Mexican power sources divided on new CFE master trust financing model

• Decision to purchase existing plants seen as controversial
• More details needed to assess master trust impact – sources
• Moody’s says it will monitor financial impact of new trust
• Some market participants question feasibility of planned new plants

MEXICO CITY (ICIS)–Sources said they believe state-run utility CFE could use some of the funds from its recently announced master investment trust to purchase existing power plants under so-called legacy contracts, but questions remain about how transparent and financially prudent the use of the trust could be.

CFE may purchase plants under legacy contracts from some of its competitors at attractive prices, according to Ramses Pech, an energy specialist at Mexico-based consultancy firm Caraiva y Asociados. This presents an opportunity for CFE as it could increase its share in the generation market for a fraction of what it would spend in building new plants, he said.

Pech thinks the utility may seek to purchase facilities old enough that capital costs have been amortised and that it would likely be likely paying the residual value of an asset based on third-party appraisals.

A former official at energy ministry SENER said, however, it was possible and concerning that CFE could push some of its private competitors to sell their plants by imposing impossible requirements or by limiting their dispatch to the power grid. CFE did not respond to requests for comments.

TRANSPARENCY, CREDIT ISSUES

Sources are also divided on whether this type of trust can be implemented in a transparent way, regardless of how the funds are used. A former official at energy regulator CRE said opting for a trust instead of the PIDIREGAS model may be the right decision as long as the utility follows similar rules as those outlined for the Fibra E securities issued a few years ago . The rules force the utility to provide detailed information on both the transaction and the ways in which the proceeds are used, he said.

Meanwhile, the former SENER official said the trust was not too different from acquiring debt. “It is another way of borrowing money, only less transparent [than PIDIREGAS] as it does not allow for a lot of supervision from the finance ministry,” the official said, adding that Fibra E securities still represent a commitment that needs to be paid off in the future with revenue from certain assets.

In addition to new Fibra E issues, the trust would be funded with future revenues from CFEnergia -the fuels trading arm of CFE, the utility said in its 21 July announcement.

All sources polled agreed CFE needs to release further information before the trust’s actual impact can thoroughly be evaluated. Unknown details include the trust’s initial investment amounts as well as the generation assets to be monetised for the future Fibra E issues, said Roxana Munoz, assistant vice president analyst at credit ratings agency Moody’s.

Like Munoz, other sources said investors’ appetite in the future Fibra E issues will depend on the return on investment CFE offers. Previous issues were attractive as they were linked to guaranteed returns from transmission charges, some sources said. Due to high competition within the generation market, conditions offered to investors will have to be attractive enough to make the investments worthwhile, said the former CRE official.

While the trust itself will not have a direct impact on CFE’s credit rating, Moody’s will be looking at how using revenue from CFEnergia for the trust instead of funding basic supply activities as CFE currently does can affect the utility’s finances. “We cannot assess a potential direct impact on the rating until there is more clarity on this,” Munoz said.

OUTLOOK

The names of the five new projects and of the “strategic” existing facilities to be purchased via the trust have not been officially confirmed.

Projects already included in the utility’s pipeline such as the combined cycle plants for Salamanca, Merida and Tuxpan were all mentioned by sources as those most likely to be financed via the new trust. While some sources are expecting a Baja California Sur project, others think priority would be given to locations with access to existing or under-construction natural gas pipelines. Sources expect at least a couple of the plants for which tenders had been cancelled to be included.

A Mexico City-based power analyst questioned the likelihood the five plants can be executed in the short term given the current scenario of reduced power demand and the economic contraction expected to last at least into 2021. Pech said the number of plants that make it to the tendering stage will likely depend on the amount of funds CFE can raise through the Fibra E.