Mexico’s state electric utility (CFE) has agreed to pay US $300 million to a Goldman Sachs entity to settle a dispute over a debt triggered by a spike in gas prices after a freak winter storm in 2021.
The agreement “significantly reduced the economic and operational scope of the dispute,” according to the news agency Bloomberg News, ending the case before the London Court of International Arbitration.
Goldman had argued that CFE owed roughly US $400 million, but the electric utility agreed to acknowledge a reduced portion of that bill, in a deal that hands a big win to the Wall Street powerhouse’s trading desk. The deal could leave Mexican households footing the bill, if the electrical utility passes the cost on to its customers.
In what Bloomberg termed a routine deal that turned in Goldman’s favor, the case dates back to a natural gas trade that spun out of control when a deep freeze descended on Texas in February 2021.
The harsh weather forced Texas to cut off fuel exports to Mexico, which relies heavily on natural gas imports to feed its power plants.
Power suppliers and traders struggled to find fuel to meet delivery obligations and prices skyrocketed. As Mexican households faced power outages, the CFE had no choice but to deal with the dramatic price hikes during the freeze, as prices reached almost 100 times the usual daily rate.
The case hinged on a contract between CFE and Goldman International that dates back to August 2017, Bloomberg reported.
As part of the arrangement with CFE’s U.S.-based unit, Goldman’s obligations were tied to a monthly index of gas prices (which was largely unchanged during the freeze), while CFE was exposed to daily rates at certain hubs, one of which saw extreme price surges.
On the hook for an unusually large debt, CFE argued that it shouldn’t have to fulfill the contract because of the unforeseeable, extreme price action, Bloomberg reported. CFE also claimed the traders who initiated the deal through CFE’s subsidiary were not authorized to do so.
Scrambling to avoid the unexpectedly hefty payment, CFE fired its own staff and accused Goldman of lacking financial sophistication because it signed the contract with a U.S.-based subsidiary rather than CFE itself.
Bloomberg reported that Goldman’s senior-most executives sought to force through a resolution. The spat also attracted the attention of then-Mexican President Andrés Manuel López Obrador, a strong supporter of the CFE.
Back in 2021, Bloomberg News speculated that since Goldman’s interests in Mexico were expanding, it might be unwilling to push the dispute too far. On the other hand, if CFE refused to pay, it said, the utility risked becoming persona non grata on Wall Street, a position that would severely complicate its future business possibilities.
After three years of legal disputes and arbitration in London, Goldman agreed to accept the reduced payment this week.
With reports from Bloomberg News, El País, Imagen Radio and El Financiero
