IEnova expects quick Mexican natgas line talks

Sempra Energy's Mexican subsidiary IEnova expects to finish renegotiating disputed natural gas pipeline contract terms with state power company CFE by end-2019.

"The government has clearly stated that they want to reach an agreement soon and so do we," IEnova's general director Tania Ortiz said on the company's first-quarter earnings call today. "I would not see this dragging into next year."

The government of President Andres Manuel Lopez Obrador called to renegotiate seven contracts held by four companies for pipelines under force majeure — mostly because of community conflicts — and aims to recover costs CFE has been having to make because pipeline are not online. CFE also recently filed requests for international arbitration.

IEnova holds five natural gas transport contracts via pipeline with CFEnergia — CFE's natural gas trading arm. One of the pipelines — the 510mn cf/d Guaymas-El Oro in Sonora state — was sabotaged and halted operations in 2017. The pipeline is a segment of the company's Sonora pipeline, which stretches to the US border.

Restart and other issues were long pending a judge's verdict. But in July, a federal court judge in Sonora ruled that there was a proper consultation and rejected a legal action that was filed in 2016 by the Yaqui indigenous Loma de Bacum community. It was the only one of eight consulted communities along the Guaymas-El Oro natural gas pipeline's route that denied development. The ruling is still subject to appeal, which would prevent IEnova from repairing the pipeline for it to operate again. If the community appeals, there is no set date for when courts would rule on it, Ortiz said.

"The resolution is a very important step forward in having a definitive solution to put the pipeline back in operation," Ortiz said. "We are waiting to see what decision the community makes. In any case, we will continue talking with them trying to find a solution. We are seeing support from the government in reaching out to the community to find a solution."

IEnova is also working with CFE to extend the two-year force majeure deadline on the pipeline Guaymas-El Oro in order to appropriately account for the time it will take for the company to be able to restart the pipeline's operations.

IEnova's 40:60 joint venture with TC Energy on the marine 2.6 Bcf/d Sur de Texas-Tuxpan line — another major contract with CFEnergia — is also under negotiations. TC Energy is the operator.

Ortiz said IEnova has still received force majeure payments for Guaymas-El Oro but stopped receiving payments for Sur de Texas-Tuxpan in April, when CFE stopped recognizing the force majeure on the line. She added that the arbitration process does not affect payments on Guaymas-El Oro.

IEnova's projects in the country include natural gas pipelines, fuel storage terminals, solar farms and a planned LNG terminal.

The company also started operations at Rumorosa Solar this quarter — the company's second solar project in service — and expects to start operations at the Don Diego project during the fourth quarter of 2019. During 1Q19, IEnova also placed solar farm Pima Solar into service, which is also one of the company's 15-year PPA's with large industrial customers in Mexico. Tepezala solar, a JV with Trina Solar, was completed and is in commissioning activities to begin commercial operation. The company now has 151MW in operation and expects another 225MW to come online.

Ortiz also said that IEnova will make a final investment decision on its Energia Costa Azul LNG project by the end of this year, and plans to file for an export permit in Mexico by the third quarter of this year.

IEnova, with Sempra LNG and Midstream, signed three initial agreements with affiliates of Total, Mitsui and Tokyo Gas for the full capacity of 2.5mn t/yr first phase of the liquefied natural gas facility. The three companies will potentially buy 900,000 t/yr. The first LNG deliveries are slated for 2023.

IEnova's profits increased to $113mn in the second quarter from $102mn during the same period of 2018.

"Regarding our adjusted Ebitda for the year, we maintain our range of $935mn to $980mn assuming no impact from the pipeline contracts that are under discussion with CFE," IEnova's chief financial officer Nelly Molina said. "We assume that the marine pipeline will start operations during late 2Q. We do not necessarily assume distribution of dividends or repayment of loans for the marine pipeline."