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

Transmissora Alianca de Energia Eletrica S.A.

Transmissora Alianca de Energia Eletrica S.A.'s (Taesa) ratings reflect its low business risk relative to its diversified portfolio of power transmission assets in Brazil, with predictable revenue and high operating margins. The analysis incorporates the company's maintaining net adjusted leverage at adequate levels around 3.5x, even with negative FCFs due to its strong capex program. Taesa's liquidity benefits from ample access to funding and a lengthened debt maturity profile.

The company's Foreign Currency Issuer Default Rating (IDR) is constrained by Brazil's Country Ceiling of 'BB', while Brazil's operating environment limits the Local Currency IDR. The Stable Outlook matches that of Brazil's 'BB-' sovereign rating.

Key Rating Drivers

Low Business Risk: Taesa's credit profile benefits from the low business risk associated with Brazil's power transmission segment in Brazil, as permitted annual revenues (PAR) are based on asset availability rather than volume transported. Positively, PARs are adjusted annually by inflation indices, which tends to compensate for cost pressures. Companies in the segment have a diversified client base and guaranteed payment structure.

Robust Asset Portfolio: Taesa presents a strong and diversified 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, based on its stake in each project. Taesa's concessions will not begin to expire until December 2030, and expirations occur on a staggered basis over several years.

Predictable and Robust Revenues: The conclusion of new projects should allow Taesa to compensate for reduced revenue and EBITDA 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. Based on the company's consolidated PAR of BRL2.4 billion from operational assets for the 2021/2022 cycle, the expected gradual revenue decline until 2024 should correspond to less than 7% of the total. The three projects under development, meanwhile, should add BRL216 million, or 9%, to the company's revenues until 2026.

High exposure to General Price Index - Market inflation-indexed concessions (about 80% of consolidated PAR) will also strengthen the group's consolidated results in 2022 and 2023. EBITDA, calculated through regulatory accounting, is expected to increase to BRL1.9 billion in 2022, from BRL1.5 billion in 2021. Fitch expects EBITDA to grow to BRL2.0 billion in 2023, given that five projects concluded throughout 2022 will be operational for the entire year. EBITDA margins are high at 80%-85%, characteristic of transmission companies in Brazil.

Capex Pressures FCF: Based on regulatory accounting rules, Taesa's consolidated cash flow from operations is forecast to remain robust at BRL1.4 billion in 2022 and BRL1.6 billion in 2023, even with high interest rates in Brazil. Aggressive capex plans and significant dividend distributions will pressure the company's FCF, which is forecast to be negative BRL1.0 billion in 2022 and BRL212 million on average in 2023-2024.

The base case scenario incorporates capex of BRL529 million in 2022 and dividend distributions of 95% of regulatory net income over the rating horizon. Taesa's investments should peak at BRL1.1 billion in 2023 with the construction of the two new recently acquired projects.

Moderate Leverage Ratios: The base case scenario reflects that Taesa will manage its adjusted net leverage around 3.5x, consistent with the current ratings. Substantial dividend payments along with significant investment disbursements limit the company's capacity to deleverage. Fitch

Corporates

Electric-Corporate

Brazil

Ratings

			Last
			Rating
Rating Type	Rating	Outlook	Action
Long-Term BBB-	Stable	Affirmed
Local			Aug. 3,
Currency			2022
IDR
Long-Term	BB	Stable	Affirmed
IDR			Aug. 3,
			2022
National	AAA(bra)	Stable	Affirmed
Long-Term			Aug. 3,
Rating			2022

Click here for full list of ratings

Applicable Criteria

Corporate Rating Criteria (October 2021)

National Scale Rating Criteria (December 2020)

Related Research

Fitch Affirms Taesa's Ratings (August 2022)

Analysts

Wellington Senter

[phone]

Lucas Rios

[phone]

Rating Report │ August 10, 2022

fitchratings.com

1

Corporates

Electric-Corporate

Brazil

forecasts Taesa's adjusted net debt/adjusted EBITDA at 3.9x in 2022 and 3.6x in 2023, compared with 3.9x in 2021. Fitch includes off-balance-sheet debt related to guarantees provided as well as dividends received from non-consolidated companies in these ratios.

Standalone Approach: Taesa's ratings are not constrained by the credit quality of one of its shareholders, Companhia Energetica de Minas Gerais (CEMIG) (BB/Stable), because CEMIG shares control of Taesa with Interconexion Electrica S.A. E.S.P. (ISA; 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. CEMIG plans to sell its Taesa stake, but timing and outcome are uncertain.

Financial Summary

(BRL Mil., as of Dec. 31)	2020	2021	2022F	2023F
Net Revenue	2,678	3,008	2,269	2,445
Operating EBITDA Margin (%)	64.8	74.0	84.6	85.1
Total Net Debt with Equity Credit/Operating EBITDA (x)	3.1	2.9	3.9	3.6
Total Debt with Equity Credit/Operating EBITDA (x)	3.6	3.0	4.3	3.8
Operating EBITDA/Interest Paid (x)	10.1	11.1	3.0	3.1

F - Forecast. Note: Reflects regulatory accounting rules.

Source: Fitch Ratings, Fitch Solutions.

Rating Derivation Relative to Peers

Taesa's financial profile is stronger than Latin American peers ISA and Consorcio Transmantaro S.A. (CTM; BBB/Stable), in Colombia, and Transelec S.A. (BBB/Stable), in Chile. These peers have low business risk profiles and predictable cash flows, characteristic of electricity transmission companies in a regulated industry. The main difference in ratings for these companies is the country in which 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'.

Navigator Peer Comparison

Issuer

Business profile

Financial profile

Management and

Commodity

Operating

Corporate

Price and

Asset Base and

Financial

Financial

IDR/Outlook

Environment

Governance

Regulatory Risk

Market Risk

Market

Operations

Profitability

Structure

Flexibility

Alupar Investimento S.A.

BB/Sta

bb+

n

bbb-

n

bbb

n bbb

n

bbb

n

bbb-

n

bbb

n

bbb-

n

bbb-

n

Consorcio Transmantaro S.A. (CTM)

BBB/Sta

bbb

n

bbb

n

bbb+

n a-

n

bbb

n

bbb+

n

bbb

n

bbb-

n

bbb

n

Empresa de Transmision Electrica S.A.

BBB-/Sta

bbb+

n

bbb

n

bbb

n a-

n

bbb

n

bbb

n

bbb-

n

bb

n

bbb

n

Interconexion Electrica S.A. E.S.P.

BBB/Sta

bbb

n

a-

n

bbb

n bbb+

n

bbb+

n

bbb+

n

bbb+

n

bbb

n

bbb+

n

Transelec S.A.

BBB/Sta

a+

n

bbb

n

bbb+

n a-

n

bbb

n

bbb+

n

bbb

n

b

n

bbb

n

Transmissora Alianca de Energia Eletrica S.A.

BB/Sta

bbb-

n

bbb-

n

bbb

n bbb

n

bbb

n

bbb-

n

bbb

n

bbb

n

bbb

n

Source: Fitch Ratings.

Importance

n

Higher

n

Moderate

n

Lower

Issuer

Business profile

Financial profile

Management and

Commodity

Operating

Corporate

Price and

Asset Base and

Financial

Financial

Name

IDR/Outlook

Environment

Governance

Regulatory Risk

Market Risk

Market

Operations

Profitability

Structure

Flexibility

Alupar Investimento S.A.

BB/Sta

1.0

n

2.0

n

3.0

n 3.0

n

3.0

n

2.0

n

3.0

n

2.0

n

2.0

n

Consorcio Transmantaro S.A. (CTM)

BBB/Sta

0.0

n

0.0

n

1.0

n 2.0

n

0.0

n

1.0

n

0.0

n

-1.0

n

0.0

n

Empresa de Transmision Electrica S.A.

BBB-/Sta

2.0

n

1.0

n

1.0

n 3.0

n

1.0

n

1.0

n

0.0

n

-2.0

n

1.0

n

Interconexion Electrica S.A. E.S.P.

BBB/Sta

0.0

n

2.0

n

0.0

n 1.0

n

1.0

n

1.0

n

1.0

n

0.0

n

1.0

n

Transelec S.A.

BBB/Sta

4.0

n

0.0

n

1.0

n 2.0

n

0.0

n

1.0

n

0.0

n

-6.0

n

0.0

n

Transmissora Alianca de Energia Eletrica S.A.

BB/Sta

2.0

n

2.0

n

3.0

n 3.0

n

3.0

n

2.0

n

3.0

n

3.0

n

3.0

n

Source: Fitch Ratings.

n Worse positioned than IDR

n

In line with IDR

n

Better positioned than IDR

Transmissora Alianca de Energia Eletrica S.A.
Rating Report │ August 10, 2022	fitchratings.com	2

Corporates

Electric-Corporate

Brazil

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Positive Rating

Action/Upgrade

• An upgrade on Brazil's sovereign rating would be associated with an upgrade to Taesa's
  Foreign Currency IDR;
• Improvements in Brazil's operating environment would be associated with a positive action for the company's Local Currency IDR;
• An upgrade of the National Long-Term Rating is not applicable as it is at the highest level.

Factors that Could, Individually or Collectively, Lead to Negative Rating

Action/Downgrade

• A deterioration in Taesa's consolidated financial profile, with net adjusted leverage above 3.5x on funds from operations net leverage above 4.0x, both on a sustainable basis, would be associated with a negative action on Taesa;
• A weaker operating environment on Brazil may result on a downgrade of the Local Currency IDR;
• A downgrade on Brazil's sovereign rating would result in a similar rating action on Taesa's Foreign Currency IDR;
• A two-notches downgrade on Taesa's Local Currency IDR would lead to a downgrade on the National Long-Term Rating.

Liquidity and Debt Structure

Adequate Liquidity: Taesa is expected to maintain moderate liquidity compared with short-term debt and ample access to bank credit lines and capital markets to mitigate expected negative FCF. Consolidated cash and marketable securities amounted to BRL1.5 billion at March 31, 2022, compared with short-term debt of BRL1.0 billion. A BRL1.25 billion debenture issuance in April 2022, with final maturity in 2037, reinforced its liquidity position.

Taesa's consolidated debt has a manageable maturity profile and no foreign exchange risk. The group's adjusted total debt was BRL9.0 billion at March 31, 2022, reflecting 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, at BRL6.2 billion, or 86% of total debentures issuances.

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.

Transmissora Alianca de Energia Eletrica S.A.
Rating Report │ August 10, 2022	fitchratings.com	3

Corporates

Electric-Corporate

Brazil

Liquidity and Debt Maturities

Liquidity Analysis

(BRL Mil., as of Dec. 31)	2022	2023F	2024F	2025F
Available Liquidity
Beginning Cash Balance	385	(1,654)	(3,030)	(3,917)
Rating Case FCF After Acquisitions and Divestitures	(1,077)	(331)	(93)	34
Total Available Liquidity (A)	(692)	(1,986)	(3,124)	(3,883)
Liquidity Uses
Debt Maturities	(962)	(1,045)	(793)	(353)
Total Liquidity Uses (B)	(962)	(1,045)	(793)	(353)
Liquidity Calculation
Ending Cash Balance (A+B)	(1,654)	(3,030)	(3,917)	(4,236)
Revolver Availability	0	0	0	0
Ending Liquidity	(1,654)	(3,030)	(3,917)	(4,236)
Liquidity Score (x)	(0.7)	(1.9)	(3.9)	(11.0)
F - Forecast.
Source: Fitch Ratings, Fitch Solutions, Transmissora Alianca de Energia Eletrica S.A.

Scheduled Debt Maturities

(BRL Mil.)	12/31/21
2022	962
2023	1,045
2024	793
2025	353
2026	3,602
Thereafter	0
Total	6,754

Source: Fitch Ratings, Fitch Solutions, Transmissora Alianca de Energia Eletrica S.A.

Key Assumptions

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

• PAR is adjusted for inflation and, in some cases, a 50% reduction when the 15th operational year is completed;
• Operational expenses adjusted for inflation;
• Minimum cash of BRL400 million;
• Capex of BRL2.2 billion during 2022-2024;
• Dividends correspond to 95% of net income calculated through regulatory accounting rules.

Transmissora Alianca de Energia Eletrica S.A.
Rating Report │ August 10, 2022	fitchratings.com	4

Corporates

Electric-Corporate

Brazil

Financial Data

		Historical				Forecasta
(BRL Mil., as of Dec. 31)	2019	2020	2021	2022	2023	2024
Summary Income Statement
Net Revenue	1,426	2,678	3,008	2,269	2,445	2,512
Revenue Growth (%)	3.1	87.8	12.3	(24.6)	7.8	2.7
Operating EBITDA (Before Income from Associates)	712	1,736	2,226	1,919	2,080	2,135
Operating EBITDA Margin (%)	49.9	64.8	74.0	84.6	85.1	85.0
Operating EBITDAR	712	1,736	2,226	1,919	2,080	2,135
Operating EBITDAR Margin (%)	49.9	64.8	74.0	84.6	85.1	85.0
Operating EBIT	1,089	2,361	2,654	1,597	1,733	1,779
Operating EBIT Margin (%)	76.4	88.2	88.2	70.4	70.9	70.8
Gross Interest Expense	(232)	(327)	(420)	(755)	(826)	(798)
Pretax Income (Including Associate Income/Loss)	1,146	2,719	2,625	1,079	1,353	1,419
Summary Balance Sheet
Readily Available Cash and Equivalents	2,420	896	385	960	490	471
Total Debt with Equity Credit	5,383	6,247	6,754	8,595	8,456	8,530
Total Adjusted Debt with Equity Credit	6,325	7,277	7,950	9,840	9,639	9,654
Net Debt with Equity Credit	2,963	5,351	6,370	7,635	7,966	8,060
Summary Cash Flow Statement
Operating EBITDA	712	1,736	2,226	1,919	2,080	2,135
Cash Interest Paid	(200)	(201)	(239)	(755)	(826)	(798)
Cash Tax	(50)	(43)	(59)	(85)	(106)	(111)
Dividends Received Less Dividends Paid to Minorities (Inflow/(Out)flow)	-	-	-	-	-	-
Other Items Before FFO	202	(576)	(1,470)	-	-	-
Funds Flow from Operations	1,033	1,247	916	1,497	1,672	1,614
FFO Margin (%)	72.5	46.6	30.4	66.0	68.4	64.3
Change in Working Capital	71	111	724	(53)	(46)	(41)
Cash Flow from Operations (Fitch Defined)	1,104	1,358	1,640	1,444	1,626	1,573
Total Non-Operating/Nonrecurring Cash Flow	-	-	-	-	-	-
Capex	(333)	(882)	(483)
Capital Intensity (Capex/Revenue) (%)	23.3	32.9	16.1
Common Dividends	(651)	(1,106)	(1,552)
FCF	120	(630)	(395)
Net Acquisitions and Divestitures	(184)	(765)	-	-	-	-
Other Investing and Financing Cash Flow Items	(218)	(236)	(88)	(188)	-	-
Net Debt Proceeds	1,864	228	(29)	1,841	(139)	74
Net Equity Proceeds	-	-	-	-	-	-
Total Change in Cash	1,582	(1,402)	(511)	576	(470)	(19)
Leverage Ratios (x)
Total Net Debt with Equity Credit/Operating EBITDA	4.0	3.1	2.9	3.9	3.6	3.7
Total Adjusted Debt/Operating EBITDAR	6.4	3.6	3.0	4.3	3.8	3.9
Total Adjusted Net Debt/Operating EBITDAR	4.0	3.1	2.9	3.9	3.6	3.7
Total Debt with Equity Credit/Operating EBITDA	6.4	3.6	3.0	4.3	3.8	3.9
FFO Adjusted Leverage	5.6	5.2	7.1	4.5	4.0	4.1
FFO Adjusted Net Leverage	3.4	4.5	6.7	4.0	3.8	3.9
FFO Leverage	5.6	5.2	7.1	4.5	4.0	4.1
FFO Net Leverage	3.4	4.5	6.7	4.0	3.8	3.9

Calculations for Forecast Publication

Transmissora Alianca de Energia Eletrica S.A.
Rating Report │ August 10, 2022	fitchratings.com	5