El Salvador’s Electricity Sector

Fitch Special Report: Industry Risks and Challenges for the New Government.

Friday, September 4, 2009

Overview
El Salvador’s electricity sector exposure to government intervention and regulatory uncertainty during recent years has affected the financial performance of the companies in the sector. The impact of government intervention has been somewhat mitigated by recent measures taken by the current administration to eliminate energy
subsidies and to free up electricity tariffs so that distribution companies can recover
electricity costs from end users rather than from the government. El Salvador has recently announced the elimination of subsidies for end users with electricity consumption over 99 KWh. These changes are expected to improve the sector companies’ financial profile by reducing their dependence on government transfers. On the other hand, the elimination of energy subsidies may lead to an increase in the price
paid by the final user, which, coupled with deteriorating economic conditions, could lower demand as well as distribution companies’ revenues and cash generation.

The lack of investment in renewable energy generation has led to a system that heavily relies on thermoelectric generation. As of May 2009, 46% of the total electricity generation in the country was provided by thermoelectric sources. This, combined with the high hydrocarbon price volatility evidenced during the last three years resulted in very high spot market prices and high electricity prices to final users. However, the latter were somewhat mitigated by general government subsidies granted by the previous administration, which kept end users’ tariffs frozen between June 2006 and January 2009. In February 2009, due to the stress on public finances created by this
hefty subsidies program, the government decided to eliminate the general subsidies and only maintain those for users with consumption below 99 KWh per month. The current administration’s challenge is to prioritize electricity subsidies and to promote new investment in renewable energy generation.

More on this topic

Fitch Downgrades AES El Salvador's Rating

July 2015

After lowering the country's sovereign debt rating, the ratings agency also lowered the rating for the electricity company, anticipating difficulties in collecting payments from the Salvadoran government subsidies.

From the press release by Fitch Ratings:

Fitch Ratings-Monterrey-14 July 2015: Fitch Ratings has downgraded AES El Salvador Trust II's (AES El Salvador) foreign and local currency Issuer Default Ratings (IDRs) to 'B+' from 'BB' and revised the Rating Outlook to Stable from Negative. In addition, Fitch has downgraded the company's USD310 million senior unsecured notes due 2023 to 'B+/RR4' from 'BB'.

Panama: $151 Million Electricity Contract Canceled

June 2015

The State Power Generation Company (Empresa de Generación Eléctrica) has cancelled the contract with AES Panama to supply thermal energy, indicating the excessively high cost of supplying electricity.

The early termination of the contract comes just three months after the company AES Panama began the tests to begin connecting the barge's electrical system .At the request of Egesa, the Varela administration approved the cancellation of the contract, invoking Article 73 of the Public Procurement Law 22, which allows "... the unilateral termination of contract in the public interest."

Fitch Downgrades AES El Salvador's Ratings

May 2010

Fitch Ratings has downgraded AES El Salvador Trust's foreign and local currency Issuer Default Ratings (IDRs) to 'BB' from 'BB+'.

The rating action applies to US$300 million of Political Risk Protected (PRP) bond issuance due Feb. 1, 2016. Concurrently, Fitch has downgraded Compania de Alumbrado Electrico de San Salvador, S.A.

End of energy grant is agreed in El Salvador

July 2008

The private sector and the Executive agreed to eliminate the grant on electric energy for commercial and industrial users.

The grant will be eliminated in three phases, with the first one on August 12, the second on May 12, 2009, and the last on October 12, 2009. Phase one will take out 40% of the grant, while the next two phases will eliminate 30% each.

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