Fitch Affirms CORPOELEC's IDRs at 'CCC'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed Corporacion Electrica Nacional S.A.'s (CORPOELEC) local and foreign currency Issuer Default Ratings (IDRs) at 'CCC'. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

CORPOELEC's ratings reflect the company's strong linkage to the government of Venezuela (rated 'CCC' by Fitch), given its tight integration into the public sector, evidenced by its 100% public ownership and dependence on public funding to carry on day-to-day operations, honor financial obligations and finance capital expenditure needs.

The ratings also reflect the environment of weak administrative control under which CORPOELEC conducts its operations. The poor quality of its financial and accounting information has prevented the auditors from issuing an opinion on the company's financial statements for the period 2009 - 2014. Audited financial statements were not available for FY 2015. The company's monopolistic condition as the sole provider of electricity services in the country (generation, transmission, distribution and retail) is also factored into the rating.

The ratings incorporate Venezuela's weakening policy framework, which is the result of increased vulnerability to commodity price shocks and deterioration in fiscal and external credit metrics. 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.

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 Electric Energy (MPPEE), 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 (Petroleos de Venezuela, SA) in the form of subsidized fuel costs.

Poor Quality of Information

CORPOELEC's most recent audited consolidated financial statements are for the period 2014. During the period 2011 - 2014 the auditor, Ernst & Young, could not issue an opinion on the reasonability of the statements given the weaknesses observed in the administrative control environment and lack of accounting support to establish an opinion on key components of the company's financial statements. At the time of publication the company did not make available its audited financial statements for FY 2015.

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 company absorbed all generation assets and transmission, distribution and retail infrastructure in the country during the period 2010 - 2011, affording it an installed capacity of 28,998 MW (52% Hydro, 48% Thermo) and a client base of 6.4 million users by December 2015. CORPOELEC's monopolistic position conveys the company's strategic relevance to the country given the essential nature of the service provided and the sector's correlation with GDP growth.

Operational Results Impacted by Tariff Lag

The state's control of CORPOELEC exposes the company to political interference in its day-to-day operations. Tariffs are set by the MPPEE and are expected to continue to be below the level necessary to allow for cost recovery. Tariffs had been frozen since 2002, but the MPPEE implemented tariff adjustments during 2013 - 2014 resulting in an average tariff increase of 29.8% in 2015. In spite of these price adjustments, CORPOELEC continued to post a large operational deficit before government's current transfers, as evidenced by pro forma results for FY 2015 (negative EBITDA of Bs. 123,452 million at Dec. 31, 2015).

As a result, Fitch expects CORPOELEC's dependence on public funding to remain unchanged going forward (preserving the linkage to the sovereign) and as its standalone credit profile deteriorates over time due to low tariffs preventing the recovery of operational costs.

Sovereign Support Needed to Fund CAPEX:

By the end of 2015 CORPOELEC executed USD 2,590 million in CAPEX (USD 4.1 billion in 2014) of which 61.5% or USD 1.6 billion was associated with progress of existing generation projects (USD 2.8 billion in 2014). The low level of additional CAPEX and the progress in on going CAPEX execution, allowed CORPOELEC to incorporate 707 MW of new capacity and re-establish 2,485 MW to the SEN in 2015.

RATING SENSITIVITIES

The key rating triggers that could lead to a negative rating action include:

--A downgrade of the sovereign;

--Lack of financial support coming from the central government and its agencies in order to allow CORPOELEC to service its financial obligations on a timely basis, particularly the EDC bond maturing in October 2018 (USD650 million).

KEY ASSUMPTIONS

The continuation of the tariff lag impedes cost recovery of operations, which strengthens CORPOELEC's rating linkage to the sovereign.

LIQUIDITY

Liquidity is determined by opportune access to government transfers that allow CORPOELEC to meet operating costs, finance its capex and meet its financial obligations.

FULL LIST OF RATING ACTIONS

Fitch has affirmed CORPOELEC's ratings as follows:

--Local Currency IDR at 'CCC';

--Foreign Currency IDR at 'CCC';

--National Long-Term Rating at 'AA(ven)';

--National Short-Term Rating at 'F1+(ven)';

--EDC's USD650 million senior unsecured bond issuances due 2018 at 'CCC/RR4'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009985

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009985

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160804006223/en/

Fitch Ratings
Primary Analyst/Lead Surveillance Analyst
John Wiske, +1-212-908-9195
Analyst
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Julio Ugueto, +57 1 484-6770 x1038
Associate Director
or
Committee Chairperson
Daniel R. Kastholm, CFA, +1-312-368-2070
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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