Fitch Ratings has assigned Compass Gas e Energia S.A. (Compass) first-time Foreign Currency (FC) and Local Currency (LC) Issuer Default Ratings (IDRs) of 'BB' and 'BB+', respectively, and Long-Term National Scale Rating of 'AAA(bra)'.
The Rating Outlook for the FC IDR is Negative, while the Outlook for the LC IDR and the National Scale Rating is Stable.
Compass' ratings reflect the linkage with its parent Cosan S.A. (Cosan; FC IDR 'BB'/Negative; LC IDR 'BB+'/Stable; National Scale Rating 'AAA(bra)'/Stable) and that company's stronger standalone credit profile (SCP). The application of Fitch's Parent and Subsidiary Linkage Rating Criteria has resulted in the equalization of Compass' ratings with those of Cosan. Cosan owns 88% of Compass, and has open access to Compass' assets because of the absence of legal ring-fencing between the two companies. The Negative Outlook for the FC IDR is tied to the Negative Outlook for the Brazilian sovereign rating.
Key Rating Drivers
Strong Gas Distribution Subsidiary: Compass' key asset is its subsidiary, Companhia de Gas de Sao Paulo - Comgas (FC IDR 'BB'/Negative; LC IDR 'BBB-'/Negative; and National Scale Rating 'AAA(bra)'/Stable). Compass has received robust dividends from Comgas relative to its forecasted debt amount, resulting in low leverage for this intermediate holding company. In the near future, Compass' portfolio of assets should diversify due to ongoing acquisitions.
Fitch views Compass' SCP as weaker than Comgas', as the latter is a natural gas distributor with regulatory and debt restrictions that could limit Compass' access to its cash. As an intermediate holding company of Cosan for investments in the natural gas sector, Cosan has control over Compass' strategies and cash through its 88% ownership stake in the company. Fitch believes that Cosan would support this company, if needed, because of Comgas' value to the group.
Strong Business Model: Cosan's credit profile is supported by its strong and diversified asset portfolio, with a leading sugar and ethanol business, sales of fuels and lubricants, rail operations, in addition to the natural gas activity. Cosan has a robust consolidated financial profile, with the expectation of a growing and consistent flow of dividends to the holding in the coming years.
Low to Moderate Industry Risk: Compass' exposure to the natural gas distribution industry with low to moderate business risk is a positive credit consideration. Natural gas distributors operate under long term concession contracts with non-manageable cost pass through mechanisms that protect their cash flows and improving predictability, despite moderate demand volatility. Gas supply risks to distributors are expected to be manageable as Petrobras reduces its position as the main supplier in Brazil. Compass aims to benefit from high growth potential for natural gas demand resulting from a new regulatory framework that should stimulate supply competition and gas prices reduction in the mid-term.
Natural gas distribution operations should contribute to around 90%-95% of Compass' consolidated EBITDA through 2024 with around 80% coming from Comgas. With operations in the state of Sao Paulo, Comgas is the largest company in this sector in Brazil, and has robust credit metrics and solid business profile. Once concluded, Compass' acquisition of 51% of Petrobras Gas S.A, - Gaspetro (with shares on 19 natural gas distributors concessionaires in Brazil) and Companhia de Gas do Estado do Rio Grande do Sul - Sulgas, both expected to occur until mid-2022 subject to preceding conditions, should improve Compass asset diversification.
Sound Financial Structure: Compass' consolidated financial profile should remain conservative in the next three years as equity injections of BRL2.3 billion during 2021 support its growth strategy through acquisitions. The company's consolidated net leverage should peak at 1.7x by 2022 due to the approximately BRL3.0 billion acquisition payment. Compass' consolidated EBITDA in 2021 is projected to reach BRL2.5 billion and gradually increase to BRL4.2 billion by 2024 underpinned by the Gaspetro and Sulgas acquisitions.
Strong Cash Flow Generation: The base case scenario forecasts a consolidated cash flow from operations (CFFO) in 2021 of BRL1.8 billion, resulting on negative free cash flow (FCF) of BRL588 million after dividends of BRL982 million and capex of BRL1.4 billion. Compass' consolidated CFFO should average BRL2.5 billion in 2022-2023 and its capex should average around BRL1.8 billion.
Derivation Summary
Compass's ratings are in line with power and gas utilities group in the Latam region. The company similarly compares with Energisa S.A. (BB+/Stable), a holding company with diverse operating subsidiaries in the power distribution segment also in Brazil. Energisa has solid growth potential through its subsidiaries and above average performance as compared with the main peers in the segment. Fitch expects Compass to gradually increase portfolio diversification while maintaining a conservative financial profile and benefitting from credit risk related to its parent.
Compass' ratings are influenced by Brazil's operating environment compared to GNL Quintero S.A.'s (GNLQ; BBB+/Stable), which owns and operates the largest LNG regasification terminal in Chile, despite GNLQ operating single asset under expectation of higher leverage metrics through the rating horizon. Compass also negatively compares with Promigas S.A. E.S.P. (BBB-/Stable), which benefits from a strong business position within the Colombian natural gas transportation and distribution segments, despite expectation of sustaining higher leverage ratios compared with Compass.
Key Assumptions
Comgas total volume billed excluding the thermo power generation segment growth of 14% in 2021, with an annual average increase of 2.7% thereafter, in line with Fitch's GDP projections;
Comgas annual contribution margin increases in line with Fitch's inflation estimates and adjusted by an efficiency factor of 0.52%;
Compass dividend distribution of BRL780 million on average per year in 2021-2023;
Acquisition of Gaspetro and Sulgas until mid-2022.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of Cosan's ratings;
A downgrade of Comgas' ratings in more than one notch;
A downgrade of the sovereign rating may also trigger a downgrade of Compass' Foreign Currency IDR.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Upgrade of Cosan;
A revision of the Negative Outlook to Stable for the FC IDR could occur if the sovereign's Rating Outlook is similarly revised.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined 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 (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and 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-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Sound Liquidity: Compass, as an intermediate holding company, had BRL1.7 billion in cash and no on-balance sheet debt at the end of September 2021, but should raise debt in the near future to finance working capital. Compass also guarantees BRL700 million debt at a subsidiary level. Compass holding cash balance reflects the BRL1.6 billion of capital injection received in the 3Q21 from new shareholders, with an additional capital injection of BRL630 million by the end of November and BRL1.5 billion of dividends upstream from Comgas expected until December 2021. Those cash inflows will support Gaspetro and Sulgas acquisitions in 2022.
Compass is expected to receive robust annual dividends of around BRL1.7 billion during the next three years from Comgas. It should distribute about half of these proceeds to its controlling shareholder, Cosan. Consolidated adjusted debt of BRL8.0 billion as of Sept 31, 2021 consisted mainly of BR5.9 billion in debentures and BRL1.1 billion of BNDES loans, mostly allocated at Comgas
Issuer Profile
Compass Gas & Energia S.A. (Compass), is a non-operating subsidiary controlled by Cosan group responsible to develop the group's activities within natural gas and energy sectors in Brazil. Compass is strategically focused on natural gas distribution, LNG regasification infrastructure, gas trading and gas-powered thermal generation.
Summary of Financial Adjustments
Construction revenues are excluded from net revenue
Debt adjusted with hedging derivatives.
Date of Relevant Committee
09 December 2021
Sources of Information
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.
COMPASS GAS E ENERGIA S.A. 