Taesa Transmissora Aliança de Energia Eletrica S A : Fitch Ratings | 2022 Analytical Report

03/08/2022 18:05

Fitch Affirms Taesa's Ratings

RATING ACTION COMMENTARY

Fitch Affrms Taesa's Ratings

Wed 03 Aug, 2022 - 16:15 ET

Fitch Ratings - Rio de Janeiro - 03 Aug 2022: Fitch Ratings has affrmed Transmissora Alianca de Energia Eletrica S.A.'s (Taesa) Foreign Currency (FC) and Local Currency (LC) Long-Term (LT) Issuer Default Ratings (IDRs) at 'BB' and 'BBB-', respectively, and its National Scale LT Rating at 'AAA(bra)'. The Rating Outlook for the IDRs and for the corporate National Scale rating is Stable.

Taesa's ratings refect its low business risk relative to its diversifed portfolio of power transmission assets in Brazil, with predictable revenues and high operating margins. The analysis incorporates that the company will maintain its net adjusted leverage at adequate levels around 3.5x even considering negative FCFs due to strong capex program. Taesa's liquidity benefts from ample access to funding and lengthened debt maturity profle.

The company's FC IDR is constrained by Brazil's country ceiling of 'BB', while Brazil's operating environment limits the LC IDR. The Stable Outlook for the IDRs follows the same Outlook of Brazil's 'BB-' sovereign rating.

KEY RATING DRIVERS

Low Business Risk: Taesa's credit profle benefts from the low business risk associated with Brazil's power transmission segment in Brazil, as revenues (permitted annual revenues [PAR]) are based on assets availability rather than volume transported. Positively, PARs are annually adjusted by infation indexes, which tend to compensate cost pressures. Companies in this segment have a diversifed client base and guaranteed payment structure.

Robust Asset Portfolio: Taesa presents a strong and diversifed asset portfolio and no exposure to concession renewals over the short-to- medium term. The company is one of the largest power transmission companies in Brazil. It has 11,689km of transmission lines across the country, with 1,399km under construction, considering its stake in each project. Taesa's concessions will not begin to expire until December 2030 and will occur on a staggered basis over the following years.

Predictable and Robust Revenues: New projects conclusion should allow Taesa to compensate revenue and EBITDA reductions coming from part of its current portfolio. Concessions for transmission assets prior to 2006 provide for a 50%-PAR reduction once the concession completes 15 years of operation. Considering the company's consolidated PAR of BRL2.4 billion from operational assets, the expected gradual revenue decline until 2024 should correspond to less than 7% of total. On the other hand, the three new projects under development should add BRL216 million (9%) to the company's revenues until 2026.

High exposure to concessions IGPM-indexed (about 80% of consolidated PAR) will also strengthen the groups consolidated results in 2022 and 2023. EBITDA, calculated through regulatory accounting, should increase to BRL1.9 billion in 2022, from BRL1.5 billion in 2021. For 2023, Fitch expects EBITDA to grow to BRL2.0 billion, given that fve new projects concluded throughout 2022 will be operational during the entire year. EBITDA margins are high, ranging 80%-85%, characteristic of transmission companies in Brazil.

Capex Program Pressures FCF: Based on regulatory accounting rules, Taesa's consolidated cash fow from operations (CFFO) should remain robust, with BRL1.4 billion in 2022 and BRL1.6 billion in 2023, even with high interest rates in Brazil. Aggressive capex plan and signifcant dividends distribution will pressure the company's FCF. It should be negative at BRL1.0 billion in 2022 and BRL212 million on average during 2023-2024. The base case scenario incorporates capex of BRL529 million in 2022 and dividend distribution of 95% of regulatory net income during the rating horizon. Taesa's investments should peak at BRL1.1 billion in 2023 with the construction of the two new projects recently acquired.

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Fitch Affirms Taesa's Ratings

Moderate Leverage Ratios: The base case scenario considers that Taesa's will manage its adjusted net leverage around 3.5x, consistent with its current ratings. Substantial dividend payments along with signifcant investment disbursements limit the company's capacity to deleverage. Fitch forecasts Taesa's adjusted net debt-to-adjusted EBITDA ratio of 3.9x in 2022 and 3.6x in 2023, which compare to 3.9x in 2021. Fitch includes off balance sheet debt related to guarantees provided as well as dividends received from non-consolidated companies on those ratios.

Standalone Approach: Taesa's ratings are not constrained by the credit quality of one of its shareholders, Companhia Energetica de Minas Gerais (Cemig) (LC and FC IDRs, BB/Stable), because Cemig shares control of Taesa with Interconexion Electrica S.A. E.S.P. (ISA; LC and FC IDRs, BBB/Stable), and its access to Taesa's cash is limited to dividends. The analysis does not incorporate an expected change in its shareholder structure. Despite of Cemig's plan to sell its stake in Taesa, the timing and fnal outcome are uncertain.

DERIVATION SUMMARY

Taesa's fnancial profle is stronger than Latin American peers Interconexion Electrica S.A. E.S.P. (FC IDR, BBB/Stable) and Consorcio Transmantaro S.A. (FC IDR, BBB/Stable), in Colombia, and Transelec S.A. (FC IDR, BBB/Stable), in Chile. All these peers have low business risk profles and predictable cash fow generation, characteristic of transmission electricity companies in a regulated industry. The main different in ratings for these companies are the country where they generate their main revenues and the location of assets. While Taesa's peers are in higher rated countries, its ratings are negatively affected by Brazil's Country Ceiling of 'BB'.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

--PARs adjusted considering infation and, in some cases, 50% reduction when the 15th operational year is completed; --Operational expenses adjusted by infation (IPCA);

--Minimum cash of BRL400 million;

--Capex of BRL2.2 billion during 2022-2024;

--Dividends corresponding to 95% of net income calculated through regulatory accounting rules.

RATING SENSITIVITIES

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

--Positive rating action for the company's FC IDR would be associated to an upgrade on Brazil's sovereign rating;

--Positive rating action for the company's LC IDR would be associated to improvements on Brazil's operating environment; --Upgrade not applicable to the National Scale rating as it is at the highest level.

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

--Negative rating action for the LC IDR would be associated to a deterioration in Taesa's consolidated fnancial profle, with net adjusted leverage above 3.5x on funds from operations net leverage above 4.0x, both on a sustainable basis;

--A weaker operating environment on Brazil may result on a downgrade of the LC IDR;

--A downgrade on Brazil's sovereign rating would result in a similar rating action on Taesa's FC IDR;

--Atwo-notches downgrade on Taesa's LC IDR would lead to a downgrade on the National Scale rating.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defned 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

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Fitch Affirms Taesa's Ratings

rating downgrade scenario (defned 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-specifc best- and worst-case scenario credit ratings, visit https://www.ftchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Adequate Liquidity: Taesa should maintain a moderate liquidity compared with short-term debt and ample access to bank credit lines and capital markets to mitigate expected negative FCFs. By March 31, 2022, consolidated cash and marketable securities amounted to BRL1.5 billion, compared with short-term debt of BRL1.0 billion. The BRL1.25 billion debenture issuance in April 2022, with fnal maturity in 2037, reinforced its liquidity position.

Taesa's consolidated debt has a manageable maturity profle and no foreign exchange risk. As of March 31, 2022, the group's adjusted total debt was BRL9.0 billion, considering BRL1.2 billion of its proportional stake in debt guarantees of non-consolidated subsidiaries. Its debt mainly consisted of BRL7.1 billion in debentures, mainly concentrated at the holding level (BRL6.2 billion, or 86% of total debentures issuances).

ISSUER PROFILE

Taesa is the third largest transmission power company in Brazil with 11,689km of lines including 1,399km under development. It has participation in 41 concessions across the country, including four under construction. Taesa is controlled by the Brazilian group Cemig and ISA, which own 36.97% and 26.03% of the voting shares, respectively.

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.ftchratings.com/esg.

SUMMARY OF FINANCIAL ADJUSTMENTS

IFRS construction margins not included in EBITDA.

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.

			RATING ACTIONS
	ENTITY / DEBT 	RATING 		PRIOR 
	Transmissora Alianca de Energia	LT IDR	BB Rating Outlook Stable Affrmed	BB Rating Outlook
	Eletrica S.A.	Stable
		Natl LT	AAA(bra) Rating Outlook Stable Affrmed	AAA(bra) Rating
		Outlook Stable
	senior unsecured	Natl LT	AAA(bra) Affrmed	AAA(bra)
VIEW ADDITIONAL RATING DETAILS
FITCH RATINGS ANALYSTS

Wellington Senter

Director

Primary Rating Analyst [phone]

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Fitch Affirms Taesa's Ratings

[e-mail] Fitch Ratings Brasil Ltda.

Av. Barão de Tefé, 27 - Sala 601 Saúde Rio de Janeiro, RJ 20220-460

Lucas Rios, CFA

Associate Director Secondary Rating Analyst [phone] [e-mail]

Martha Rocha

Managing Director Committee Chairperson [phone] [e-mail]

MEDIA CONTACTS

Elizabeth Fogerty

New York

[phone] [e-mail]

Additional information is available on www.ftchratings.com

PARTICIPATION STATUS

The rated entity (and/or its agents) or, in the case of structured fnance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.

APPLICABLE CRITERIA

National Scale Rating Criteria (pub. 22 Dec 2020)

Corporate Rating Criteria (pub. 15 Oct 2021) (including rating assumption sensitivity)

APPLICABLE MODELS

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

Corporate Monitoring & Forecasting Model (COMFORT Model), v8.0.3 (1)

ADDITIONAL DISCLOSURES

Dodd-Frank Rating Information Disclosure Form

Solicitation Status

Endorsement Policy

ENDORSEMENT STATUS

Transmissora Alianca de Energia Eletrica S.A.

EU Endorsed, UK Endorsed

DISCLAIMER & DISCLOSURES

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