Taesa Transmissora Aliança de Energia Eletrica S A : Fitch Ratings | Fitch affirms Taesa’s Ratings and revises outlook for IDR in local currency to negative

RATING ACTION COMMENTARY

Fitch Affrms Taesa at 'BB'; Revises Outlook on Local Currency Rating to Negative

Tue 10 Jan, 2023 - 3:45 PM ET

Fitch Ratings - Rio de Janeiro - 10 Jan 2023: 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 FC IDR and National Scale rating is Stable. The Outlook of the LC IDR was revised to Negative from Stable.

The Negative Outlook on the LC IDR refects Taesa's challenges to maintain its net adjusted leverage at adequate levels due to relevant additional capex of BRL2.3 billion related to two new concessions acquired in December 2022. Taesa total capex of BRL4.4 billion during 2023 to 2025 should result in negative FCF and pressure credit metrics. A reduction in off balance sheet debt guarantees and on dividends distribution are uncertain events that could partially offset the pressure on the company's capital structure.

The company's FC IDR is constrained by Brazil's country ceiling of 'BB', and the Stable Outlook for the FC IDRs follows the same Outlook of Brazil's 'BB-' sovereign rating. A one- notch downgrade in the LC IDR would not affect the National Scale rating, which justify its Stable Outlook.

KEY RATING DRIVERS

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Capex Program Pressures FCF: Aggressive capex plan and signifcant dividends distribution will pressure Taesa's FCF over the next three years. It should be negative at around BRL1.8 billion in 2023, BRL710 million in 2024 and BRL540 million in 2025, after expected negative BRL627 million in 2022. The two new concessions recently acquired should require investments of BRL2.3 billion until 2025.

Taesa's investments should peak at BRL2.4 billion in 2023, pressured by the payment of BRL886 million in indemnity to the previous concessionaire of one of these concessions (Lot 5). The base case scenario incorporates annual capex of BRL1.0 billion on average during 2024 and 2025. Dividend distribution of 95% of regulatory net income during the rating horizon will represent an average disbursement of BRL1.1 billion during 2023-2025 period.

Leverage to Increase: Taesa should present adjusted net leverage above 3.5x until 2026, not consistent with its current LC IDR. The base case scenario considers Taesa's adjusted net debt-to-adjusted EBITDA ratio of 3.7x in 2022, 4.0x in 2023 and 4.4x in 2024 and 2025, declining to 3.9x 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 2022, off balance sheet debt totaled BRL1.3 billion, being BRL1.1 billion from Interligação Elétrica Ivaí S.A. (Ivaí) and BRL196 million from Empresa Diamantina de Transmissão de Energia S.A. (EDTE). Ivai has started its operation in November 2022 and EDTE in February 2022, with corporate guarantee not expected to be released at least until 2024.

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 11,623km of transmission lines across the country, with 1,332km under construction, considering its stake in each project. Recently acquired Lots 3 and 5 will add 1,094km to the company's portfolio after the signature, expected to March 2023. Out of the two new projects, 743km of Lot 5 is already in operational phase, while the 351km from Lot 3 should be built until 2026. The two concessions will add BRL243 million in terms of consolidated permitted annual revenues (PAR) to Taesa, representing a 9% growth.

Low Business Risk: Taesa's credit profle benefts from the low business risk associated with Brazil's power transmission segment in Brazil, as revenues are based on assets availability rather than volume transported. Positively, PARs are annually adjusted by

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infation indexes, which tend to compensate cost pressures. Companies in this segment have a diversifed client base and guaranteed payment structure.

Predictable and Robust Revenues: High exposure to concessions IGPM-indexed (about 80% of consolidated PAR) will also strengthen the groups consolidated results. 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.

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:

--Payment of BRL886 million in indemnity foreseen for Lot 5 in March 2023;

--PARs adjusted considering infation and, in some cases, 50% reduction when the 15th operational year is completed;

--Operational expenses adjusted by infation (IPCA);

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--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 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

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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: Fitch expects Taesa to maintain an adequate liquidity position compared with short-term debt, and to maintain ample access to bank credit lines and capital markets to mitigate expected negative FCF over the next three years. By Sept. 30, 2022, consolidated cash and marketable securities amounted to BRL1.6 billion, as per Fitch's calculations, compared with short-term debt of BRL722 million.

The BRL1.25 billion debenture issuance in April 2022, with fnal maturity in 2037, supported the strong liquidity position. Nevertheless, Fitch believes the strong cash-to-short-term debt ratio will return to the 0.5x-1.0x range after scheduled outfows associated to capex under development, including the BRL886 million to be paid regarding Lot 5 concession, expected to occur by March 2023.

Taesa's consolidated debt is characterized by a manageable maturity profle and no foreign exchange risk. As of Sept. 30, 2022, the group's total adjusted debt was BRL10.0 billion, considering its proportional stake guarantee in debt of non-consolidated subsidiaries - BRL1.3 billion. Its BRL8.7 billion consolidated on balance sheet debt mainly consisted of BRL8.0 billion in debentures.

ISSUER PROFILE

Taesa is the third largest transmission power company in Brazil with 11,623km of lines including 1,332km 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.

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.

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