of subsidies for residential and agriculture segments” are some of the reasons he gave. Others include a lack of maintenance and modernization, arbitrary retirements, inconsistent structural reforms and a change in CFE’s mission. “(These factors) have provoked a critical financial situation.”
AUCTION RESULTS FELT
Of concern to the market is the suspension of the long-term electricity auctions after three editions. Although there were no electricity auctions in 2018, benefits of previous editions began to be felt by many – none more so than CFE, according to Héctor Olea, President of the Mexican Association of Solar Energy (ASOLMEX). “Renewable energy sources have dominated every edition. The participant that has most benefited from this scheme is CFE,” he says. “This company has never purchased electricity as cheap as the prices obtained during the auctions. Under this mechanism, the productive enterprise of the state does not invest any money, nor does the state.”
In June 2018, Fitch Ratings gave CFE a AAA rating. Marian Aguirre, Energy Finance Vice President of Bancomext, believes the triple-A status of the country’s biggest off-taker aided the success of the auctions because the thin margins for projects match the equally thin development risk. “As long as CFE maintains a position of leadership as an off-taker, development banking institutions will be able to contribute from a more comfortable position,” she says. However, in November, Fitch downgraded CFE’s Outlook from stable to negative and downgraded its rating to BBB+ after López Obrador announced the cancellation of the Mexico City airport project (NAIM).
TARIFFS
Also bolstering CFE in 2018 was the tariff regime that allows the company to recover its costs. Prior to the Energy Reform, CFE was mandated with supplying energy to the country, establishing its own tariffs and overseeing its own infrastructure development. However, with the passing of the reform came an independent body, CRE, that would take over the establishment of tariffs. This was done with the expectation that private companies could compete with the state-owned enterprise, effectively increasing competition in the country and reducing electricity costs for final users without the need to provide government subsidies.
Leonardo Beltrán, former Deputy Minister of Planning and Energy Transition at the Ministry of Energy, says 2018 was an interesting year in terms of electricity tariffs. “The tariff we had before 2018 was a closed fee that obeyed to an income objective and that did not recover CFE’s costs, so every year CFE saw its assets reduced,” he explains.
As a result of the LIE, CRE is now responsible for setting tariffs for CFE, and according to Marcelino Madrigal, this was done in a way that allows CFE to recover the grid’s operation, maintenance and growth costs, meaning it can continue to compete with private companies entering the country. “CRE has a regulatory mechanism in place where, provided the right rates, CFE, in its role as electricity transmitter and distributor, has the required incentives to improve the grid,” he says.
THE NATIONAL GRID
The Ministry of Energy drafted a smart grid plan in 2016, approved by CRE. “CFE’s grid expansion plan includes investments in innovative technologies, such as smart metering,” says Madrigal. “CFE even launched a portal within its website for users to determine if the grid has the capacity to absorb a distributed generation system in a specific location, residential or other.”
Mexico’s total installed grid capacity as of September 2018 was 75,685MW. CENACE says that 12,429MW of extra capacity would enter into operation in the National Interconnected System by June 1, 2019. This total capacity will be generated by 84 new power plants that will be installed in 22 entities in Mexico, of which 6,380MW, or 51.3 percent of the new capacity, are renewable technologies and the remaining 6,049MW, or 48.6 percent, are conventional sources.
BALANCING THE BOOKS
As it embarks on a new era, CFE finances remain stable despite losses in the in the year to September 2018. Revenues from Oct. 1, 2017 to Sept. 30, 2018 totaled MX$361.4 billion, a 0.4 percent increase on the MX$359.8 billion registered in the same period of 2016-17. Sale of energy accounted for the greatest revenue, contributing MX$261.7 billion.
However, CFE made net losses of MX$37.8 billion during this period, compared to net income of MX$34.5 billion for the same period in 2016-17.
As of Sept. 30, debt had increased by MX$24.5 billion to MX$356.9 billion compared to MX$332.5 billion registered at year-end 2017. In its financial report, CFE indicated that an unfavorable exchange rate, amortization payments and debt repayment amounted to MX$127.1 billion. EBITDA dropped in the third quarter of the year to MX$15.3 billion compared to MX$31.9 billion during the same period in 2017.
Looking to the future, Beltrán believes that, just like PEMEX, the state-owned electricity company would be more profitable and transparent if all or part of it were to launch an Initial Public Offering. “We should have paved the way to unlock CFE’s access to capital markets and to list on the Mexican stock exchange,” he says. “CFE is difficult to compare to a similar fully private and stock market-listed corporation as it does not operate under the same conditions nor does it have the same corporate mandate. Listing CFE on the Mexican stock exchange has the potential of doing wonders for its corporate governance, financial health and overall competitiveness, both at the national and international levels.”