Fitch Assigns First-Time IDR of 'BBB-' to Comgas; Outlook Stable

RIO DE JANEIRO & NEW YORK--()--Fitch Ratings has assigned a Long-Term Issuer Default Rating (IDR) of 'BBB-' and a National Scale long-term rating of 'AA+(bra)' to Companhia de Gas de Sao Paulo (Comgas). The Rating Outlook is Stable.

KEY RATING DRIVERS

Comgas' ratings reflect the sound fundamentals of its natural gas distribution business and track record of robust financial profile, supported by reduced leverage, strong liquidity and relevant cash flow from operations (CFFO). Comgas' growth perspectives look positive over the medium- and longer-term supported by the expectation of expansion in its gas distribution network and consistent above-average demand predictability compared with other sectors of the economy, without considering gas supply to thermal plants.

Comgas' credit profile further benefits from its long-term concession contract, which includes pass-through clauses regarding non-manageable cost variations, which has enabled the company to sustain its EBITDA margins at adequate levels. Comgas operates within an important region in the State of Sao Paulo with a diversified gas supply infrastructure that reduces the operating and concentration risks of one single supplier.

Fitch's assessment considered the fact of Comgas as part of Cosan group in which the company's main shareholder is Cosan S.A. Industria e Comercio (Foreign and Local Currency IDRs 'BB+' and National Scale Long-Term Rating 'AA(bra)'. Despite the existing debt of its main shareholder, the group's access to Comgas' cash is limited to dividend distribution given its concession condition.

EBITDA Margin Should Remain Satisfactory

Comgas has been efficient in expanding its net revenue as it maintains a satisfactory EBITDA margin. During the LTM ended March 2015, the company's net revenue was BRL5.9 billion, not including construction revenue, supported mainly by the positive tariff readjustments. In 2014 and 2013, the company's net revenue on the same basis was BRL5.9 billion and BRL5.7 billion, respectively. For the LTM, company's robust normalized EBITDA of BRL1.3 billion resulted in a satisfactory margin of 23%, in line with the last two years. The normalized EBITDA is adjusted with costs incurred higher or lower as estimated within the concession contract which will be later incorporated on the tariff.

Conservative Financial Profile

Fitch's expectation is that Comgas will be able to maintain its conservative financial profile, with maximum gross leverage of 3.0x and net leverage up to 2.0x, as it develops its operations. By the end of March 2015, company's gross and net leverage were 2.6x and 1.6x, respectively, considering the normalized EBITDA. These ratios were 2.2x and 1.4x in 2014, and 2.0x and 1.6x in 2013, respectively. Considering IFRS standards, Comgas' EBITDA was BRL1.3 billion in the LTM, with gross leverage at 2.2x, while net leverage was 1.2x.

Robust CFFO

Fitch estimates Comgas' planned capex for the next four years will pressure its free cash flow (FCF), and that the company will distribute strong dividends as a way to partially support debt service of its shareholder. During the LTM, Comgas' strong cash flow from operations (CFFO) of BRL1.5 billion resulted in positive FCF of BRL582 million, after capex of BRL629 million and dividend distribution of BRL274 million. During the same period, the company's CFFO was sound even when excluding the benefit of positive working capital of approximately BRL325 million due to unrealized payments between December 2014 and March 2015 to Petrobras Transporte S.A. (Transpetro), its supplier of natural gas, given litigation on the price of gas supplied.

Adequate Operating Efficiency

Comgas has been efficient in managing its investments and sustaining the competitiveness of its natural gas price against alternatives power sources, mainly within the industrial and commercial segments. The maintenance of this scenario is a concern as it also depends on cost variations, such as the gas purchased price, which the company cannot control. Fitch considers Comgas' moderate regulatory risk and its track record of tariff reviews and adjustments has been satisfactory. Comgas has the challenge of expanding its client base, mainly in the residential segment, so as to mitigate the estimated lower average natural gas volume billed in the next few quarters, due to the hydrologic crisis within its operating region and the unfavorable macroeconomic environment.

Manageable Operating Risks

Comgas' operations present manageable operating risks, in Fitch's view. The company is exposed to the risk of a single long-term supply contract, with take-or-pay clauses. The expectation is that the supply concentration of gas from Bolivia should reduce in the next few years as the Brazil increases the gas exploration infrastructure of its own proven reserves.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Comgas include:

-- Decrease in the company's total natural gas volume billed by 8% in 2015 and annual growth of 2% from 2016 onwards;

-- Payout dividend ratio of around 75% in 2015 and 2016 and of approximately 100% between 2017-2019;

-- EBITDA margins between 21%-23% during 2015-2019;

-- Annual average capex of BRL836 million between 2015-2019.

RATING SENSITIVITIES

Future developments which can, individually or collectively, lead to a negative rating action include:

-- Expectation of sustainable increase in gross leverage to above 3.0x;

-- Fitch's perception of regulatory risk deterioration.

Future developments which can, individually or collectively, lead to a positive rating action include:

-- Strengthening of the macroeconomic environment;

-- Perception of lower regulatory risks.

LIQUIDITY

Comgas' credit profile benefits from its robust liquidity and lengthened debt maturity. By the end of March 2015, the company's balance of cash and equivalents of BRL1.3 billion, represented comfortable coverage of its short-term debt of BRL548 million by 2.4x. Similar to the CFFO, this liquidity benefited from the unrealized payments to Transpetro. Excluding this favorable higher cash balance, its cash/short term debt coverage ratio of 1.9x remained high. By the end of March 2015, Comgas' total debt was BRL2.9 billion, of which, BRL843 million in foreign currency was hedged from eventual currency exchange variations with derivative instruments.

Fitch has assigned the following new ratings:

Comgas

-- Long-Term Foreign Currency IDR 'BBB-';

-- Long-Term Local Currency IDR 'BBB-';

-- National Long-Term Rating 'AA+(bra)'.

The Rating Outlook is Stable.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

National Scale Ratings Criteria (pub. 30 Oct 2013)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=986489

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986489

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Gustavo Mueller
Associate Director
+55-21-4503-2632
Fitch Ratings Brasil Ltda.
Praca XV de Novembro, 20 - Room 401 B - Downtown
Rio de Janeiro - RJ - CEP: 20020-010
or
Secondary analyst
Adriane Silva
Associate Director
+55-11-4504-2205
or
Committee Chairperson
Mauro Storino
Senior Director
+55-21-4503-2625
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Gustavo Mueller
Associate Director
+55-21-4503-2632
Fitch Ratings Brasil Ltda.
Praca XV de Novembro, 20 - Room 401 B - Downtown
Rio de Janeiro - RJ - CEP: 20020-010
or
Secondary analyst
Adriane Silva
Associate Director
+55-11-4504-2205
or
Committee Chairperson
Mauro Storino
Senior Director
+55-21-4503-2625
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com