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Early Coal Phase Out Legislation Puts Pressure on Some Chilean Gencos

Fitch Ratings views negatively the proposed legislation coming from the Chilean deputy chamber to anticipate a complete coal phase out by 2025. If the legislation is ultimately approved and finally enacted into law, single coal-based units such as Guacolda Energia SpA (Guacolda) (B/Stable) and Empresa Electrica Cochrane SpA (Cochrane) (BBB-/Stable) would be negatively impacted. Guacolda is already facing a challenging situation, due a declining contractual position that will increase its exposure to the spot market.

Fitch’s base case for Guacolda assumes an increase in leverage to 5.4x in 2021 and remaining in that range over the rating horizon. Fitch expects no dividends through 2025, so the company can strengthen its liquidity to be better positioned to refinance and partially repay its outstanding US$500 million bond due 2025.Even with the declining contractual position, Guacolda has existing PPA’s expiring through 2025 to 2030 that will pressure the company’s eventual refinance and future cash flow generation. While Cochrane’s PPAs average 14 years with mining counterparties, these contracts include fixed monthly charge payments and full pass-through of variable costs. Cochrane has long-term PPAs that go beyond 2025, the current motion will put pressure on how those PPAs will continue to be served, without incurring in interruptions that could divert Fitch’s assumptions that Cochrane’s leverage will decline below 5.0x by 2022 combined with debt service coverage ratio (DSCR) of 1.5x during the life of the notes.

The current proposed motion will put additional pressure on AES Andes S.A (AES Andes) (BBB-/Stable) Greentegra strategy and its expansion plan, as the company’s nearly one-third of installed capacity in Chile at 3.2GW is mostly concentrated in coal. AES Andes plans to add 2.3GW from renewable energy sources until 2024 while gradually reducing the energy dispatch from its coal units until the original decarbonization agreement expires in December 2040.

The early anticipation is credit neutral for the remaining Generation companies among Fitch’s rated portfolio as these Gencos have a diversified generation asset base. Enel Chile S.A. (A-/Stable), will be the first company in the country to fully decommission coal by May 2022. While Engie Energia Chile S.A. (BBB+/Stable) will disconnect units 14 & 15 from Tocopilla in December 2021 and two units from Mejillones in December 2024. Engie’s remaining coal capacity will be reconverted to biomass and natural gas during 2025. Colbun S.A. (BBB+/Stable) has only one coal-based unit, among its generation fleet that represents approximately 6% of the company’s installed capacity.

As for Empresa Electrica Angamos SpA’s (Angamos) (BBB-/Stable), the early termination of its PPAs with BHP Group (A/Stable) has accelerated the company’s decommission, already incorporated in Fitch’s base case assumptions. Angamos’ remaining PPAs will be served through AES Andes with renewable sources, starting in 2022 until it’s expiration in 2037. Angamos will fully delink all its PPAs from the physical 558MW coal-fired plant, which will remain as a back-up unit to ensure the reliability of the country’s national grid.

Fitch estimates the initiative would increase the marginal cost in the Chilean electric system between 25% and 30% during peaking hours, as the system would need to cover the high demand with less efficient and more expensive diesel units presenting marginal costs in the range of US$110 and US$120 per MW hour. To avoid high marginal costs or potential shutdowns in the system, it is critical to accelerate the expansion of the transmission system with new infrastructure to evacuate the country’s increasing energy generation coming from renewable sources, especially the Kima-Lo Aguirre transmission line, which is expected by 2028.
Source: Fitch Ratings

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