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1 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs

Proprietary and Confidential — External Use Only

Mexico Energy Reform &The New Electrical Energy Market

Brian Weihs, Managing Director & Head of Mexico, Kroll

February 21, 2016

New Opportunities & Challenges

Proprietary and Confidential — External Use Only

2 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs

Mexico Energy Reform – Opportunities & Challenges

� Mexico’s Energy Reform

� Electrical Energy Reform

� Current Status of the Electrical Energy Reform

� Electrical Energy Investments

� Compliance Challenges

� Land Rights Issues

� Key Compliance Takeaways

Outline

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3 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs

Mexico’s Energy Reform� Includes oil, gas and electrical energy

� Previously monopolized by state enterprises – Pemex (oil and gas) and CFE (electrical)

� The reform opened significant aspects of these industries to private enterprise and converted Pemex and CFE into commercial enterprises

� Driven by inadequate investment by the state monopolies, inefficiency of development and production, and high energy prices to industry

� Key elements: (1) separation of functions (regulation and production/distribution), (2) incentivize competition, (3) transparency

� Required constitutional reform, secondary legislation, creation of new state agencies.

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4 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs

Electrical Energy Reform� Why focus on electrical energy?

� Private investment in generation, to compete with CFE

� CENACE controls the National Electrical System and designs expansion of networks

� CFE builds and operates the networks (can contract private investors)

� Secretary of Finance (SCHP) sets consumer rates and CFE supplies consumer and commercial customers

� Wholesale and industrial supply open to market and rates set by market

� Clean Energy Certificates

� Renewable energy micro-producers can sell their energy

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5 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs

Structure of Reformed Electrical Energy Market

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6 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs

Current Status of the Electrical Energy Reform� CFE restructured (10 new subsidiaries)

� CENACE restructured and strengthened

� CRE continues as regulator (licensing, rates)

� Spot market opened on January 31

� Existing market players are the usual suspects – CFE and Fenix (JV operated by Electrical Union)

� SENER anticipates a year before the market matures

� Analysts anticipate several years

� Difficulties in licensing, uncertainty about regulations

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7 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs

What is driving electrical energy investments?Expansion of gas supply, demand for electrical energy

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8 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs

Renewable energy potentialFeasible generation scenarios to 2018 according to CENACE pre-

feasibility studies

*Graphic from PwC/CESPEDES Study Oct 2015

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9 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs

Compliance Challenges

� Continued allegations of corruption in large public bids

� Increased scrutiny

� New Transparency requirements in energy reform and in General

� New National Anti-Corruption System

� New anti-corruption prosecutor (not yet appointed)

� NAS not yet implemented – details unclear

� Application to state and municipalities - theoretical

� Same public entities

� Limited additional scrutiny

Bid Processes

Contracting processes

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10 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs

Compliance Challenges (cont’d)

� Land rights and community issues

� State and municipal issues (licenses, taxes, land-use, etc.)

� Local partners

� Security

� Uncertainty and lack of clarity

� New obligations and enforcement

� New or revamped regulators

Local Issues

Regulatory issues

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11 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs

Land rights issues� Numerous energy projects delayed or stopped by community and land issues

� La Parota hydroelectric project

� San Antonio hydroelectric project and others near Puebla

� Mareña wind project (Oaxaca)

� Morelos gas pipeline

� Challenges

� Land tenure and communal land possession (ejidos)

� Manipulation of land rights/prices

� Dependence on local partners

� Unclear processes

� International requirements of community consultation

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12 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs

Key Takeaways for Compliance

� In-depth understanding of project challenges

� Regulatory

� Key partners, participants and stakeholders

� Local environment

� Detailed mapping of compliance requirements

� Risk factors related to partners, participants and stakeholdersHolistic (challenges above)

� Implementation of compliance program from Day One (first contact)

� Expert advice and support

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13 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs

Brian Weihs

Managing Director - Mexico

bweihs@kroll.com

T +52 55 5279 7250

Thank You!