Fitch Downgrades & Removes CGE Group's IDR from Rating Watch Negative.

SANTIAGO, Chile -- Fitch Ratings has downgraded the international scale Issuer Default Rating (IDR) in local and foreign currency of Compania General de Electricidad S.A. (CGE) to 'BBB+' from 'A-'.

In addition, Fitch has taken the following rating actions on the Chilean national scale:

CGE:

--Local bonds downgraded to 'AA-(chl)' from 'AA(chl)'.

--Commercial paper affirmed at 'F1+'.

CGE Distribucion S.A. (CGE Distribucion):

--Local bonds downgraded to 'AA(chl)' from 'AA+(chl)'.

CGE Transmision S.A. (CGE Transmision):

--Local bonds downgraded to 'AA(chl)' from 'AA+(chl)'.

Cia. Nacional de Fuerza Electrica S.A. (Conafe):

--Local bonds downgraded to 'AA(chl)' from 'AA+(chl)'.

Empresas Emel S.A. (Emel):

--Local bonds affirmed at 'AA(chl)'.

All of the above referenced ratings were assigned Stable Outlooks and removed from Rating Watch Negative.

CGE's downgrade reflects the company's increased leverage product of the acquisition of 97.94% of Emel's shares in November 2007. The increase in debt associated with the acquisition's financing further pressured credit protection measures, which were considered weak for the assigned rating categories prior to the Emel transaction.

Emel's stake was acquired by CGE for US$678 million and was financed at the holding company level through a combination of debt and equity. This was comprised of a US$300 million bank bridge loan, UF 2.9 million in local bonds (approximately US$114 million), US$265 million in a capital contribution and the remaining portion with the company's own funds. Thus, CGE's consolidated Debt to EBITDA ratio increased from 4.0 times (x) on a last twelve months basis (LTM) as of September 2007, to 4.7x as of December 2007 (assuming full year EBITDA coming from Emel). On an individual basis, CGE almost doubled its financial debt from US$441 million as of September 2007, to US$873 million as of December 2007, increasing its Debt to EBITDA Adjusted by Dividends Received ratio from 2.9x as of September 2007 (LTM), to 4.3x as of December 2007 (assuming full year of dividends coming from Emel and excluding extraordinary dividends).

It is important to note that Fitch views Emel's acquisition as strategically positive for CGE, as it provides higher concentration in the low risk and stable electric distribution and transmission businesses, increased geographical diversification within Chile and with potential business synergies. The electric distribution subsidiaries in Chile, CGE Distribucion, Conafe, Edelmag and now Emel, distribute electricity to more than 2.0 million clients in Chile, allowing the group to become the largest electricity distributor in the local market as measured by clients number.

The downgrades of CGE Distribucion, Conafe and CGE Transmision, reflect the higher pressure over these companies' cash flows due to CGE's increased leverage. The affirmation of Emel's ratings reflects the company's credit protection measures and the new controlling shareholder's credit fundamentals. CGE's IDR of 'BBB+' positively compares with the previous controlling shareholder's credit profile (PPL Corporation, 'BBB' IDR by Fitch).

In Fitch's opinion, there exists enough linkage between CGE and its subsidiaries so that a deterioration in the holding company's financial flexibility affects the credit quality of its operating companies. This reflects various factors, including CGE's control of its operating subsidiaries; CGE's reliance on dividends from its subsidiaries as a source of funds to service its individual debt; weak ring-fencing mechanisms to limit the flow of cash from the subsidiaries to the parent (such as restricted dividend payments); the financial support provided by CGE to its subsidiaries through inter-company loans; and the groups centralized management. CGE Distribucion, CGE Transmision, Conafe and Empresas Emel are rated one notch above the parent on the national scale, reflecting the structural subordination of the holding company's debt.

Fitch expects CGE's cash generation to strengthen and leverage levels to decrease starting in 2010, as a result of a combination of factors, including the improvement of natural gas-related cash flows following the start-up of the LNG Quintero Regasification project, the expected operational synergies of the electricity distribution business as consequence of Emel's purchase, the projected reduction in CGE's individual debt levels, and the effect of organic demand growth on the power distribution and transmission business. Between 2008-2009, however, the group's consolidated Debt to EBITDA ratio will average approximately 4.6x.

CGE is currently evaluating the development of the Central Nuble project, a 136 MW run-of-river generation facility which would represent an investment of approximately US$185 million. Although the project has received its environmental approval, CGE is currently appealing some of the restrictions contained therein to the Comision Nacional del Medio Ambiente (Conama). This process has delayed the project's development and could even lead to its suspension. In the event that CGE develops the Central Nuble project, however, the company's near-term leverage levels could be higher than the aforementioned 4.6x as the cash flow benefits of the investment would begin to materialize in 2011 or later, depending on the start of construction. The assigned ratings have incorporated this scenario.

CGE is a pure holding company that, through its subsidiaries and affiliates, participates in the electric and gas sector in Chile and, to a lesser degree in the Argentinean market. The electric distribution and transmission business represents CGE's main investment in terms of cash flow contribution. By December 2007, the electricity subsidiaries and affiliates of CGE distributed electricity to 2.1 million customers in Chile and 714 thousands in Argentina. CGE participates in the gas business through its 56.6% owned subsidiary Gasco, which operates the distribution, transportation and commercialization of liquefied gas, while Metrogas (51.8% owned by Gasco) participates in the natural gas distribution business in central Chile.

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.