Ienova’s Pipeline Dominance Powers Share Gains: Corporate Mexico

Infraestructura Energetica Nova SAB (IENOVA*), Mexico’s first publicly traded pipeline operator, is reaping the benefits of longevity as it wins the country’s most vital pipeline auctions amid the country’s energy industry opening. Ienova, the best performer on Mexico’s benchmark IPC index this year, returned 56 percent in 2014 and 140 percent since the company first sold shares last year. Ienova, Mexico’s sole shareholder-owned energy company, started operating the country’s largest pipeline project Dec.2 and won approval Nov. 24 from the state-run Comision Federal de Electricidad to develop the 205-kilometer (127-mile) Ojinaga-El Encino pipeline near U.S.-Mexico border. Ienova’s domestic network provides an advantage over international competitors TransCanada Corp., Atco Ltd. (ACO/X) and Gas Natural SDG SA (GAS), according to Alik Garcia, an analyst at brokerage Intercam in Mexico City. Ienova, which won its first contract to distribute natural gas in Mexico in 1996, is the largest private operator of national pipelines as the country ramps up to almost double its pipeline capacity. “The company has a head start on the competition not only in experience but as well as the administration that they have in place,” Garcia said in a phone interview from Mexico City. “It is undoubtedly a very important competitive advantage that opens the door to continue participating in the most important pipeline auctions.” Increasing Imports Ienova, the Mexican unit of U.S. utility Sempra Energy (SRE), will invest $3.2 billion in domestic infrastructure projects over the next two years, according to Mexico City-based newspaper Reforma, citing a Dec. 2 interview with Chief Executive Officer Carlos Ruiz Sacristan. The company didn’t respond to e-mails and phone calls seeking comment as Ienova’s management team was in Monterrey, Mexico, to attend the opening of the Los Ramones pipeline. The stock fell 1.8 percent to 80.10 pesos, its lowest intraday level since Nov. 21, at 9:45 a.m. in Mexico City. The first phase of the 1,021-kilometer pipeline, a joint venture between Ienova and state-run oil producer Petroleos Mexicanos, is Mexico’s most important transportation infrastructure project in the last 40 years, according to the government. Los Ramones’ initial phase will increase natural gas imports from the U.S. by as much as 45 percent, President Enrique Pena Nieto said Dec. 2. Well Connected Mexico approved legislation last year to end state-run monopolies by Pemex and CFE and allow for private investment in the energy industry. Mexico will build 17 pipelines and invest 228.5 billion pesos ($16 billion) to construct 8,500 kilometers of pipelines by 2018, Pena Nieto said. “This means that by the end of this administration, we will see a 75 percent increase in pipeline infrastructure, almost doubling the capacity we currently have installed in the country,” he said. The company’s management team includes former government officials, giving Ienova an unparalleled advantage over competitors, Eric Conrads, a money manager at ING Groep NV in New York who helps oversee about $500 million of Latin American stocks, said in a phone interview. CEO Ruiz was Mexico’s communications and transportation minister from 1994-2000. He also was Pemex’s CEO and sat on Sempra’s board. “The company has first-class management that is very connected and know the industry very well,” said Conrads. “They have a history of always being on time and on budget, and are well ahead of others in terms of understanding how Mexico works.” Pipeline Bids Ienova beat out four international and national companies to win the Ojinaga-El Encino pipeline with a $300 million bid, $100 million less than the original CFE estimate to construct and operate the pipeline. Ienova was the lowest bidder for the pipeline, which will boost by as much as 12 percent the total amount of lines the company operates, according to Garcia. Three days after being awarded the Ojinaga-El Encino pipeline, Ienova said Nov. 27 that it had bid to develop and operate the connecting El Encino-La Laguna pipeline. Ienova is well-positioned to win the contract, which will be awarded on Dec. 16, according to Garcia. “It helps a lot that they already won the first project that connects to El Encino-La Laguna,” he said. “It puts them in a very advantageous position in that they can reduce costs and are well positioned logistically.” CFE Transparency Ienova’s recent CFE contracts won’t deter other companies from bidding on the $4.9 billion in pipeline and electricity projects to be offered by the state-run utility next year, according to Conrads. “The CFE processes are very open and very transparent,” said Brandon Anderson, TransCanada senior vice president and general manager of Mexico natural gas and power, in a Sept. 26 interview. “There is no room for favoritism, which is why they are attracting such international interest both on pipeline and power side.” Calgary-based Atco Ltd. won a $50 million contract from CFE on Oct. 9 to build and operate a gas pipeline near Tula, Mexico. The company is also interested in developing the El Encino-La Laguna pipeline, James Delano, who heads Mexican operations, said in an Oct. 16 interview. Gas Natural, known as Fenosa, didn’t respond to e-mailed questions seeking comments. The company was awarded a gas distribution contract in northern Mexico in October. The stock will continue to rise should Ienova win additional projects, Vanessa Quiroga, a Credit Suisse equity analyst, said in a Nov. 26 research report. Credit Suisse, which has a buy recommendation on the stock, boosted the target price on the stock to 98 pesos from 71 pesos. “Ienova has been using more efficient capital structures to fund projects across the board,” Quiroga said. The company has sufficient “investment firepower” to participate in new projects the next four years, according to Quiroga. To contact the reporter on this story: Adam Williams in Mexico City at awilliams111@bloomberg.net To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net Robin Saponar

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