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25 August 2023

CFE leans on PRI for hydro portfolio debt

Is Comision Federal de Electricidad’s (CFE) CFE’s MIGA-guaranteed deal an innovation or a demonstration of weakness?

Mexico’s state power company, Comision Federal de Electricidad (CFE) has ambitions to be the sole vehicle for additions to the country’s generating fleet. It is a politically and economically powerful constituency, and embodies Mexico’s revolutionary desire to control its own energy destiny.


But for much of the last three decades, the CFE has had to look on as private developers took on an ever-greater share of new construction. The structures might vary, starting with pidiregas and build-lease-transfer arrangements that only really transferred construction risk to the private sector. However, increasingly the independent power producer and self-supply models became the norm for additions of conventional and renewable power capacity. A round of reforms to Mexico’s energy sector in 2013 led to a boom in private renewables development.


The CFE might not have been as overstaffed as its critics contended, but its workforce certainly acted as a powerful voting bloc. So when Andrés Manuel López Obrador, or AMLO, became president in 2018 his most aggressive moves towards reasserting state control of the energy sector involved frustrating the efforts of private developers in the renewables sector to bring their plants online.


AMLO and the CFE can be more pragmatic. In June 2023, Spanish utility Iberdrola agreed to sell 75% of its generating fleet in Mexico to Mexico Infrastructure Partners, a state-backed investment vehicle. The $6 billion transaction brought the 8,579MW portfolio under the control of CFE, which was already the offtaker for 87% of its capacity, and brought CFE’s share of the country’s generation fleet to 55%.


But the transaction left Iberdrola in control of 2.4MW of operational capacity and a 6GW development pipeline. The Iberdrola deal followed an August 2022 agreement with TC Energy that restructured TC’s Mexican pipeline capacity contracts with CFE, but left TC in control of the assets and allowed it to refinance them.


Still, these deals gave few indications about how Mexico, and by extension the CFE, would finance the capacity additions necessary to meet growing demand.


A little clarity came with the January release of the CFE’s business plan for 2023-27, which identified three vehicles for procuring and operating new capacity. The first, the Fideicomiso Maestro de Inversión, would be responsible for 4,159MW of new CCGT capacity, across six plants in six different states. A second, the Fideicomiso de Proyectos de Generación Convencional (FPGC), would handle 3,253MW of generally smaller gas- and oil-fired projects.


The third, the Fideicomiso Energías Limpias (FIEL), was established alongside the FPGC in 2021. It has the most modest goal, being tasked with 700MW of new solar capacity, and 300MW of hydro capacity, the latter of which is mostly brownfield. But FIEL is first to market, with a partially-wrapped 15-year bank loan for the hydro upgrades.


The $333.6 million loan for Fideicomiso Energías Limpias 10670 carries a five-year grace period and ten-year amortisation period. The proceeds will be used to upgrade the La Villita (in Michoacán state), Infiernillo (Guerrero), Zimapan (Hidalgo), Humaya (Sinaloa) and Peñitas (Chiapas) hydroelectric plants, and partially upgrade the Mazatepec (Puebla) and Malpaso (Chiapas) hydro plants.


According to the borrower, the financing will facilitate an incremental 113MW in capacity, improve the assets’ efficiency by 6%, extend their useful life, and lead to the generation of an estimated additional 1,426GWh per year of energy. The initial backbone of the Mexican power sector early in the 20th century came from hydroelectric power, and CFE is highly familiar with hydro assets.


The coordinator for the debt package was Santander, through its Mexico branche, while lenders HSBC and JP Morgan participated under a guarantee from the Multilateral Investment Guarantee Agency (MIGA) covering non-honoring of sovereign financial obligations by a state-owned enterprise. The CFE proudly described the transaction as innovative, noting that it is the first time MIGA has extended a non-honouring guarantee of the obligations of an SOE anywhere in the world.


The TXF perspective


While the deal demonstrates CFE’s ability to access international commercial bank debt, it also illustrates how far CFE has fallen in the eyes of those lenders. Despite the experience of the Mexican toll road sector in the 1990s, the IPP boom of the first decade of the 21st century was not dependent on wrapped debt. Export credit agencies loved working in Mexico, particularly in support of turbine exports, but their presence was never required.


The recourse to a MIGA policy puts Mexico in a club of jurisdictions that developers and lenders probably thought it had left two decades ago. While 15 years is a respectable tenor for CFE, it has typically not needed its obligations to carry external enhancement. Investors in the four-year bond financing for the El Cajon hydroelectric project, which signed in 2004, were much more concerned about the performance of the plant’s builder, ICA, than its purchaser, the CFE. AMLO’s plan to centre the Mexican power sector on CFE has so far primarily highlighted its institutional weaknesses.

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