IEnova sees opportunities in partnership with Mexico's state-owned firms

Sempra-owned Mexican midstream and electric power player IEnova plans to focus on projects that are closely intertwined with state-owned players to avoid risk related to the country’s rapidly changing regulatory environment.

“At a very general level, all of the changes that have been made, and I’m repeating what the president [Andrés López Obrador]  has said, he wants to ensure [public utility] CFE and [NOC] Pemex are stronger,” IEnova CEO Tania Ortiz told investors on Thursday during the company’s Q1 conference call.

“All of these changes point to that. Working together with CFE and [natgas grid control center] Cenagas for us, for others it may be Pemex, finding ways to work with them is the correct approach.” 

The remarks highlight shifting investor strategies as Mexico’s government pushes for changes in the energy sector in the shape of an updated electric power law and hydrocarbons legislation that have been widely criticized by the industry for jeopardizing the security of private investment.

“We have very different offtakers, from CFE to large international oil companies to smaller Mexican industrial firms. Everybody is aligned on taking a long-term view [of the market] and our projects continue to make sense for our customers. They continue to want access to the Mexican market. It’s a different environment, but we continue to see interest and appetite for Mexico’s long-term view,” Ortiz said.

IEnova has operations in two sectors heavily exposed to the legislative changes: on the electric side, the company invests in renewable generators, which are exposed to changes in dispatch priority contained in the new electricity law that would allow more expensive CFE-owned units to dispatch first.

And on the hydrocarbons side, the company owns and operates large-scale midstream infrastructure including natural gas pipelines, storage facilities and liquefaction plants. According to Ortiz, while infrastructure permits are theoretically at risk given the broad powers contained in the new law to review and suspend licenses, the key to understanding its true risk will be found in lower-level regulation that explains these powers and their use in detail.

“This law was recently passed by both chambers, and we’re waiting for it to be published,” Ortiz said. “It’s primarily intended to fight illegal commerce of fuels … There are other provisions related to potential suspensions of permits. But because those provisions are very general and we’re in full compliance, we’ll need to look at secondary laws which regulate those abilities to understand what their impact will be.”

The new hydrocarbons law has raised alarm among sector analysts because of the broad emergency powers it grants to the energy ministry and regulatory commission CRE to review and suspend midstream and downstream permits.

Future growth

IEnova said it had plans to expand its operations in Mexico in two main areas: cross-border renewable plants straddling Mexico and the US, especially in the state of Baja California; and finding new offtakers for its vast natural gas pipeline network, comprising 2,900km of lines in Baja California, Chiapas, Chihuahua, Nuevo León, Sinaloa, San Luis Potosí, Sonora, Tabasco, Tamaulipas and Veracruz.

“Mexico continues to need energy infrastructure to supply its energy needs, and will continue to need private investment,” said Ortiz. “We are dealing with important changes in the regulatory side, we need to continue to find ways to collaborate with the current administration to continue developing projects … We work hand in hand with CFE and Cenagas to try and develop new projects together.”

The company also said it was struggling to find a financing solution for deleveraging the US$2.6bn Sur de Texas-Tuxpan marine pipeline, which it built in partnership with TC Energy and which started operations in 2019. However, CFO Carlos Mauer said the firm would continue working with its partners to find a solution that would protect the company’s balance sheet.

Investment

IEnova’s main investment focus this year will be construction of a new liquefaction unit at its Energía Costa Azul terminal in Baja California Sur state, a project that received the green light last year. It plans to invest US$280mn in the initiative this year.

Earlier in the year, the company said it would invest US$650mn in total in 2021, taking what Ortiz called a “conservative position” in light of COVID-19 and domestic energy policy uncertainty. The figure represents a 20% reduction compared to 2020. 

Besides Costa Azul, IEnova has US$220mn earmarked for storage projects, US$50mn for power generation and US$100mn for natural gas-related infrastructure.

Earlier this year, the firm acquired full ownership of the Energía Sierra Juárez wind farm in Baja California for US$80mn, which it already operated with a 50% share, and purchased full ownership of the Manzanillo refined products terminal from Trafigura for US$6mn. Construction is ongoing for an expansion of capacity at Sierra Juárez that would add 108MW for total capacity of 273MW.

IEnova is currently in the middle of a merger process with Sempra subsidiary Sempra LNG. After the deal is completed, both companies would form a new firm called Sempra Infrastructure Partners. 

San Diego-based Sempra made an offer to acquire all the shares of IEnova it does not already hold earlier this week and said it would list its own common shares on the Mexican stock exchange.

IEnova’s credit rating was downgraded by Moody’s on Wednesday on the continued weakness of the company’s financial metrics, the agency said in a release. The new rating is ‘Baa3’ and the outlook was changed from negative to stable. According to Mauer, the decision was influenced by the company’s level of indebtedness, but the stable outlook signals that leverage will not increase significantly in the near future.

The company posted a US$111mn profit in Q1, up 139% on the same period last year, while revenues rose 17% to US$366mn.