CHICAGO & CARACAS, Venezuela - (Business Wire) Fitch Ratings has upgraded both the Foreign Currency and Local Currency Issuer Default Ratings (IDRs) for C.A. La Electricidad de Caracas (EDC) to 'BB-' from 'B+.' In addition, Fitch has assigned a 'BB-' rating to the proposed issuance of up to USD650 million senior unsecured notes due 2018 to be issued by EDC. Fitch has upgraded the long-term national scale rating of EDC to 'AAA(ven)' from 'AA-(ven)' and the short- term national scale rating to 'F1+(ven)' from 'F1(ven)'. The Rating Outlook remains Negative.
The upgrade is based upon the implicit support from both PDVSA and the government in the form of investment assistance, access to foreign currency and government assistance with capital expenditure programs. EDC is inextricably linked to both its new majority shareholder, Petroleos de Venezuela S.A. (PDVSA) and the Bolivarian Republic of Venezuela (ultimate shareholder). PDVSA currently owns 93.62% of EDC. It is important to underscore that the upgrade is based upon new ownership and support by the Venezuelan government and PDVSA. On a standalone basis, EDC's leverage can be expected to increase, and tariff increases in 2008 are uncertain. In addition, the adverse effects of inflation and currency devaluation could be expected to continue.
Since the nationalization of the Venezuelan electricity sector, EDC's senior management is now comprised of senior PDVSA management. The company has retained most operating level management from its prior ownership under U.S.-based AES Corporation. New PDVSA management has also provided high level government access that EDC didn't have under its prior AES ownership. Based on the Decree No 5,330, EDC and the rest of government electric power and energy assets will be part of the National Electric Corporation (NEC) by the year 2010. Even if some changes on the property could be in place by that time, the ultimate shareholder of the company will continue being the Venezuelan government.
EDC will, as expected, begin to pay dividends to PDVSA in the near term. We anticipate a payout ratio in the 90% to 100% range to PDVSA. Unlike PDVSA, EDC will not be expected to make payments dedicated toward Venezuelan social programs. If any contributions toward social programs are made, such contributions are expected to be modest.
EDC is a natural monopoly with high barriers to entry. EDC is a vertically integrated electricity company in Venezuela with operations in generation, transmission and distribution of electricity services to the metropolitan Caracas area. The company has over a 100-year history of supplying energy and of operational stability and efficiency.
Since the nationalization, the electricity sector is undergoing significant transition. The sector is still operating under the regulatory framework that established the last tariff increase in 2003. In the government's attempt to curb inflation, the sector has not received a tariff increase which is adversely impacting infrastructure due to lack of investment. EDC's decrease in revenues and cashflow is primarily due to the lack of tariff increase. Even if the company anticipates some tariff increase in the near tern, that tariff increase is still uncertain. The adverse effects of inflation and currency devaluation are significant and mitigate any growth in sales.
The ratings also incorporate the many adverse economic and political challenges that have pressured the credit quality of the company and Venezuelan sovereign including increasing inflation, currency devaluation and a high dependence on the petroleum sector.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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 Ratings
Gianna Bern, +1-312-368-3217 (Chicago)
Hilario Ramirez, +58 212 2863844 (Caracas)
Carlos Fiorillo, +58 212 2863232 (Caracas)
Christopher Kimble, +1-212-908-0226
(Media Relations, New York)
