Fitch Ratings has affirmed the Issuer Default Rating (IDR) on the National Scale for Comision Federal de Electricidad (CFE) and all outstanding debt securities at 'AAA(mex)'. The Outlook for these ratings remains Stable.
CFE's rating reflects the company's position as the largest electric energy generator in Mexico, its exclusive transmission and distribution rights, and its strategic importance to the country's economy. The rating also incorporates CFE's high exposure to political interference, given its status as a wholly owned decentralized entity of the Mexican government, along with budgetary constraints and the weak tariff structure.
CFE operates as a virtual monopoly and has exclusive rights to provide electric services throughout Mexico. The company's monopoly status is embedded in the Mexican Constitution and is defined by the Electric Energy Public Service Law. CFE's budget is incorporated into the government's budget and is approved by the Mexican Congress. While CFE's monopoly status lowers competitive and other business-related risks, the company's operating and financial performance is highly linked to the United Mexican States (UMS). CFE's debt is not guaranteed by the Mexican government.
CFE is vertically integrated and provides generation, transmission and distribution service for all of Mexico, with the exception of electric distribution in the Mexico City metropolitan area. Luz y Fuerza del Centro (LFC), another wholly owned decentralized entity of the Mexican government, is responsible for the distribution of electricity in Mexico City and purchases all of its power from CFE.
Mexican law allows for the operation of independent power producers (IPPs); however, IPPs must sell all of their power to CFE. The creation of the IPP segment in Mexico has generally resulted in the addition of lower cost generation capacity due to the public-bidding process. Competitive threats generally are limited to self-generation projects by large industrials.
CFE's tariffs are set annually by the Secretaria de Hacienda y Credito Publico (Hacienda), which exposes the company to political interference and regulatory risk. The weak tariff structure includes subsidies to the residential and agricultural sectors. These subsidies are generally paid by the government to CFE through non-cash governmental transfers which are offset against taxes, duties and royalties owed to the government.
CFE is also partially exposed to fuel prices and operating cost fluctuations as the current tariff structure does not pass-through 100% of the changes in fuel and operating costs on approximately 24% of its total revenues. Also, operating costs are high when benchmarked against comparable private sector electric companies.
The company generates relatively stable cash flows with funds from operations averaging USD3.15 billion in the past three years. With average capex of about USD2.7 billion per year the CFE was able to generate USD125 million in accumulated free cash flow during this period. However, credit protection measures are weak for the rating category when adjusted for USD22.4 billion unfunded pension plan and payments to IPPs for capacity availability over the next 25 years.
As of March 31, 2009 on-balance-sheet debt totaled USD8.5 billion, of which USD1.7 billion are short-term maturities compared to USD4 billion in cash and cash equivalents. Over the next 10 years the CFE plans to invest USD58.1 billion in the sector with 45% of the resources allocated to generation, 19% to transmission, 22% to distribution and 13% to maintenance. Forty-three percent of these investments are expected to be financed with CFE's own budget, 35% through financed public work structures (Pidiregas), and 11% via IPP's participation.
CFE is Mexico's state electric energy generation company. It is the nation's second largest company in terms of assets and ranks among the world's largest electric companies, with 2008 generation capacity of 49,931 megawatts (MW).
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