Fitch Ratings has affirmed Alupar Investimento S.A.'s (Alupar) Foreign Currency (FC) and Local Currency (LC) Issuer Default Ratings (IDRs) at 'BB' and 'BBB-', respectively.

Fitch has also affirmed the Long-Term National Scale Rating at 'AAA(bra)' for Alupar and its senior unsecured debenture issuances. The Rating Outlook for the IDRs is Negative, while the Rating Outlook for the National Scale Rating is Stable.

Alupar's ratings reflect its low business risk associated with the combination of its operations in the electric energy transmission and generation segments, as well as a positive asset base diversification, which dilutes operational risks. The transmission segment is characterized by high EBITDA margins and great predictability of operating cash generation. On the generation segment, Fitch expects the company to present robust performance and positively manage its exposure to the current hydrological risk.

The rating action also considers the reduction of the group's construction and financing risks in the development of its new transmission lines as the projects obtained most of the pending environment licensees and credit lines during 2019 and 2020, with start of operation of three projects in 2020. Based on the delivery of the projects and the associated revenue and cash generation, Alupar should return its credit metrics to levels consistent with the current IDRs. Fitch forecasts consolidated adjusted net leverage of 4.0x in 2021 and below 3.5x from 2022 on, after the expected peak at 4.7x in 2020 due to capex concentration.

The holding company Alupar also presents robust credit metrics and is in a position to appropriately meet its debt service obligations and forecast equity contributions to projects under development through current cash position, expected dividends to be received and proved financial flexibility. The new investments will offset the drop in revenues and operating cash generation from some older transmission line concessions that will occur in the coming years.

Alupar's FC IDR is constrained by Brazil's country ceiling of 'BB', as the company generates the large majority of its revenues in local currency (BRL), with no relevant cash and committed credit facilities abroad. Fitch also considers the three-notch difference between the company's LC IDR and the sovereign rating as appropriate due to the regulated nature of the power sector. As a result, the Negative Outlook for the FC and LC IDRs follows the same Outlook of Brazil's 'BB-' sovereign rating.

The Stable Outlook on the National Scale Rating is based on Fitch's view that the company will be able to strengthen its already diversified asset base while preserving a robust financial profile, compatible with companies in the industry in the same rating level. Fitch believes Alupar's robust cash position and high financial flexibility will support the group to manage the expected negative FCF, associated with the relevant investment cycle in the period 2020-2021.

KEY RATING DRIVERS

Low Business Risk: Alupar's ratings incorporate the group's low business risk associated with the combination of its activities in the transmission and generation of electricity. In transmission, concessions are based on long-term contracts and revenue is generated through the availability of its 24 operating assets, without demand risk and annually adjusted for inflation. The group also has adequate customer diversification and receivables structure that includes guarantees. Fitch considers positive the fact that this segment will continue to be the main business of the company. Fitch sees energy transmission as the lowest risk in the electric energy sector and it concentrates 65% Alupar's ongoing investments from 2021 to 2023.

In the generation segment, long-term contracts for the sale of a large part of the assured energy of the assets and the partial protection for hydrological risk also create an expectation of strong operational cash generation. According to Fitch's projections, the relevance of this segment in the group's EBITDA, estimated at 25% for 2021, will reduce after the conclusion of transmission lines under construction, mainly from 2022 on. Alupar is a medium player in this segment in Brazil with installed capacity of 527 MW in operational phase and 306 MW under construction.

Strong Financial Profile: Fitch believes that consolidated financial metrics will be gradually consistent with the current IDRs if no new project is added. Considering the current portfolio of projects under development, Fitch estimates a return to the historical conservative credit ratios after punctual increase in the group's net leverage during the elevated investment cycle in 2019 and 2020 - with the associate increase in operating cash generation mainly from 2021 on. In the LTM ended on Sept. 30, 2020, the adjusted net debt-to-EBITDA ratio was 4.8x, according to Fitch's criteria, and should gradually decrease to 4.0x in 2021 and 3.3x in 2022, after the peak of 4.7x in 2020.

Manageable Negative FCF: On a consolidated basis, Fitch expects Alupar to present negative FCF of BRL2.1 billion in 2020 and BRL234 million in 2021, pressured by disbursements of the investment program of approximately BRL3.0 billion in the period and by the dividend distribution corresponding to 50% of net income. Fitch estimates consolidated dividend distribution of BRL360 million in 2021 after BRL682 million in 2020. Considering the conclusion of the projects under construction mainly in 2021, the group's annual cash flow from operations (CFFO) is expected to increase to BRL945 million in 2021 from BRL750 million in 2020. Alupar should boost its net revenues to BRL2.5 billion, EBITDA to BRL2.0 billion and CFFO to BRL1.2 billion in 2022, which will strengthen the FCF to around BRL315 million.

Positive Asset Recomposition: Fitch believes Alupar will be able to compensate expected revenue and EBITDA reductions coming from part of its current portfolio through its new projects. Concessions for transmission assets granted prior to 2006 include a 50%-PAR reduction once the concession completes 15 years of operation. Considering the company's proportional consolidated PAR of BRL652 million from operational assets in the LTM ended in Sept. 30, 2020, BRL123 million is exposed to 50%-PAR reduction, with expected gradual revenue decline of BRL62 million until 2023 corresponds to 9% of total. On the other hand, the seven projects under development at the same date should add BRL575 million to group's revenue until 2023. Out of this, two projects with PAR of BRL197 million started its operation in October 2020, and other BRL84 million is expected to start in February 2021.

Reduced Construction Risk: Alupar made relevant progress in mitigating the risks associated with the development of its transmission projects during 2019 and 2020. Out of the nine new projects in the current investment cycle, five of them started its operations, being three in 2020 and two in 2019. The company already concluded 85% of the total investments in these nine projects, and the remaining BRL712 million will occur in 2021. Licensing is pending in only one project, located in Colombia, and is scheduled for the first half of 2021. Except for the project in Colombia, Alupar has already contracted BRL4.0 billion financing structure for the other eight special purpose entities (SPEs). This allows the completion of the projects before the contractual deadlines.

DERIVATION SUMMARY

Alupar's financial profile is stronger than Latin American peers Interconexion Electrica S.A. E.S.P. (ISA; LC and FC IDRs BBB+/Negative) and Transelec S.A. (Transelec; LC and FC IDRs BBB/Stable), and Consorcio Transmantaro S.A. (CTM; LC and FC IDRs BBB/Stable). All of them have low business risk profiles, predictable revenues and robust cash flow generation, which is a characteristic of power transmission companies operating in a regulated industry. The main differentiation in the IDRs of Alupar and those companies is the country where they generate their main revenues and the location of assets. While its peers are located in investment-grade countries, Alupar's ratings are negatively affected by Brazil's country ceiling of 'BB'. In the case of Transmissora Alianca de Energia Eletrica S.A.'s (Taesa; FC IDR BB/Stable), also located in Brazil, the company has a diversified portfolio of transmission companies and a robust financial profile, with some expected increase in leverage metrics due to investments.

KEY ASSUMPTIONS

The main assumptions of Fitch's base scenario for the issuer include:

RAPs adjusted annually by inflation, with a 50% reduction for transmission assets whose concession agreement contemplates this movement after the 15th year of operation;

Generation scaling factor of 0.81 from 2021 to 2023;

Operating expenses adjusted by inflation;

Distribution of dividends equivalent to 50% of net income;

Total investments of BRL4.0 billion during 2020-2023 period and absence of acquisitions and/or new investments out of the current portfolio.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

The Rating Outlook could stabilize as result of a revision to Brazil's Sovereign ratings to Stable from Negative.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Deterioration in Alupar's consolidated financial profile, with net leverage above 3.5x on a sustainable basis;

Funds from operations (FFO) adjusted net leverage above 4.0x on a sustainable basis;

Total debt/dividends received over 3.0x and net debt/dividends received over 2.0x at the holding level;

Investments in projects with risks significantly higher than existing ones and weak financial structures;

A more challenging environment in Brazil's power sector;

Negative rating actions on Brazil's sovereign rating may also pressure Alupar's IDRs.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Strong Liquidity Profile: Fitch believes that Alupar group will continue to benefit from a high liquidity position and broad access to the banking and capital markets, in order to adequately finance the expected negative FCF in 2021. On a consolidated basis, the group's cash position of BRL2.4 billion at the end of September 2020, covered its short-term debt of BRL902 million by 2.6x. Fitch also expects that the operating cash generation of new transmission lines will be adequate to service their debt. On Sept. 30, 2020, total consolidated adjusted debt of BRL8.9 billion mainly consisted of debentures issuances (BRL6.4 billion, or 71%) and Banco Nacional de Desenvolvimento Economico e Social (BNDES; BRL974 million, or 11% of the total).

The agency expects the holding company to use its significant cash reserves to supply the needs of its projects, maintaining a debt maturity schedule compatible with its cash flow expectations. As of Sept. 30, 2020, its cash position of BRL850 million (36% of the consolidated amount) was slightly higher than the total debt of BRL822 million. The dividends inflow is its main source of funds, with BRL523 million received in the LTM ended on Sept. 30, 2020. In the same period, the total debt-to-received dividends ratio was 1.6x. Alupar should be able to maintain the net debt-to-received dividends ratio below 1.5x during the investment cycle until 2022.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

Rating ActionsENTITY/DEBT	RATING		PRIOR
Alupar Investimento S.A.	LT IDR	BB 	Affirmed		BB
	LC LT IDR	BBB- 	Affirmed		BBB-
	Natl LT	AAA(bra) 	Affirmed		AAA(bra)

senior unsecured

Natl LT	AAA(bra) 	Affirmed		AAA(bra)

View additional rating details

Additional information is available on www.fitchratings.com

(C) 2021 Electronic News Publishing, source ENP Newswire