Fitch Ratings, in affirming on May 13 certain Comision Federal de Electricidad (CFE) debt ratings, said this government-owned utility in Mexico is making progress with market reforms that are leading to big growth in new power generation sources.
The Rating Outlook is Stable, Fitch noted.
CFE’s ratings incorporate the company’s position as the largest electricity generator in Mexico and its monopoly on transmission and distribution. Also reflected are CFE’s strong linkage with the Mexican government, and the government’s implicit support. CFE’s foreign and local currency IDRs are at the same level as Mexico’s sovereign rating. CFE’s ratings also incorporate high debt levels, unfunded pension liabilities, negative free cash flow (FCF) during the cycle, and risk of political interference.
CFE is a state-owned productive enterprise which now has greater budgetary and financial independence from the Mexican federal government. Previously, CFE’s budget needed to be approved by the Ministry of Energy, the Ministry of Finance and ultimately by the Congress. CFE is governed by a board of directors, which includes the ministers of energy, finance, economy, and environment and natural resources. The board also includes the undersecretary of the Secretaria de Energia (Sener), four independent members, and the minister of the national executive committee of the only union of electrical workers in Mexico. In addition, the government directly sets electricity tariffs to all electricity users, except for those high-volume industrial users that decide to participate in the wholesale market; establishes subsidies for specific customers; CFE’s debt is considered national debt.
CFE will keep its monopoly on distribution and transmission activities. But, recent energy reform enables the company to enter into agreements with private investors to develop and finance the infrastructure in these subsectors on its behalf. The regulatory framework forbids granting concessions to private parties in these segments. While CFE’s monopoly position decreases competitive risks and other risks related to business operations, the company’s electricity generation will face competition after new regulations are put in place, Fitch noted.
The energy reform is intended to create an open and competitive wholesale market. High-volume industrial users will be allowed to enter into bilateral contracts with new private investors (NPIs), independent power producers (IPPs) or CFE. In February of this year, SENER presented to the Federal Regulatory Improvement Commission (COFEMER) the draft of the operating rules for the wholesale electricity market in Mexico, which will come into operation in January 2016.
Fitch said it estimates that CFE might not see high-volume industrial demand decline immediately, as almost all IPPs are currently under contract with CFE and termination clauses are limited, and the construction of generation plants takes approximately two years before start of operations. At the end of 2014, high-volume industrial users represented 17.8% of CFE’s total revenues (17.9% average over the past five years). The opening of electricity generation to the private sector improves prospects for a decline in tariffs over the medium term for high-volume industrial users.
Fitch believes CFE would be able to offer competitive rates for those industrial users in order to compete against NPIs, through the import, transport to CFE plants, and sales to third parties, of natural gas, via five pipelines located in the north of the country which will be contracted by CFE under 25-year agreements. Participation in the marketing of natural gas will not only represent an additional source of income, but will be a fundamental tool to reduce electricity generation cost. In addition, good rainfall conditions in 2014 and 2015 have supported cheaper hydroelectric generation, Fitch added.
The electricity rate settlement by the government, which covers all electricity users except those high-volume industrial users that decide to participate in the wholesale market, exposes the company to regulatory risk and political interference, Fitch wrote. Subsidies to agricultural and residential sectors also expose CFE to unfavorable tariffs, which at times could be set below operating costs.