Law ending electricity rate freeze positive for Chilean generators

PRESS RELEASE from Fitch Ratings
17 May 2024

Fitch Ratings-New York/Santiago-17 May 2024: Chile’s recently enacted Law 21,667 (PEC 3) is credit positive for rated power projects and large corporate generators (gencos) by allowing for the gradual increase of electricity tariffs and alleviating working capital pressures, says Fitch Ratings. The new law also establishes a repayment schedule for the debt accumulated under the rate stabilization regime, which gives greater certainty to gencos’ recovery of lost revenues.

Electricity tariffs had been frozen under Law 21,185 (PEC 1) in 2019 and subsequently extended by Law 21,472 (PEC 2). PEC 2 also established a tariff stabilization fund managed by the Treasury to reimburse gencos for the difference between what was charged by distribution companies to end customers and the payment to gencos for the supply of electricity under long-term power sales contracts (power purchase agreements [PPAs]).

PEC 3 removes the rate freeze and updates the electricity tariffs applicable to end customers according to their consumption level and tariff period, starting in the first half of 2024 for customers with consumption above 350 KWh and in the second half of 2024 for those with consumption below this threshold. Tariffs will reflect the price paid by the distribution companies to the gencos, with no discounts applied.

The portion of the tariff that contributes to the repayment of balances accumulated under the tariff stabilization fund will now be fixed with semiannual inflation adjustments, which will allow for a more predictable payment stream to the gencos. According to the new law, the applicable tariffs for 1H24 will be published by mid-June. A delay in the publication of the tariffs beyond this year could negatively pressure gencos' margins, as gencos continue to accumulate losses under the current tariff freeze.

The debt repayment schedule for balances arising under PEC 1, PEC 2 and PEC 3 specifies that balances under PEC 1 and payment documents issued by the Treasury under PEC 2 up to USD1.8 billion would be paid no later than December 2027. Balances under PEC 2 and payment documents issued under PEC 3 will reach approximately USD2.3 billion and will to be paid between January 2028 and December 2035. With the extension of the tariff stabilization mechanism under PEC 2, the aggregate amount due to gencos under the all three laws will reach USD5.5 billion.

The enactment of the law will ease working capital constraints for energy projects privately monitored by Fitch and Inversiones Latin America Power Limitada (ILAP), the latter of which could recover up to 8% of total revenues in 2024 due to the unfreezing of tariffs and around USD16 million in PEC 1 receivables between 2025 and 2027.

In addition, these energy projects as well as corporate gencos rated by Fitch will seek to monetize their receivables through the sale of payment certificates to the Inter-American Investment Corporation (IDB Invest). Fitch believes the monetization of the receivables will also ease some pressure on working capital needs, once they start selling the certificates corresponding to PEC 3.

For certificates issued pursuant to PEC 3, Fitch expects Engie Chile S.A. (BBB/Stable) will sell approximately USD450 million, while Enel Chile S.A. (BBB+/Stable) will sell between USD450 and USD600 million. Since Colbun S.A. (BBB+/Stable) and AES Andes S.A. (BBB-/Stable) have considerably reduced their exposure to regulated PPAs as of March 2024, these companies reported USD70 million and USD195 million in outstanding balances related to the tariff stabilization fund.