--Long-term Issuer Default Rating (IDR) at 'BBB+';
--Local currency long-term IDR at 'A-';
--National scale long-term rating at 'AAA(mex)';
--MXN90,489 million unsecured Certificados Bursatiles Issuances at 'AAA(mex)';
--National scale short-term rating at 'F1+(mex)';
--Short-term Certificados Bursatiles Program at 'F1+(mex)'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The rating action reflects CFE's existing structure as the state owned monopoly to provide electric services and strong linkage with the Mexican government. The proposed energy reform, which is in the process of discussion and approval of the secondary laws, could materially change CFE's structure. While credit impact is still uncertain and a negative impact cannot be ruled out, Fitch will review CFE's ratings once the secondary laws and additional regulation are in place to assess the impact to credit quality. Fitch will focus its review on the resulting capital structure, business profile and the degree of linkage with the Mexican government as the energy reform is ready to be enforced.
Among the main topics included in the initiative of the secondary laws sent by the president to congress is a change in CFE's legal structure to a productive state company owned by the government. This new structure is expected to have linkage with the government; however, the degree of linkage will be assessed once all laws and regulations are approved. CFE is proposed to have budgetary independence from the congress, with the board of directors led by the
An open electric market is likely to attract new entrants to serve the industrial customers and absent of a change in the subsidies to agricultural and residential customers can have a material impact to CFE's finances. As per the initiative, CFE's distribution and transmission network will remain state owned and the Centro Nacional de Control de Energia (CENACE), a decentralized public agency, will be in charge of the planning and control of the national electric system, including the wholesale market. Fitch views that after the secondary laws are approved, additional regulation need to be in place to give more detail of which assets and liabilities are transferred to CENACE. Fitch expects that additional regulation will give more detail on the subsidies.
CFE's ratings incorporate the company's position as the largest electricity generator in
Current Strong Linkage With Government
The actual relationship between CFE and the government is strong and extends beyond its ownership. CFE's budget and financing plan must be submitted to and approved by the Minister of
Strategically Important For The Country
The company operates as a virtual monopoly and has exclusive rights to provide electric services throughout
Risk Of Political Interference
The way rates are set today by the government exposes the company to regulatory risk and political interference. However, in addition to material subsidies to agricultural and residential sectors, CFE's tariff structure also includes monthly fuel cost adjustments for approximately 75% of revenues, which allows CFE to partially offset costs increases. CFE is partially exposed to fuel prices, fluctuations in production costs and unfavorable tariffs, which at times could be set below operating costs for a specific class of customer.
Although CFE's linkage with the government will likely continue to be considered strong and may increase as a key factor for its credit ratings after the energy reform, this last one would likely give the company financial flexibility through budgetary and financing independence. Also, the company would benefit by being able to associate with private investors to increase and develop the transmission and distribution infrastructure by implementing sharing costs models. Fitch still sees regulatory risk and political interference on the future regulated rates, and considers the open to competition in the industrial customers, a big challenge for CFE, due to the need to manage competitive rates and seek improvement in its cost structure.
High Leverage With Manageable Debt-Maturity Profile
An upgrade of CFE could result from an upgrade of the sovereign, increased financial support from the government, significant improvement in credit profile, and/or a sharp and extended generation of positive FCF. Negative rating actions could be triggered by a downgrade of the sovereign's rating, the perception of a lower degree of linkage between CFE and the sovereign due to the Energy Reform in conjunction with a levered capital structure, and failure to offset declining profit margins resulting from the loss of industrial customers.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology' (
--'National Scale Ratings Criteria' (
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
National Scale Ratings Criteria
Alberto Moreno, +52-81-8399-9100
Source: Fitch Ratings
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