Taesa Transmissora Aliança de Energia Eletrica S A : Fitch – 2023 Annual Rating Report

12/21/23, 6:11 PM

Fitch Downgrades Taesa's Local Currency IDR to 'BB+'; Affirms National Scale Rating at 'AAA(bra)'

RATING ACTION COMMENTARY

Fitch Downgrades Taesa's Local Currency IDR to 'BB+'; Affrms National Scale Rating at 'AAA(bra)'

Thu 21 Dec, 2023 - 3:40 PM ET

Fitch Ratings - Rio de Janeiro - 21 Dec 2023: Fitch Ratings has downgraded Transmissora Alianca de Energia Eletrica S.A.'s (Taesa) Local Currency (LC) Issuer Default Rating (IDR) to 'BB+' from 'BBB-'. At the same time, Fitch has affrmed Taesa's 'BB+' Foreign Currency (FC) IDR and 'AAA(bra)' National Scale Rating and its senior unsecured debentures. The Rating Outlook for the IDRs and for the corporate National Scale Rating are Stable.

The downgrade of the LC IDR refects the expectation that Taesa will keep its net adjusted leverage above 3.5x over the next years due to relevant capex plan and high dividend payments. The company's total capex of BRL5.1 billion during 2023 to 2025 should contribute to its negative FCF and keep credit metrics at levels not consistent with the previous LC IDR.

Taesa's credit profle benefts from its low business risk related to its diversifed portfolio of energy transmission assets in Brazil, with predictable revenues and high operating margins. The analysis considers the company's moderate liquidity, extended debt maturity profle and proved access to funding.

KEY RATING DRIVERS

Pressured FCF: Aggressive capex plan and signifcant dividends distribution will pressure Taesa's FCF until at least 2025. It should approximate negative BRL670 million in 2024 and BRL1.1 billion in 2025, after expected negative BRL1.3 billion in 2023. The four new concessions under construction should require investments of BRL3.8 billion out of the BRL5.1 billion during 2023-2025, with a peak of BRL2.0 billion in 2023. High payout ratios should represent an average annual disbursement of BRL1.1 billion during the 2023-2026 period.

Leverage to Increase: Adjusted net leverage should range from 3.5x to 4.5x until 2026, not consistent with its previous LC IDR. The base case scenario considers Taesa's adjusted net debt-to-adjusted EBITDA ratio of 3.5x in 2023, 3.8x in 2024 and 4.3x in 2025, declining to 3.7x in 2026 after the end of the current investment cycle. Fitch includes off balance sheet debt related to guarantees provided as well as dividends received from non-consolidated companies on those ratios. As of September 2023, off balance sheet debt totaled BRL1.4 billion, with BRL1.2 billion from Interligação Elétrica Ivaí S.A. (Ivaí) and BRL205 million from Empresa Diamantina de Transmissão de Energia S.A. (EDTE). Fitch does not factor the corporate guarantee for Ivaí at the end of 2023 into Taesa's adjusted debt as the precedent conditions for the release were already concluded.

Robust Asset Portfolio: Taesa has a strong and diversifed asset portfolio and no exposure to concession renewals until 2029. The company is one of the largest power transmission companies in Brazil. It has 11,943km of transmission lines in operation and 735km under construction across the country, considering its stake in each project. The company's participation in 43 concessions adds to asset diversifcation and dilutes operational and regulatory risks. The consolidated Permitted Annual Revenue (PAR) in the 2023/2024 cycle, of BRL2.6 billion, should gradually increase until 2026 by projects under development, which will add BRL467 million.

Favorable Business Profle: Taesa's credit profle benefts from the low business risk associated with the power transmission segment in Brazil, as revenues are based on asset availability rather than volume transported. Positively, PARs are annually adjusted by infation indexes, which tend to compensate cost pressures in the medium term. Companies in this segment have a diversifed client base and guaranteed payment structure, which signifcantly reduces counterparty risks. EBITDA margins are

https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-taesa-local-currency-idr-to-bb-affirms-national-scale-rating-at-aaa-bra-21-1… 1/6

12/21/23, 6:11 PM

Fitch Downgrades Taesa's Local Currency IDR to 'BB+'; Affirms National Scale Rating at 'AAA(bra)'

expected to remain high, ranging from 82% to 84%, with EBITDA, calculated through regulatory accounting, around BRL2.0 billion from 2023 to 2025. Robust operational cash generation will be important to reduce the effect of the aggressive investment plan and the signifcant dividends distribution.

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 compares favorably with that of Latin American peers Interconexion Electrica S.A. E.S.P. (LC IDR BBB/Stable) and Consorcio Transmantaro S.A. (LC IDR BBB/Stable) in Colombia, and Transelec S.A. (LC IDR BBB/Stable) in Chile. All these peers have low business risk profles and predictable cash fow generation, characteristic of electricity transmission companies in a regulated industry. The main differences in ratings for these companies include 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

--PARs adjustments based on infation indexes;

--Operational expenses adjusted by infation (IPCA); --Capex of BRL3.1 billion during 2024-2025;

--Current portfolio under construction fully operational until 2026;

--Dividends distribution based on 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 with an upgrade of the LC IDR and an upgrade of Brazil's sovereign rating;

--Positive rating action for the LC IDR would be associated to net adjusted leverage limited to 3.5x on a sustainable basis; --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 with net adjusted leverage above 4.0x on a sustainable basis; --A downgrade on Brazil's sovereign rating would result in a similar rating action on Taesa's FC IDR;

--A downgrade on Taesa's LC IDR would lead to a downgrade on the National Scale Rating.

LIQUIDITY AND DEBT STRUCTURE

Moderate Liquidity: Taesa should maintain moderate liquidity compared with its short-term debt, in the range of 0.5x to 1.0x, and continue to beneft from broad access to bank credit lines and the local capital market to fnance the expected negative FCFs and rollover the debt over the next years. As of Sept. 30, 2023, consolidated cash and equivalents amounted to BRL1.7

https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-taesa-local-currency-idr-to-bb-affirms-national-scale-rating-at-aaa-bra-21-1… 2/6

12/21/23, 6:11 PM

Fitch Downgrades Taesa's Local Currency IDR to 'BB+'; Affirms National Scale Rating at 'AAA(bra)'

billion, as per Fitch's calculations, which were strong compared with short-term debt of BRL1.2 billion, but should weaken over time. The 14th debenture issuance of BRL800 million, raised in September 2023 and maturing in 2038, will fnance part of the expected negative FCF.

Taesa's consolidated debt is characterized by a manageable maturity schedule and no foreign currency risk. As of Sept. 30, 2023, the group's total adjusted debt was BRL11.7 billion, considering its proportional stake guarantee in debt of non- consolidated subsidiaries of BRL1.4 billion. Its BRL10.3 billion consolidated on balance sheet debt mainly consisted of BRL9.7 billion in debentures.

ISSUER PROFILE

Taesa is the third largest transmission power company in Brazil with 12,678 km of lines, including 735km under development. It has participation in 43 concessions across the country, with 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.

SUMMARY OF FINANCIAL ADJUSTMENTS

Net revenues and EBITDA based on Brazilian regulatory accounting rules.

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

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.ftchratings.com/topics/esg/products#esg-relevance-scores.

		RATING ACTIONS
ENTITY / DEBT 	RATING 				PRIOR 
Transmissora Alianca de Energia	LT IDR	BB+ Rating Outlook Stable Affrmed	BB+ Rating Outlook
Eletrica S.A.	Stable
	LC LT IDR	BB+ Rating Outlook Stable	Downgrade	BBB- Rating Outlook
	Negative
	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]

https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-taesa-local-currency-idr-to-bb-affirms-national-scale-rating-at-aaa-bra-21-1… 3/6

12/21/23, 6:11 PM

Fitch Downgrades Taesa's Local Currency IDR to 'BB+'; Affirms National Scale Rating at 'AAA(bra)'

[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]

Mauro Storino

Senior 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)

Metodologia de Ratings em Escala Nacional (pub. 22 Dec 2020)

Corporate Rating Criteria (pub. 03 Nov 2023) (including rating assumption sensitivity)

Metodologia de Ratings Corporativos (pub. 10 Nov 2023)

APPLICABLE MODELS

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

Corporate Monitoring & Forecasting Model (COMFORT Model), v8.1.0 (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

https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-taesa-local-currency-idr-to-bb-affirms-national-scale-rating-at-aaa-bra-21-1… 4/6

12/21/23, 6:11 PM

Fitch Downgrades Taesa's Local Currency IDR to 'BB+'; Affirms National Scale Rating at 'AAA(bra)'

DISCLAIMER & DISCLOSURES

All Fitch Ratings (Fitch) credit ratings are subject to certain limitations and disclaimers. Please read these limitations and disclaimers by following this link: https://www.ftchratings.com/understandingcreditratings. In addition, the following https://www.ftchratings.com/rating-defnitions-document details Fitch's rating defnitions for each rating scale and rating categories, including defnitions relating to default. ESMA and the FCA are required to publish historical default rates in a central repository in accordance with Articles 11(2) of Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 and The Credit Rating Agencies (Amendment etc.) (EU Exit) Regulations 2019 respectively.

Published ratings, criteria, and methodologies are available from this site at all times. Fitch's code of conduct, confdentiality, conficts of interest, affliate frewall, compliance, and other relevant policies and procedures are also available from the Code of Conduct section of this site. Directors and shareholders' relevant interests are available at https://www.ftchratings.com/site/regulatory. Fitch may have provided another permissible or ancillary service to the rated entity or its related third parties. Details of permissible or ancillary service(s) for which the lead analyst is based in an ESMA- or FCA-registered Fitch Ratings company (or branch of such a company) can be found on the entity summary page for this issuer on the Fitch Ratings website.

In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verifcation of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verifcation it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existingthird-party verifcations such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verifcation sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verifcation can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to fnancial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of fnancial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verifed as facts. As a result, despite any verifcation of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affrmed. Fitch Ratings makes routine, commonly-accepted adjustments to reported fnancial data in accordance with the relevant criteria and/or industry standards to provide fnancial metric consistency for entities in the same sector or asset class.

The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Fitch also provides information on best-case rating upgrade scenarios and worst-case rating downgrade scenarios (defned as the 99th percentile of rating transitions, measured in each direction) for international credit ratings, based on historical performance. A simple average across asset classes presents best-case upgrades of 4 notches and worst-case downgrades of 8 notches at the 99th percentile. Sector-specifc best- and worst-case scenario credit ratings are listed in more detail at https://www.ftchratings.com/site/re/10238496

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not

https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-taesa-local-currency-idr-to-bb-affirms-national-scale-rating-at-aaa-bra-21-1… 5/6

12/21/23, 6:11 PM

Fitch Downgrades Taesa's Local Currency IDR to 'BB+'; Affirms National Scale Rating at 'AAA(bra)'

address the risk of loss due to risks other than credit risk, unless such risk is specifcally mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identifed in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verifed and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement fled under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative effciency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian fnancial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.ftchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.

dv01, a Fitch Solutions company, and an affliate of Fitch Ratings, may from time to time serve as loan data agent on certain structured fnance transactions rated by Fitch Ratings.

Copyright © 2023 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: [phone]. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved.

READ LESS

SOLICITATION STATUS

The ratings above were solicited and assigned or maintained by Fitch at the request of the rated entity/issuer or a related third party. Any exceptions follow below.

ENDORSEMENT POLICY

Fitch's international credit ratings produced outside the EU or the UK, as the case may be, are endorsed for use by regulated entities within the EU or the UK, respectively, for regulatory purposes, pursuant to the terms of the EU CRA Regulation or the UK Credit Rating Agencies (Amendment etc.) (EU Exit) Regulations 2019, as the case may be. Fitch's approach to endorsement in the EU and the UK can be found on Fitch's Regulatory Affairs page on Fitch's website. The endorsement status of international credit ratings is provided within the entity summary page for each rated entity and in the transaction detail pages for structured fnance transactions on the Fitch website. These disclosures are updated on a daily basis.

https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-taesa-local-currency-idr-to-bb-affirms-national-scale-rating-at-aaa-bra-21-1… 6/6