Fitch Affirms C.A. Electricidad de Caracas's IDR at 'B+'

CARACAS, Venezuela--(BUSINESS WIRE)--

Fitch Ratings has affirmed C.A. La Electricidad de Caracas's (EDC) local and foreign currency Issuer Default Ratings (IDRs) at 'B+' as well as its national scale long- and short-term ratings of 'AAA(ven)' and 'F-1+(ven)', respectively. Fitch also affirms EDC's approximately USD663 million senior unsecured debt issuance due 2014 and 2018 at 'B+/RR4'.

The Ratings Outlook is Stable.

EDC's credit quality reflects the company's linkage to the government of Venezuela, as its majority shareholder is Corporacion Electrica Nacional S.A. (CORPOELEC), a public entity ascribed to the Ministry of Popular Power for Electricity, in charge of operating Venezuela's electricity system. CORPOELEC took control of EDC following the transfer of 93.62% of EDC's stock to CORPOELEC from Petroleos de Venezuela S.A. (PDVSA), the national oil company. This linkage is further heightened by the increasing government control of operations and the subsidies the latter provides to finance EDC's operational costs and capital expenditures.

Ratings Linked to the Government:

EDC receives explicit support from both PDVSA and the government, and likely CORPOELEC, in the form of subsidized fuel costs, access to foreign currency and government assistance to cover operating losses and capital expenditures. As previously disclosed the Venezuelan government spun-off EDC from PDVSA and into a stated owned entity called CORPOELEC. The transfer of the shares is viewed as neutral for EDC as it is now consolidated in to a larger integrated energy company although with potentially equally negative operating margins and dependence on similar support.

The 2018 bond issue covenants allow for the eventual consolidation of EDC into a third party, CORPOELEC, as long as the latter assumes, by supplemental indenture, all of EDC's obligations under current indenture and the notes.

Margins Remain Negative:

EDC's profitability has significantly deteriorated as a result of a tariff freeze since 2002 and increased financial burden associated with its new operational responsibilities in Aragua, Miranda and Nueva Esparta states. The company's financial metrics have remained weak due to the tariff freeze and inefficient generation units. Furthermore, high inflation has contributed to higher costs, further impacting profitability margins. EDC will likely continue to report operating losses as a result of no expected changes in tariffs. However, a potential reduction in operating losses could come from focusing on decreasing non technical losses (electricity theft) and improving collections, both from the public and private sectors.

During the LTM ended Sept. 30, 2011, EDC's EBITDA marginally improve but was still negative USD68 million from negative USD148 million in fiscal 2010. The company reported positive Cash Flow from Operations (CFFO) of USD209 million during the same period, primarily as a result in an increase in other accounts payables due to the increasing capital expenditures in new capacity. Fitch does not expect the government to implement a tariff adjustment in the short term, and as such EBITDA margins will continue to deteriorate, increasing its dependence on government transfers to meet its cash needs.

Sovereign Support Needed to Fund CAPEX:

As of the last 12 months ended Sept. 30, 2011, Cash Flow from Operations (CFO) was significantly insufficient to cover the company's capital expenditures of USD889 million. As a result, EDC received USD 396 million in government financing, mostly coming from CORPOELEC, 'El Fondo Conjunto Chino Venezolano (FCCV)' and FONDEN, a special Fund that has channeled funds in the past to respond to the electricity crisis experienced during the first semester of 2010.

Going forward, the continuing support of the Venezuelan government will be key to maintaining the financial viability of the electricity sector in general and of EDC's assets in particular as CORPOELEC is expected to continue to receive additional funding through the execution of the national budget to finance and implement the government's sector initiatives.

Liquidity improves moderately:

As of Sept. 30, 2011, EDC had USD100 million of cash on hand; an improvement over liquidity registered at the end of FY2010 (USD 71 million ). This result is explained in part by cash subsidies received from the government to cover operational costs but could revert in the short term if the continuation of the tariff lag and weakening generating capacity further diminish operating results, thereby putting pressure on organic cash generation. EDC's total debt was USD663 million by September 2011, comprised primarily of the USD650 million notes due in 2018, making debt maturities quite manageable in the medium term.

Additional information is available at 'www.fitchratings.com' and 'www.fitchvenezuela.com' . The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011)

--'Country Ceilings' (Aug. 12, 2011)

--'Parent and Subsidiary Rating Linkage' (Aug. 12, 2011)

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Country Ceilings

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647869

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210

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