Covid-19 weakens Central American, Caribbean utility liquidity

Fitch Ratings-Chicago/San Jose-20 July 2020.- Sharply lower electricity demand and government programs recently introduced to provide end-users relief during the coronavirus pandemic are stressing cash flows and liquidity for some generation companies (GenCos) and distribution companies (DisCos) in Central America and the Caribbean, says Fitch Ratings. Adequate cash, laddered debt maturities, working capital management and lines of credit should help alleviate the pressure for some issuers.

Electricity demand declined 13% across all of Central America and the Dominican Republic yoy in May. We project demand to remain weak, declining about 10% in 2020 versus 2019. In El Salvador, Guatemala and Panama, specifically, electricity demand fell 16%, 20% and 11%, respectively, yoy in May. The price of electricity in wholesale markets also declined. Spot prices dropped 60% yoy in May to USD43.20/MWh in Panama, 59% to USD67.40/MWh in the Dominican Republic, 55% to USD54.40/MWh in El Salvador and 43% to USD49.80/MWh in Guatemala.

Measures to protect consumers from losing access to electricity constrained DisCos’ cash flow and, in turn, slowed DisCos’ payments to GenCos. Panama declared a four-month moratorium on payments for consumers affected by the virus pandemic and lowered power costs for residential users consuming less than 1,000kWh. These measures were extended to September 2020.

Guatemala’s government barred DisCos from disconnecting customers during the pandemic and is allowing customers to pay off arrears over 12 months with no additional fees. The government temporarily increased subsidy payments for users who consume less than 300kWh to mitigate the effects on DisCos. In El Salvador, the relief program allowed end-users to temporarily delay electricity payments if they consume 250kWh or less and are affected financially by the coronavirus.

DisCos AES El Salvador Trust II (B-/Negative) and Panama’s Elektra Noreste (BBB/Stable) are mitigating the effect of payment arrears from end-customers by managing working capital. Cash on hand plus delayed payments to GenCos should help support liquidity, assuming government relief programs are not extended. However, ENERGUATE Trust’s (BB-/Stable) liquidity may be challenged due to the open-ended nature of Guatemala’s payment holiday.

Liquidity may be less of an issue for regional GenCos AES Panama (BBB-/Stable) and Instituto Costarricense de Electricidad y Subsidiarias (B/Negative). AES Panama has a favorable debt maturity profile and cash flow generation that is relatively stronger than peers.

The utility borrowed USD25 million from its credit lines in anticipation of slower receivables from DisCos due to the pandemic. Instituto Costarricense de Electricidad y Subsidiarias’ cash balance of CRC30.5 billion as of May 2020 was enough to cover 2020 debt maturities.

Conversely, Investment Energy Resources’ (B/Rating Watch Negative) high exposure to state-owned Empresa Nacional de Energia Electrica (ENEE) in Honduras compromised liquidity at the GenCo’s operating companies. ENEE, Investment Energy Resources’ main counterpart, has a stressed financial profile which is resulting in overdue receivables.

AES Andres (BB-/Negative) and Empresa Generadora de Electricidad Itabo (BB-/Negative), which operate both DisCos and GenCos, face working capital pressure as falling collection rates and sizable subsidies for end-users created dependence on government transfers. Delayed transfers add volatility to cash flows.

Restrictions on travel and economic activity have essentially shut down tourism, which accounts for an average of 8% of GDP across most of the region. In recent weeks, governments are beginning to gradually lift some lockdown measures, but the process was stalled and remains subject to reversal.

Panama re-imposed a curfew on the capital after a spike in infections but allowed the resumption of some activities including construction and non-metal mining. The country is also instituting weekend quarantines with staggered weekday working hours. El Salvador’s presidential office suspended the second phase of reopening until further notice, due to the rising number of infections.