Fitch Affirms CORPOELEC's IDRs at 'CCC'
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 its dependence on public funding to carry on its day-to-day operations, honor its financial obligations and finance its 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 - 2013. Audited financial statements were not available for FY 2014. 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 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 (Petroleos de Venezuela, SA) in the form of subsidized fuel costs.
Poor Quality of Information
CORPOELEC recently made available its audited consolidated financial statements for the period 2013. 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 2014.
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 28,430 MW (56% Hydro, 44% Thermo) and a client base of 6.3 million users by December 2014. 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 MPPE and are expected to continue to be below the level necessary to allow for cost recovery. Tariffs had been frozen since 2002 but recently the MPPE has implemented tariff adjustments of 137% and 112% to residential and non-residential costumers, respectively, during the period 2013 - 2014 in its efforts to try to diminish its operational deficit. In spite of these price adjustments CORPOELEC continued to post a large operational deficit before thr government's current transfers, as evidenced by pro - forma results for FY 2014 (negative EBITDA of Bs. 35.737 million at Dec. 31, 2014).
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 2014 CORPOELEC executed USD 4.1 billion million in CAPEX, of which 71.3% or USD2.785 million was spent in generation (USD1.210 million in 2013). CORPOELEC received USD 2.930 million from the sovereign and other financing vehicles to fund its capex program during 2014. Of this amount, USD1.288 million came from the 'Fondo Chino - Venezolano' (43.9% of total funding) and USD 1.097 million came from 'Fonden' (37.4%). Despite this declared high level of CAPEX execution, CORPOELEC was only able to incorporate 278 of new megawatts (MW) to the national electric system (SEN) in 2014, below the 1,950 MW brought on line in 2013.
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).
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.
KEY ASSUMPTIONS
The continuation of the tariff lag impedes cost recovery of operations, which strengthens CORPOELEC's rating linkage to the sovereign.
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'.
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