Mexico City — To improve its cash flow from pipelines commissioned in recent years, Mexico's state power utility CFE will renegotiate gas transportation contracts and build new combined-cycle power plants, the company's CEO, Manuel Bartlett, said.

S&P Global Platts asked Bartlett at a news conference Friday what CFE's gas strategy would be under President Andres Manuel Lopez Obrador, as well as how the company would employ capacity from newly developed pipelines.

"We need to promote new combined cycles, which is the fastest way to attend our urgent need for new generation," Bartlett responded.

Lopez Obrador has criticized Mexico's dependency on US gas imports for power generation, bringing uncertainty on CFE's vision, set by the previous administration, of expanding the utility's combined-cycle gas turbine power plant fleet.

Mexico currently generates half of its power using CCGTs. The previous administration projected that would continue until 2025, then decrease to 44.6% by 2030.

Under this forecast, Mexico would add 18.95 GW of new combined-cycle capacity during this period, increasing total CCGT generated power to 203.8 TWh from 148.4 TWh.

CFE, under former President Enrique Pe?a Nieto, signed transportation contracts for 6,400 km of new private gas pipelines anchored by construction of new CCGT plants or reconfiguration of existing fuel oil units.

The power utility commissioned these pipelines at the beginning of the 2010s with the plan of building and reconfiguring 22 power plants, Mexico's Federal Auditor General reported last week.

But ASF added that 14 of these power plants hadn?t been commissioned yet, as CFE is still evaluating their financial viability. The utility currently is paying for capacity at multiple operational pipelines that have no power plants to feed, ASF concluded, including the Tamazunchale-El Suez, the Chihuahua Corridor, El Encino-Topolobampo and El Encino-La Laguna pipelines.

Bartlett said that CFE would take advantage of pipelines commissioned under the previous government, although the utility wants to renegotiate contractual terms of certain pipelines, he added.

CFE seeks to negotiate to stop making payments for seven pipelines under force majeure, Bartlett added, but he declined to comments under what terms CFE will renegotiate with pipeline developers Fermaca, IEnova, TransCanada and Carso.

"We have explained [to these companies] that the conditions for all of those contracts are impossible to fulfill ... and are unequal," the CEO added.

Bartlett said the Mexican government would work with local communities to solve social opposition against uncompleted pipelines while it renegotiates the contracts.

CONTRACTS ARE GENERATING CASH FLOW PROBLEMS FOR CFE

The current terms in transportation contracts are affecting CFE's financial standing, Miguel Santiago Reyes Hernandez, CFEnergia's new general director, said during the conference.

"We have pipelines that reach 14 plants [that] do not exist, which is absurd," Reyes said. The company has already paid in two years more than Peso 9 billion ($450 million) for unused pipelines or pipelines under force majeure, he added.

There are seven CFE-contracted pipelines under force majeure that were affected by social problems, he added, including Tuxpan-Tula, Tula -Villa de Reyes, Samalayuca-Sasabe, Guaymas-El Oro, la Laguna-Aguascalientes, Villa de Reyes-Guadalajara, and the Sur de Texas-Tuxpan pipeline.

Under pipeline contracts, CFE will get free years of service after contracts expire in 300 months for the time the pipelines were unused. But this causes significant damage to CFE's cash flow, Reyes said.

Capacity payments on pipelines under force majeure alone amount to Peso 5.8 billion/year, Reyes said. The opportunity cost compared with investing in treasury bonds would be Peso 42 billion in 300 months, he added.

"This is creating significant damage to CFE in economic terms, because gas isn't flowing in nearly 50% of awarded pipelines," he added.

-- Daniel Rodriguez, newsdesk@spglobal.com