Latin American Power Overview Outlook, Financial Performance, Regulatory Risk and Investments September 2019 Corporates Compendium Power / Latin America Table of Contents Latin American Power Overview ......................................................................................................................................... 2 Regulatory Risk Assessment .............................................................................................................................................. 3 Generation .......................................................................................................................................................................... 3 Installed Capacity ......................................................................................................................................................... 3 Growth and Expansion ................................................................................................................................................. 4 Power Generated ......................................................................................................................................................... 5 Distribution .......................................................................................................................................................................... 5 Corporates .......................................................................................................................................................................... 7 Ratings Observations ................................................................................................................................................... 7 Financial Performance ................................................................................................................................................. 7 Capital Market Activity and Refinancing ....................................................................................................................... 8 Electricity Profiles Argentine Electricity Sector (Regulatory Uncertainty, Inefficiency and FX Risk Cloud Outlook) ........................................ 11 Brazilian Electricity Sector (Growth in Demand and Low to Moderate Sector Risk Will Support New Investments) ......... 28 Chilean Electricity Sector (Shifting Dynamics Set the Pace for a Greener Energy Matrix) ................................................ 40 Colombian Electricity Sector (Stable Outlook with Long-Term Risks for Generation Companies) .................................... 56 Costa Rican Electricity Sector (Generation Expansion on Hold) ....................................................................................... 74 Dominican Republic Electricity Sector (Energy Matrix Evolving but Sector Still Vulnerable to High Fuel Prices) .............. 81 Mexican Electricity Sector (Private Investments Needed, Despite Rhetoric) ..................................................................... 94 Panamanian Electricity Sector (Infrastructure Investments and Natural Gas to Reduce Price Volatility) ........................ 108 Peruvian Electricity Sector (Challenging Market Conditions to Continue) ....................................................................... 124 Latin American Power Overview Latin American Power Overview 1 September 18, 2019 1 Corporates Compendium Power / Latin America Latin American Power Overview Outlook, Financial Performance, Regulatory Risk and Investments Stable Ratings Outside of Argentina: Latin American electric corporates outside of Argentina (CC) have a Stable rating trajectory, as leverage steadies amid slowing investments, with a median rating of currently ‘BB+’. The majority of issuers hold Stable Outlooks at 65%, with 26% holding Negative Outlooks and 9% holding Positive Outlooks. This would indicate a downgrade/upgrade ratio of 3:1 in the next 12–24 months compared with a downgrade/upgrade ratio of 5:1 in 2018 for the sector. The average rating in Fitch Ratings’ portfolio, excluding Argentina, is ‘BBB–’ shifting toward ‘BB+’ as coverage of Argentine Country Ceiling (CCC) constrained issuers increased steadily since 2017. Stable Credit Metrics: Fitch expects Latin American electric corporates’ median gross leverage, as measured by total debt/EBITDA, will remain stable at approximately 4.0x in 2019, in line with the 4.1x median reported for 2017 and 2018. We estimate consolidated gross revenue in U.S. dollar terms for rated electric corporates will decline by 2.2% in 2019, after a modest increase of 0.7% in 2018. Consolidated EBITDA margins remained flat at 29% in 2018 when compared with 2017 margins. Aggregate capex, as a percentage of revenue, is expected to be inline by an average of approximately 14% in the next two years after slowing to 13% in 2018 down from 15% in 2017. Regulatory Risk: Latin American countries, on average, have a median regulatory score supportive of a ‘BBB’ rating. The highest overall score is held by Chile (A/Stable) followed by Peru (BBB+/Stable) and Colombia (BBB/Negative). Fitch has seen positive overall developments in improving transparency and a movement toward a more independent regulatory environment in countries such as Colombia and Peru. Argentina has the lowest overall regulatory score of ‘B’, representing a regulatory-based system where not-for-profit Compania Administradora del Mercado Mayorista Electrico or CAMMESA, which is subsidized by the government, is the sole off-taker of generation companies. Ripe for Investment: Fitch estimates aggregate installed capacity in Latin America will increase by 7% to 364GW in 2021 from 341GW in 2018. The largest growth in the region is from nonconventional renewable energy, defined as wind and solar, which is expected to reach 8% of total installed capacity by 2021, with the largest investment plans in Chile and Argentina. We believe more investment is needed, particularly in Argentina, where approximately 35% of installed capacity is inefficient, and in Chile, which laid out a clear plan to decarbonize its generation matrix. Brazil (BB–/Stable) remains a hotbed for renewable investment with renewables comprising 10% of total installed capacity and a pipeline of 2.3 GW currently under development. Heightened Political Risk: Fitch believes uncertain political environments continue to inhibit investment in some countries, particularly Argentina and Mexico (BBB/Stable). The primary presidential election results in Argentina sparked a negative market reaction stressing the Argentine peso and increasing the probability of regulatory reforms, which can have an adverse effect on issuers. In Mexico, the current administration seems determined to preserve the government’s role in controlling the sector through CFE, dampening reform efforts toward a more competitive and reliable system. The shift in policy priority and the decision to cancel the clean energy auctions raised concerns regarding CFE’s ability to fund these projects at the pace required to maintain a balanced system with healthy reserve margins and lower prices. Electricity Demand Versus GDP Growth Real GDP Growth Demand Growth (%) 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2011 2012 2013 2014 2015 2016 2017 2018 Source: Fitch Ratings, Regulatory Filings. Latin American Power Overview Latin American Power Overview 2 September 18, 2019 2 Corporates Compendium Power / Latin America Regulatory Risk Assessment Fitch has assessed the regulatory risk among countries scoring each market’s independence from the central government, timeliness of cost recovery, recourse of law, transparency of tariffs and balance between end users and companies assigning a score consistent with our ratings scale from ‘A’ (highest) to ‘CCC’ (lowest). The median score was ‘BBB’ with each variable comfortably in the ‘BBB’ category except independence from the central government with a median score of ‘BB’. Government intervention remains a key theme limiting most markets. This is particularly the case in Argentina and Mexico where the government is actively involved and subsidies to the system make off-takers highly dependent on the government. In Mexico, Fitch views the regulatory framework as highly dependent on the central government, which maintains the planning and control of the electric system and the provision of all power activities as an indispensable public service. We consider Argentina’s regulatory risk the highest among rated peers. The country has the lowest overall regulatory score given the high level of government intervention and a history of government delays in payments and implementing social programs designed to benefit end users. Chile has the highest overall score with ‘BBB’ remaining the archetype which other countries have referred to when developing more competitive and independent regulatory systems. Chile stands out with an ‘A’ score in both balance between end users and companies and timeliness of cost recovery, when compared with Argentina, which has a ‘CCC’ score in independence from the central government. Latin American Regulatory Score Median Brazil, Colombia, Chile Argentina Independence from Central Government 5 4 3 Timeliness of Cost Recovery 2 Balance Between End Users and Companies 1 0 Recourse of Law Transparency of Tariff Note: 1.0 = A; 2.0 = BBB; 3.0 = BB; 4.0 = B; 5.0 = CCC. Source: Fitch Ratings. Generation Installed Capacity Total aggregate installed capacity in Latin America stood at 341GW in 2018 representing a CAGR increase