CFECapital S de RL de CV

BMV:FCFE18

Earnings Call Analysis

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon, everyone. Welcome to the CFE FIBRA E quarterly report corresponding to the first quarter of 2023. I would like to introduce the host of this investor call. Miguel Reyes, President of the Promoted Trust; Edmundo Sanchez Aguilar, Chief Financial Officer CFE and Technical Secretary of the Promoted Trust; Miguel Lopez, Member of Technical committee of the [ Investment ] Trust; Noe Pena, CEO of CFE Transmission, a member of the Technical Committee of the [indiscernible] trust, [ Munre Mukhi Kavias ], Head of Strategy and Regulation Unit of CFE transmission. Sandra Rivera, Head of Budget Department of CFE Transmission; and Carmen Serdán Banda, CEO of CFE Capital.

In this call, our speaker will present the key activities of CFE FIBRA E and the results corresponding to the first quarter of 2023. In order to share the content of this call with the invested public that was unable to attend. This presentation will be recorded. In addition, the audio will be available on the CFE Capital website.

[Unknown Executive]

Good afternoon, everybody. We appreciate having your presence and we welcome you in this CFE FIBRA E report corresponding to the first quarter of 2023. I would like to comment that CF Capital reiterated to all its invested public, the strategic role that CFE FIBRA E as a source of financing for productive investment and how this contributes to the strengthening of CFE as an energy company with the goal of ensuring energy in the country.

Relevant events for CFE FIBRA E, May 1, the CEO of Federal Electricity Commission, [indiscernible] Manuel Bartlett reiterated the strategic role that CFE FIBRA E has as a source of financing for productive investment as a productive company of the Mexican state. In addition, the CEO of CFE has highlighted that our reliable and robust transmission network will allow the development of electrical projects in the country. The CFE Transmission Board of Directors report on the infrastructure projects completed in 2022 in Jimenez, Las Norias, and San Fernando in the state of Tamaulipas, [ Ik Kil, ] Culiacán, Sinaloa and Frontera Comalapa located in the state of Chiapas. With these projects, the supply of electricity demand is guaranteed as well as preserving and improving reliability in the national electric system.

On the other hand, it was reported that in order to have a supervisory control and communication system in the transmission network, the state productive company has been working since 2019 and on the intelligent electricity network to provide voice services for maintenance, manoeuvre and operation of the lines. In the Board of Directors of CFE Transmission, it was reported that the progress of the end of 2022 was 57%.

Finally, [indiscernible] CEO of CFE transmission specified that progress is being made in the maintenance and expansion of the national transmission network, to continue bending and critical points due to electricity demand in the country [ youngly ] with CFE distribution. [indiscernible] programs are carried out to strengthen the electric system. Some important events that occur through this period and are relevant both for CFE FIBRA E and for electricity market are: On January 30, the CFE reported that these implementing actions to contribute to the economic development of the Yucatan Peninsula and its energy supply with a total investment of more than MXN 151 billion in the strategy to guarantee energy security, strengthen the electrical system and supply the necessary electricity.

On January 31, the CFE received the award for the 2022 Quasi-Sovereign sustainable bond granted by LatinFinance. The sustainable bond was structured to finance projects with environmental and social objectives. On February 9, CFE International presented its new business model that ensures the required supply of natural gas to the CFV generation plant and to the industry in Mexico at competitive prices.

On February 17, the President of the Republic inaugurated the first phase of Puerto Penasco photovoltaic power plant which will produce 1,000 megawatts of green energy. The technology, it will be the first of its kind in Mexico and the largest in the Americas, due the generation capacity.

CFE reported accumulated revenues for the fourth quarter of 2023 of more than MXN 618 billion, 9.1% more than 2021. The assets of the state productive company increased by 2.9% compared to the end of 2021, mainly due to the increase in fixed assets and their revolution price and volume. With respect to the performance of FIBRA E to the first quarter of the year, the following graph shows the performance of price and volume of certificates. Through the first quarter, the price oscillated in a range between MXN 26.10 and MXN 28. In this period, the weighted average price was MXN 27.13. The closing price yesterday was MXN 27.25.

The average daily volume through the first quarter of 2023 was 54,000 [indiscernible] certificate. Performance of CFE FIBRA E and other figures through the indicative dividend yield. Comparing the indicative dividend yield of CFE FIBRA E among its peers for the month of January, February and March 2023. It can be seen that the performance of CFE FIBRA E continues to be outstanding, keeping a constant double-digit dividend yield above inflation.

Analyst coverage. There is currently a positive perception of the instrument. It can be seen that the target price estimated through analysts through the last 12 months and the certificate spreads for the same period the target price has always been above. Analysts recognize that the current price of the certificates has a potential growth of 11%.

And Next, we will present the performance of the electricity transmission sector.

[Carmen Band, executive]

Performance indicators of CFE transmission. We will begin this section with the CFE transmission performance indicators. I would like to highlight that 3 of the indicators that will be present have a preliminary data and are not the final figures. Since 3 events are in the review process for which we request that they are considered preliminary. The first indicator refers to the technical loses that correspond to the nature of power transmission showing an improvement of 0.10% and 0.19% compared to the same period of 2021 and 2022, respectively.

The second indicator is the average duration of system interruptions in minutes. This refers to interruption at 3 level to the process of transmission of electric energy in the network. This indicator has already mentioned as presented in a preliminary way. The third indicator refers to energy not supplied. As its name indicates, it's energy not delivered due to the lower potash or lack of coverage through radial network. This indicator is as a present in a preliminary way since 3 events are under review to [indiscernible] in some recurrent review by external laboratories.

Finally, the transmission lines had growth of 80 kilometers as of February 2023. Volumes of electrical energy in the NTN. This graph shows the volumes of electrical energy transmitted in the National Transmission network in terawatt hours. The growth registered by the energy volumes during the first quarter of 2023, with respect to the same period of the previous year can be observed. It is important to remember that the lowest temperatures are located in this period. And due the seasonality, the lower demand for electric energy of the year is record. However, despite this seasonality, energy volumes increased 3.82% compared to the same period in 2022. And when compared to 2021 and 2022, [ represent ] an increase of 7.72% and 5.76% respectively. This increase is the largest increase registered during the first quarter of the year since 2019.

In the same sense, these increases in energy volumes have a direct impact of the flow of collection rights received by CENACE and on the flows received by CFE FIBRA E.

Performance of collection rights by colored border. In this rate, I would like to emphasize the performance of collection rights which on average increased by 3.50% compared to 1 quarter 2002 and 8.34% compared to 1 quarter '21. This drop reflects the seasonal behavior of energy volumes and the impact of the current transmission tariff in 2023.

Performance of collection right by distribution period. In this rep, we show the performance of quickly collections rights through the distribution period which correspond to the month of December 2022 and January and February 2023. It can be observed that the weekly average was MXN 1,474 million, which represents an increase of 3.40%, compared to the first quarter of 2022 and 7.82%, compared to the same period in 2021.

[Unknown Executive]

Now we will begin the third section of this presentation to comment on the income streams and reimbursement of the promoted trust asset composition of CFE FIBRA E. As of March 31, CFE FIBRA E maintains its participation equivalent to 6.78% of the promoted trust related to the collection rights of CFE Transmission. This percentage is equivalent to MXN 27,864,637,137 which represents 99.84% of the total assets of FIBRA E and the remaining 0.16% integrates the cash and equivalent account.

Promoted trust account statement. This is a slide presents the detail of the bank accounting statement of the promoted trust through the first semester. The first quarter began with the balance of MXN 788, 195,293, to which were added MXN [ 19,440,854,333 ] for the CENACE collection rights and the reimbursement made to CFE Transmission to maintain the operation amounted to MXN 7,832,926,590.

Interest was generated for MXN [ 103,157,274 ]. Cost income tax was MXN 1,409,367. Given the [indiscernible] distribution for the quarter amounted to MXN 7,560,398,585, of which MXN 7,048,098,190 were for CFE Transmission and MXN 512,003,395 for the issuer Trust.

Uses of the promoted trust budget regarding the approved budget of the promoted trust and considering into account intercompany expenses, operation and minor maintenance obligation expenses, major maintenance of the total budget for 2023, 10% has been exercised this first quarter with the largest disbursement in minor maintenance and expenses for obligations.

Issuing trust account balance. Regarding the counter statement of the issuing trust for the first quarter of 2023, it began with a balance of MXN 50.5 million to which was added MXN 512 million, corresponding to 6.78% of the distribution of December 2022, January and February 2023 received from the promoted trust and that were mentioned in the account statement of the promoted Trust. As of March 31, the disbursement amounted to MXN 30.56 million, which corresponds to expenses of the issuing in trust and interest were generated for MXN 4.2 million. The amount distributed on March 31 to investors correspondent to first quarter of 2023 was MXN 490,617,893. The final balance as of March 31 was MXN 48,918,069.

General balance of the issuer trust. The balance sheet of the issuer Trust as of March 31 is shown below. The total assets are MXN 27,910,657,827 composed mainly on trust rights. The total liabilities are MXN [ 135,615 ], and the net worth as of March 31 is MXN 27,910,522,212.

Tax treatment of distributions. Below, we present the detail of the tax treatment of the distribution for [indiscernible] trust. On the previously presented MXN 7.5 million that were distributed from the promoted Trust, MXN 3.4 million correspond to distributable tax income and MXN 4.1 million are capital reimbursement. The promoted trust presented as of first quarter of 2023, a proportion of 45% profit and 55% equity reimbursement. It is important to note that in order to comply with the tax obligation of distributing at least 95% of profit by the first quarter of 2023. The issuing trust consider a proportion equivalent to 100% equity reimbursement. From the issuing draws, there were MXN 481.6 million capital reimbursement of the MXN 409.6 million distributed. The difference is due to amortization for issuance expenses and the adjustment for trust expenses and interest.

We will begin the first section of this presentation regarding the quarterly distribution of the quarterly distribution of CFE FIBRA E. The distribution of the first quarter of 2023 is made up of balances of December 2022, January and February 2023 for MXN 8,312 million, from which resettlements are discounted for MXN 1.8 million and MXN 250 million from the reserve as well as the MXN 1,000 of the initial contribution of the trust.

Therefore, as we mentioned, the Promoted Trust distributed a total of MXN 7,560 million that corresponds to the collection rights for the month of December 2022, January and February 2023. According to its holding factor, CFE Transmission received MXN 7,048,098,189. And CFE FIBRA E with its holding factor of 7.78% received MXN 512,003,395.

Amount distributed to Series E and Series B. Of the 512,300,395 received, the expense reserve fund was reserved for MXN 28,991 million, and interest was generated for MXN 7,308,498. Therefore, demand distributable to holders for the first quarter of 2023 as for MXN 490,617,893. In this distribution in the hands of the investing public, MXN 490.59 million were distributed to all Series A certificates and MXN 0.03 million to the Series B certificates of CFE Transmission.

Amount distributed to Series A and Series B. In the cascade of payments per certificate the amount distributable to holders as the minimum quarterly distribution for Series A certificates, certificates was covered, which was MXN 0.57 and MXN 0.0001 was delivered to Series B.

Income composition of the distribution. In this graph, we can see the income composition of CFE FIBRA E distribution for both series. I would like to reiterate some consideration. The first quarter of 2023 distribution includes the month of December 2022, January and February 2022. In this period, the lowest temperatures are located and due to the seasonality, the lowest demand for electricity in the whole year is registered. However, despite this seasonality, volumes grew 2.8% compared to the same period of the previous year. This distribution includes the collection rights corresponding to 12 weeks and the refunds applied where for 12 weeks of operation. And therefore, the average collection rights had a growth of 3.4% despite the fact that this quarter had 1 week less of collection rights compared to the first quarter of 2022.

For the last quarter of the year and into the nature of the operating expenses, an important part of the proved budget was exercised mainly in the items of major and minor maintenance, as well as the item of inter company expenses, which are direct investments for the maintenance and operation of the national transmission network in order to meet international standards in its performance indicators exercising 71% of the 2022 budget, which resulted in an increase of reimbursement for the quarter.

For this reason, it is -- reiterate once again that the totality of the income received from the collection rights of the public transmission service after their respective reimbursement made it possible to deliver to Series A, a quarterly distribution of MXN 0.67 per certificate.

Tax composition of the distribution. Regarding the tax composition of the distribution of CFE FIBRA E, the entire distribution corresponds to capital reimbursement that is for Series A MXN 0.57 and for Series B, MXN 0.001. The purpose of this composition is to ensure compliance with the CFE FIBRA E regime maintaining its tax benefits in line with what was approved by the technical committee of the issuing trust.

Finally, in the 5 and last section of this presentation, we will briefly comment on CF capital management and corporate governance activities.

[Carmen Band, executive]

Administrator expenses. Here, we can see the expenses of the administrator during the period. In the first quarter of 2023, expenses amount to MXN 30,567,535. This amount includes the expenses of the administrator, which were for MXN 26,143,540, and the rest of the expenses were for MXN 4,423,995.

Corporate governance activities. Below, we show the corporate governance activity that took place during this period. The technical committee of the Issuing Trust held its 26th ordinary session where they authorized the following topics: amount to be distributed and distribution mechanism. Proposed by the administrator in accordance, we closed 6 of the trust agreement. Upon recommendation of the audit committee financial statements of the issuer trust for this presentation before the holder meeting.

Renewal of the contract of the liability insurance policy. For members of technical committee and the Conflict Committee and were appropriated, the directors and employees of the administrator. Likewise, the technical committee took cognizance of the following matters: presentation of the market activity and Investor Relations.

Presentation of the administrator's performance report corresponding the full quarter of 2022. Also, during the reporting period the 17th ordinary session of the audit committee was held, where the following topic was addressed: Auditor financial statements of the trust for the year 2022. Likewise on April 2023, the holders' meeting was held where the following topics were addressed: Annual report of the administrator and the annual report of the technical committee and the Audit Committee and the Nominations Committee.

Regarding the fiscal year ending December 31, 2022. Presentation of the audited financial statements of the trust corresponding to the fiscal year of 2022 with the pure validation of the audit committee and the technical committee. Discussion and -- were prepared qualification of this independence and performance of the independent members as well as were appropriated, the ratification of the appointment of proprietary members and the respective alternative teams.

Lastly, I would like to remind you that [ decorums ] and [ compensations ] in the financial market are beginning to resume gradually. So for now and corresponding to the distribution of the second quarter of 2023, which will take place on June 30 of this year. This quarter corresponding to the second quarter of 2023 will be tentatively on July 28.

The next call with investors is planned for July 31, date that is yet to be confirmed.

[Unknown Executive]

With this, we conclude the presentation. We thank the members of the Technical Committee of the promoted trusts and the issuing trust for their attendance and your attention to their participation. Thank you very much to our panelists and to the people who join us in the presentation of the results for the first quarter of 2023. We remind you that the presentation of this quarterly report will be available on the CFE Capital website as well as the recording of this call. We appreciate your presence to everyone who joined this presentation.