Natural Gas Prices Potentially Pressure CFE’s Margins and Working Capital Requirements

By Fitch Ratings

Recent increased volatility in natural gas prices in North America may pressure the margins and working capital requirements for Comisión Federal de Electricidad (CFE).

On Jan. 12, 2024, prices jumped ahead of a winter storm in the U.S. The Henry Hub spot price reached USD13.20 per mmBtu, up from USD2.52 per mmBtu at YE2023.

In Mexico, the energy generation matrix is mainly thermal. Gas-based power plants account for around 62% of the total energy generation mix. Reduced gas supply (freezing conditions could lead to disruptions) combined with higher demand has resulted in energy power shortages in the past, such as the shortage experienced in the first months of 2021.

CFE is exposed to shortages and fluctuations in natural gas prices and FX rates. As of September 2023, CFE has hedged 32% of its fuel requirements and it is expected that by December this percentage will be close to 40%. For CFE, the pass through of the increase in cost of fuels is not immediate, as the tariff adjustment for the end users is mainly gradual. The company´s margins and cashflow are expected to be negatively affected by the natural gas price increase, although to a lesser extent than in 2021, given the fuel hedges in place and a more favourable exchange rate. An additional subsidy to compensate for fuel price increases for the low consumption domestic and agricultural tariff will be needed in order to mitigate part of the effect.

Fitch does not expect a significant impact in the capital structure of Cometa Energia and Infraestructura Energetia Nova as they operate under long-term PPAs with CFE. Usually the contacts have full cost pass-through provisions, limiting their exposure to volume and price risk.