rfp comments for $1.2 bnusd hvdc transmission line project in

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Energy Alert Mexico Energy Reform CFE’s Release of Specifications for Yautepec Ixtepec HVDC Transmission Line Project October 14, 2016

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Page 1: RFP Comments for $1.2 BnUSD HVDC Transmission Line project in

Energy Alert – Mexico Energy Reform

CFE’s Release of Specifications for Yautepec – Ixtepec HVDC Transmission Line Project

October 14, 2016

Page 2: RFP Comments for $1.2 BnUSD HVDC Transmission Line project in

Page 2

Executive Summary1 3

Tender specifications2 5

Assessment of Project Development Risks5 10

Guaranteed Net Transmission Capacity7 12

Table of Contents

Real Estate – Rights of Way4 9

Payments made by the CFE8 13

Observations6 11

Payments in Mexican Pesos3 8

EY Professionals9 14

CFE Transmission Line Solicitation Yautepec – Ixtepec HVDC in Mexico

Page 3: RFP Comments for $1.2 BnUSD HVDC Transmission Line project in

Page 3

► Mexico’s Federal Electricity Commission (Comision Federal de Electricidad or ¨CFE¨) released its

specification of requirements for the construction of a new high voltage direct current (HVDC)

transmission line project.

► The project is consistent with the National Electric System Development Program (PRODESEN),

a 15-year strategic development plan that was released by the Mexican Energy Minister (SENER)

in June, 2016.

► The solicitation invites tenders from companies or duly constituted consortiums for the

construction and operation of a ±500 kV HVDC line running 1,260 kilometers through the Oaxaca

region in southern Mexico. The Project consists of 15 works:

► 2 (two) converter work stations with ±500 kV of voltage – Bipolo, 3000 MW and 5 feaders of Alternating

Current in 400 kV;

► 7 (seven) substation Works with 400 kV of voltage with 1550 MVA of capacity, 150 MVAr and 11 feeders;

► 5 (five) transmission lines Works of Alternating Current with 400 kV of voltage and a total of 438.1 km-C;

and

► 1 (one) transmission line of Direct Current with 500 kV of voltage and a total of 1221.2 km-C.

Executive Summary(1/2)

Source: CFE & PRODESEN

CFE Transmission Line Solicitation Yautepec – Ixtepec HVDC in Mexico

Page 4: RFP Comments for $1.2 BnUSD HVDC Transmission Line project in

Page 4

► The project will provide access to abundant wind resources in southern Mexico, and also satisfy

increasing electricity demand in Mexico City and the surrounding areas.

► The transmission line will connect the Yautepec substation, situated 50 km away from the Mexico

City substation, to the Ixtepec substation, situated approximately 30 km away from the

Tehuantepec substation. The 1,260 km line requires two circuits, with a current rating of 3,000

MVA and a capacity of 3,000MW.

► The CFE tender document describes the requirements and specifications for the construction,

operation, maintenance and transfer (to CFE) of the transmission facilities.

Executive Summary(2/2)

CFE Transmission Line Solicitation Yautepec – Ixtepec HVDC in Mexico

Source: CFE & PRODESEN

Page 5: RFP Comments for $1.2 BnUSD HVDC Transmission Line project in

Page 5

► For Converter Stations: 2 Stations ±500 kV – Bipolo – 3000 MW – 500kV/400kV, 5 feeders CA in

400 kV.

► For SS: 11 feeders , 1550 MVA and 150 MVAr.

► For transmission lines in Direct Current : 610.6 km-Line and 1221.2 km-Circuit

► For transmission lines in Alternating Current : 294.6 km-Line and 438.1 km-Circuit

CFE Transmission Line Solicitation Yautepec – Ixtepec HVDC in Mexico

Tender specifications(1/3)

Page 6: RFP Comments for $1.2 BnUSD HVDC Transmission Line project in

Page 6

► Real Estate Rights

► Real Estate Rights A: real, possessory or use rights, including those for the Dominant Property, Servant

Property and Other Properties: a part must be sold and transferred by CFE to the Trust, the remaining must be

procured and transferred by Contractor to the Trust.

► Real Estate Rights B, any real, possessory or use rights to be obtained and contributed to the Trust

Transmission System, including: a) Any additional area needed for the construction of the Transmission

System; and b) Any other rights for the contractor regarding any land or property necessary to build, operate,

upgrade or maintain the Transmission System. Real Estate Rights must be procured and transferred by

Contractor to the Trust.

► Warranties

► Value of $5,000,000.00 USD for a period of 180 days counted from the date of filing of the Economic Offer.

► Irrevocable letter of credit in favor of the Commission, issued in Mexico by a Mexican Development Banking

institution or by a bank authorized by the National Banking and Securities Commission (CNBV per its acronym

in Spanish).

► Submission of Offers and Opening of Technical Bids

► The purpose of the Technical Evaluation Offer of each Contestant is to qualify under the statement of

“Technically Fulfill” or “Technically Do Not Fulfill”

► Characteristics and Technical Information of the Equipment and Materials

► Transformers and/or Reactors losses, Static Compensators of Reactive Power and Converter Stations

► Operation and Maintenance experience

► Professional staff of the Contractor for the execution of the Project

CFE Transmission Line Solicitation Yautepec – Ixtepec HVDC in Mexico

Tender specifications(2/3)

Source: CFE

Page 7: RFP Comments for $1.2 BnUSD HVDC Transmission Line project in

Page 7

Publication of the specification of requirements calendar of events for the competition and project implementation

EVENT DATE HOUR

Publication of the specification of requirements November 03, 2016

Site visits November 14, 2016 09:00

Start of the first Session of clarification December 05, 2016 10:00

Closing of the first Session of clarification December 15, 2016 12:00

Start of the second Session of clarification January 09, 2017 10:00

Closing of the second Session of clarification January 19, 2017 12:00

Submission of Offers and Opening of Technical Bids February 27, 2017 10:00

Opening of Economic Tenders March 29, 2017 10:00

Award April 14, 2017 13:00

Signature of Contract May 12, 2017 13:00

Date to Initiate Work September 12, 2017

Date of notification to issue the Certificate Start September 12, 2017

Scheduled date of Commercial Operation May 12, 2020

Period of Project implementation in calendar days 974

CFE Transmission Line Solicitation Yautepec – Ixtepec HVDC in Mexico

Source: CFE

Tender specifications(3/3)

Page 8: RFP Comments for $1.2 BnUSD HVDC Transmission Line project in

Page 8

Payments in Mexican Pesos

Source: CFE & EY analysis

• CFE Transmission is willing to

hedge the incomes it would

receive from CENACE; in this

sense, they may offer indexation

to USD options.

Reasons

• Financing institutions may not

have enough time to provide to

respond with satisfactory financing

conditions.

• Possibility exists that bidders will

not find enough liquidity for MXN

debt for their offers and bidding

full equity would imply strong

exposure to MXN.

• Contacting SWAP for foreign

investors would imply less

competitive bids and may exceed

CFE cap Price.

Issues

CFE Transmission Line Solicitation Yautepec – Ixtepec HVDC in Mexico

Page 9: RFP Comments for $1.2 BnUSD HVDC Transmission Line project in

Page 9

Methodology

► Real Estate Rights A: CFE will transfer (the ones CFE has; not all) to the Contractor and then to the

Trust. The Contractor is obliged to obtain the missing land rights and transfer them to the Trust.

Contractor must pay a set amount for such rights (not yet defined), it is not clear how such amount is

going to be offset by the rights CFE fails to transfer,

► Real Estate Rights B: the Contractor is obliged to obtain all of these Rights at its cost and transfer

them to the Trust.

Methodology and Findings on Real Estate Rights

Source: CFE & EY analysis

The transfer value of the Real Estate Rights CFE possesses is not established.

Transfer Value

Even CFE is flexible in case CFE does not comply with timeframe for transferring Real Estate Rights A, the Contractor would automatically fail to meet critical milestones of the Project timeline.

Calendar

FINDINGS/CONCERNS

CFE Transmission Line Solicitation Yautepec – Ixtepec HVDC in Mexico

Page 10: RFP Comments for $1.2 BnUSD HVDC Transmission Line project in

Page 10

► Real Estate Rights from CFE: CFE obligated to provide easements. Delays attributable to CFE

provide justification for extending/suspending critical milestone dates. Any delay by the CFE in

transferring the Real State Rights A will only result in an adjustment of the Critical Events Dates, but

in no case will the CFE pay any penalty or adjust the applicable tariff or pay for any costs associated

with such delay.

► Delays associated with securing Real Estate Rights from 3rd parties (not within control of CFE) due

to no fault of Contractor may provide basis for extending critical milestone dates.

► Execution of agreement with CFE means Contractor accepts responsibility for all risks that might

influence construction and achievement of commercial operation date.

► Climatic and hydrological conditions

► Soil characteristics

► Subsoil conditions

► Applicable laws

► Reconfiguration or change in route:

► Contractor must confirm that technical specifications are suitable for construction and implementation of Project

► Contractor can propose adjustments to transmission route to resolve technical or real estate acquisition

problems; however, any adjustments do not permit adjustment to economic offer set forth in the Contract with

CFE.

► Contractor must obtain at its cost, all the Real State Rights arising from any change in the path of the

transmission lines proposed by the Contractor.

► Archeological impacts: any finds must be reported to CFE and appropriate governmental

authorities; any cost impacts or delays are the responsibility of the Contractor.

Assessment of Project Development Risks

CFE Transmission Line Solicitation Yautepec – Ixtepec HVDC in Mexico

Page 11: RFP Comments for $1.2 BnUSD HVDC Transmission Line project in

Page 11 CFE Transmission Line Solicitation Yautepec – Ixtepec HVDC in Mexico

Observations

No prequalification process

but 5 million USD to ensure

the seriousness of the offer.

Fix transmission payments:

Capacity and Operation and

Maintenance (O&M).

Limited or no room for

technological innovation or

proposed changes to

requirements.

Limitations

on

technology

“Low

demand

risk”

Initial warranty

1 4

2

CONCEPTS TO CONSIDER

Unclear National Content

requirements.

No minimum equity; only in

case the Contractor uses the

auto financing scheme, which

might be at least the same

amount as the Economic

Proposal.

Uncertainty5

It has operated, preserved,

modernized and maintained within 5

(five) years prior to the filing of the

Offer, Converter Stations , with a

voltage equal to or greater than ±500

kV, for three years or more.

Having managed the O&M within 5

(five) years prior to

the filing of the Offer, made by

another company, Converter Stations

with a voltage equal to or greater than

±500 kV; or

The Contractor can credit such

experience based on a company that

intends to be the Operator for O&M,

who has to show that within five years

prior to the submission of the offer,

has been the primarily responsible for

the O&M of at least one Converter

Station with a voltage equal to or

greater than ±500 kV.

Experience

on O&M6

Source: CFE & EY analysis

Whenever the Contractor

subcontracts with SUTERM,

the latter will sign a contract

with the Subcontractor. Once

this happens, the Contractor

will be held fully responsible

as substitute employer.

Labor relations3

Page 12: RFP Comments for $1.2 BnUSD HVDC Transmission Line project in

Page 12

Guaranteed Net Transmission Capacity

*You can have up to 10 events of temporary overload and/or transitory year.

CFE Transmission Line Solicitation Yautepec – Ixtepec HVDC in Mexico

Modes of operation, capabilities and operational conditions required of the HVDC link.

OPERATING MODETRANSMISSION CAPACITY

(%)OPERATIVE CONDITION

Bipolo with balanced current, max. room temperature, 3000 MW

Any load of continuous range of 10% to 105%

Permanent

Any load of continuous range of 10% to 130%

Temporary overload: for periods of 15 minutes, spaced every 8 hours*

A pole with metallic return, due to unavailability of a Converter Station, 1500 MW

Any load of continuous range of 10% to 105%

Permanent

Any load of continuous range of 10% to 130%

Temporary overload: for periods of 15 minutes, spaced every 8 hours*

A pole with ground return, due to unavailability of a pole line HVDC 1500 MW

Any load of continuous range of 10% to 105%

Permanent

Any load of continuous range of 10% to 130%

Temporary overload: for periods of 15 minutes, spaced every 8 hours*

Source: CFE

Page 13: RFP Comments for $1.2 BnUSD HVDC Transmission Line project in

Page 13

► Monthly Payments made by the CFE are based the charges proposed by the Contractor in its bid

and in accordance with the provisions of the Contract:

*Fees can be adjusted in a monthly and annual basis, depending on the costs incurred by the Contractor.

CFE Transmission Line Solicitation Yautepec – Ixtepec HVDC in Mexico

Payments made by the CFE to the Contractor

Source: CFE

Fix Charge for Capacity Fix Charge for O&M

• PCFCm = capacity fixed fee charge for Month

"m“ (MXP).

• CFCm = capacity fixed charge for Month "m“

(MXP/m), according the Offer

• FADDm = see subsection 3.1 in Annex 4 of the

Contract

• PCFOMm = O&M fixed fee charge for Month

"m“ (MXP).

• CFOm = operating fixed charge for Month "m“

(MXP/m), according the Offer

• FAIm = inflation adjustment factor determined

by the Index of Producer Prices ratio (PPI)

without Crude Export plus Monthly

Services at the date of Submission of

Offers and Opening of Technical Bids

• CFOm = maintenance fixed charge for Month "m“

(MXP/m), according the Offer

• FADDm = see subsection 3.1 in Annex 4 of the

Contract

Page 14: RFP Comments for $1.2 BnUSD HVDC Transmission Line project in

Page 14

José Salas

Partner - Advisory

EY Mexico

Tel: +52 (55) 1101 7329

Email: [email protected]

Rafael Aguirre

Partner - Transaction Advisory Services

EY Mexico

Tel: +52 (55) 5283 8650

Email: [email protected]

Alfredo Álvarez

Partner - Energy Segment Leader

EY Mexico

Tel: +52 (55) 5283 1179

Email: [email protected]

Rodrigo Fernández

Partner - Transaction Tax

EY Mexico

Tel: +52 (55) 5283 8666

E-mail: [email protected]

EY Professionals

Paul Roberti

Executive Director - Power & Utilities

EY Mexico

Tel: +52 (55) 5283 8666

E-mail: [email protected]

Loic LeGall

Executive Director - Power & Utilities

EY Mexico

Tel: +52 (55) 4094 6488

E-mail: [email protected]

CFE Transmission Line Solicitation Yautepec – Ixtepec HVDC in Mexico

Page 15: RFP Comments for $1.2 BnUSD HVDC Transmission Line project in

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