Fitch Downgrades CORPOELEC's IDRs to 'B'; Outlook Negative

NEW YORK--()--Fitch Ratings has downgraded the following ratings for Corporacion Electrica Nacional S.A. (CORPOELEC):

--Foreign and local currency Issuer Default Ratings (IDRs) to 'B' from 'B+'; Negative Outlook;

--Approximately USD663 million of senior unsecured debt outstanding to 'B/RR4' from 'B+/RR4'.

Concurrently, Fitch has affirmed CORPOELEC's national long-term and short-term ratings at 'AAA(ven)' and 'F1+'.

The rating downgrade follows the downgrade of Venezuela's sovereign ratings to 'B' from 'B+' with a Negative Rating Outlook. The downgrade of the sovereign reflects heightened macroeconomic instability and delays in the implementation of policies to address rising inflation and distortions in the foreign exchange (FX) market and the deterioration in Venezuela's external accounts. The Negative Outlook signals that the lack of sustained and coherent policy adjustments could lead to further erosion in external buffers, macroeconomic and financial instability, and exacerbate the risk of social unrest given the high level of political polarization.

CORPOELEC's rating reflects the company's linkage to the government of Venezuela as a state-owned entity, combined with increased government control over business strategies and internal resources. This underscores the close link between the company's credit profile and that of the sovereign.

KEY RATING DRIVERS

CORPOELEC's ratings reflect the strong linkage to the government of Venezuela (rated 'B', Outlook Negative by Fitch) evidenced in government ownership, dependence on public funding to: i) carry on day to day operations, ii) honor financial obligations and iii) finance capital expenditure, budget control executed by Oficina Nacional de Presupuesto (ONAPRE) and the General Controller of the Republic of Venezuela. The ratings also incorporate the company's monopolistic condition as the sole provider of electricity services in the country (generation, transmission, distribution and retail), a role that highlights its strategic importance for the economy as a whole. The Negative Outlook reflects the Negative Outlook on Venezuela's 'B' sovereign rating.

Ratings Linked to the Government

CORPOELEC's credit profile reflects its strong credit linkage with the Republic of Venezuela as the latter is closely integrated within the public sector. The company's sole shareholder is the Ministry of Popular Power for Electricity (MPPE), which has a public mandate to operate the nation's electricity sector according to its planning directives and heavily depends on public sector transfers and subsidies for the sustainability of its operations. The company receives explicit support from both the Central Government, through operational and capital expenditure allocations contained in the nation's budget and from PDVSA in the form of subsidized fuel costs. Since April 2013, the company is controlled by a special committee ('Junta Interventora') appointed by the Government.

Operational Results Impacted by Tariff Scheme

The state's control of CORPOELEC renders the entity as a vehicle for public policy implementation and therefore highly exposes it to political interference in its day-to-day operations. The tariff scheme was fixed between 2002 and 2013; tariffs were recently increased, and the company expects further adjustments. These changes are intended to make the sector more sustainable, but subsidies are expected to remain in the near future. The tariff lag tends to increase CORPOELEC's dependence on public funding going forward, which will increase the linkage to the sovereign as its stand-alone credit profile deteriorates over time due to low tariffs preventing the recovery of operational costs.

Sovereign Support Needed to Fund CAPEX:

CORPOELEC executed a USD3.3 billion CAPEX in FY 2012. Sources of financing came from FONDEN, Fondo Miranda, Fondo Conjunto Chino Venezolano (FCCV) and PDVSA. Future capital expenditures will depend on public funds as the company is expected to continue posting negative EBITDA generation.

Monopolistic Position

CORPOELEC is a vertically integrated public utility in charge of the operation of the country's electricity assets and the provision of electricity services in Venezuela. The entity was created in 2007 when the reorganization of the electricity sector took place, reserving the rights to operate the electricity sector to the State. The entity perfected a merger by absorption of all generation assets and transmission, distribution and electric power retail infrastructure in the country by the end of 2011, affording it an installed capacity of 25,890 MW and a client base of 6.1 million users by December 2012. CORPOELEC's monopolistic position conveys the company strategic relevance to the country given the essential nature of the service provided and the electricity sector's correlation with GDP growth.

RATING SENSITIVITIES

The key rating triggers that could result in a downgrade include a downgrade of the sovereign. Also lack of the needed government support for CORPOELEC's to carry its operations, service its financial obligations and fund its capex could result on a negative rating action.

Although unlikely, CORPOELEC's ratings could be positively affected by an upgrade of the Sovereign.

CORPOELEC is a 100% government owned company created by virtue of the Decree # 5.330, with rank of Organic Public Law, published on July 31, 2007. This decree mandates the nationalization and reorganization of the Venezuelan electricity sector by centralizing all generation, transmission and distribution assets in order to improve coordination in the use of primary energy sources, generation dispatch and general infrastructure use, thus ensuring the accomplishment of the Government's strategic plans for the sector and the economy as a whole.

Additional information is available at 'www.fitchratings.com' and 'www.fitchvenezuela.com'

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=825471

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Contacts

Fitch Ratings
Giancarlo Rubio, +1-212-612-7899
Associate Director
Fitch Ratings, Inc.
One State Street Plaza,
New York, NY 10004
or
Secondary Analyst
Julio Ugueto, +571 326-9999 ext. 1038
Associate Director
or
Committee Chairperson
Lucas Aristizabal, +1-312-368-3260
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Giancarlo Rubio, +1-212-612-7899
Associate Director
Fitch Ratings, Inc.
One State Street Plaza,
New York, NY 10004
or
Secondary Analyst
Julio Ugueto, +571 326-9999 ext. 1038
Associate Director
or
Committee Chairperson
Lucas Aristizabal, +1-312-368-3260
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com