OREANDA-NEWS. Fitch Ratings has affirmed Companhia de Gas de Sao Paulo's (Comgas) Foreign Currency Long-Term Issuer Default Rating (FC IDR) at 'BB+', Local Currency IDR (LC IDR) at 'BBB-' and National Scale Long-Term Rating at 'AAA(bra)'. The Rating Outlook is Negative for the FC IDR and Stable for the LC IDR and National Scale Rating. A full list of rating actions follows at the end of this release.

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, adequate financial flexibility and relevant cash flow from operations (CFFO). Comgas' growth perspectives are favorable over the medium and long term supported by the expectation of expansion in its gas distribution network and above-average demand predictability compared with other sectors of the economy, without considering gas supply to thermal plants.

Comgas' credit profile benefits from its long-term concession contract, which includes pass-through clauses regarding non-manageable cost variations. The contract's clauses have enabled the company to sustain its EBITDA generation 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. In addition, its more diversified client base within different segments compared with peers is viewed as positive.

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)' - Negative Outlook for the FC IDR and Stable Outlook for the LC IDR and National Scale Rating. Despite the existing debt of its main shareholder, the group's access to Comgas' cash is limited to dividend distribution given its concession condition.

Robust Cash Generation to Remain

Comgas has been efficient in sustaining favorable net revenue combined with increasing EBITDA generation. During the latest 12 months (LTM) ended March 2016, the company's net revenue was BRL6.1 billion, not including construction revenue, supported mainly by the positive tariff readjustments, despite the 5% reduction in volume billed when compared to 2014, excluding thermo power segment demand. During 2015 and 2014, the company's net revenue on the same basis was BRL6.2 billion and BRL5.8 billion, respectively. For the LTM, company's robust normalized EBITDA was BRL1.4 billion. 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 2016, the company's gross and net leverage were 2.3x and 1.6x, respectively, considering the normalized EBITDA. These ratios were 2.3x and 0.9x in 2015, and averaged 2.2x and 1.5x during the 2012-2015 period. If adjusting the calculation for net leverage excluding the available cash of BRL689 million of balance relative to a litigation with Transpetro, Comgas' net adjusted debt-to-normalized EBITDA would remain conservative at 2.0x. Considering IFRS standards, Comgas' EBITDA was BRL1.8 billion in the LTM ended March 31, 2016, with gross leverage at 1.8x, while net leverage was 1.2x.

Weak Macroeconomic Scenario Impacts Volume Billed

Fitch estimates Comgas' volume billed to further decrease within the industrial segment by 5% and by 4% considering all segments (excluding thermos power segment demand) during 2016. A gradual recovery may occur starting in 2017. Comgas' lower volume billed during the LTM ended March 2016 has been mainly affected by the weak macroeconomic environment within industrial clients. The company's efforts in increasing its distribution network, operating margin adjustments and stronger cost and expenses control have offset the lower volume billed in the period and sustained its EBITDA generation.

Expected Negative FCF

Fitch estimates Comgas' planned strong capex and dividends distribution to pressure its free cash flow (FCF) into moderate negative figures. The company's dividend payment is to partially support debt service of its main shareholder Cosan. During the LTM March 31, 2016, Comgas' strong cash flow from operations (CFFO) of BRL1.8 billion resulted in negative FCF of BRL470 million after capex of BRL492 million and robust dividends distribution of BRL1.8 billion in the period, impacted by the strong distribution of BRL1.2 billion in the first quarter of 2016 (1Q16).

The agency forecasts dividends of BRL1.4 billion in 2016 and to range from BRL400 million-BRL550 million until 2020. In addition, Fitch will closely monitor the future volumes of dividend payments, as the amount paid recently was significant. The company's CFFO remained strong even when excluding the benefit of positive working capital of approximately BRL566 million due to Comgas' unrealized payments between March - September 2015 to Transpetro due to legal dispute regarding gas supplied pricing policy.

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 volume billed in the industrial segment given the unfavorable macroeconomic environment.

Manageable Operating Risks

In Fitch's view, Comgas' operations present manageable operating risks. The company is exposed to the risk of a single supplier under contracts with take-or-pay and ship-or-pay clauses. Fitch estimates that the end of one of its supplying contracts with Petrobras by July 2019, relative to the gas originated in Bolivia, should be renewed directly or indirectly with the Bolivian government. The expectation is also that the supply concentration of gas from Bolivia should reduce in the next few years as 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 (excluding thermo power generation segment) by 4% in 2016 and moderate growth onwards;

--Payout dividend ratio of approximately 209% in 2016 and 84% on average between 2017-2020;

--Annual average capex of approximately BRL600 million between 2016-2020.

RATING SENSITIVITIES

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

--Expectation of sustainable increase in net leverage to above 2.5x;

--Fitch's perception of regulatory or gas supply risk deterioration.

--Further downgrade of the sovereign rating would also trigger a downgrade on the FC IDR.

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 adequate liquidity and lengthened debt maturity which supports its comfortable financial flexibility. The company's balance of cash and equivalents of BRL1 billion represented comfortable coverage of its short-term debt of BRL557 million by 1.8x at March 2016. Nevertheless, Comgas' liquidity incorporates BRL689 million of unrealized payments to its supplier of natural gas (Transpetro), given litigation on the price of gas supplied between October 2014 and September 2015. Excluding this amount from the cash balance, its cash/short-term debt coverage ratio weakens to 0.6x. Comgas has some flexibility regarding its aggressive dividends policy with a track record of substantial payout ratio during the last four years. Fitch believes the company would sustain its adequate capital structure by adjusting dividends distribution, if necessary.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Comgas

--Long-Term Foreign Currency IDR at 'BB+';

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

--National Long-Term Rating at 'AAA(bra)'.

The Rating Outlook is Negative for the FC IDR and Stable for the LC IDR and the National Scale Rating.