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���������ֳ� - Rio de Janeiro - 25 Apr 2025: ���������ֳ� has affirmed Companhia de Gas de Sao Paulo (COMGAS) Long-Term Foreign Currency Issuer Default Rating (IDR) at 'BB+' and Local Currency IDR at 'BBB-'. ���������ֳ� has also affirmed the company's National Long-Term Rating and senior unsecured debentures at 'AAA(bra)'. The Ratings Outlook is Stable.

The ratings reflect COMGAS's strong cash generation and solid financial profile in the Brazilian natural gas distribution sector, characterized by low to moderate risk. COMGAS benefits from pass through of natural gas costs onto tariffs and from having diverse and profitable customer base, with adjusted EBITDA margin above peers. Its proven access to the debt market should support expected negative FCF.

���������ֳ� considers limited risks coming from gas supply and the industry's regulatory framework. The company is analysed on a standalone basis, despite being part of Cosan group given. COMGAS's Foreign Currency IDR is capped by Brazil's 'BB+' Country Ceiling.

Key Rating Drivers

Strong Business Profile: COMGAS is the largest natural gas distributor in Brazil and benefits from its monopolistic operations in part of the State of São Paulo, the country's most economically important state, with a concession expiring in 2049. The company has a more diversified customer base compared to its peers, with a greater share of residential and commercial customers. Clients from these two segments are more profitable and generate less volatility during economic downturns. Residential consumers account for about 15% of revenues and 50% of operating results, while commercial customers represent around 5% and 15%, respectively.

Robust EBITDA: COMGAS is expected to maintain strong EBITDA and an adjusted EBITDA margin above the average of its peers. The base case scenario for the IDRs anticipates slight EBITDA growth, reaching BRL3.6 billion in 2025 and BRL3.7 billion in 2026, based on appropriate tariff increases, operational efficiencies, customer base expansion, and marginal increases in billed volume. ���������ֳ� believes the adjusted EBITDA margin, excluding gas acquisition costs from net revenue, to be around 85%. This assumption considers a contribution margin of BRL0.98/cubic meter and a total billed volume of 4.3 billion cubic meters in 2025, excluding thermoelectric generation segment customers.

Strong FCF Before Dividends: ���������ֳ� projects COMGAS's strong annual cash flow from operations (CFFO) at BRL2.1 billion-BRL2.3 billion during 2025-2027, sufficient to sustain the high average annual investments of BRL1.5 billion. FCF should be negative by approximately BRL1.0 billion on annual average during the period due to aggressive dividend payments. ���������ֳ� assesses the company through its standalone credit profile (SCP), considering legal ring-fencing as isolated, with permeable access and control, due to the parent company, Cosan S.A. (Cosan; IDRs, BB and National Long-Term Rating, AAA(bra), all with Stable Outlooks), only has access to COMGAS through its dividends.

Conservative Leverage: ���������ֳ� estimates COMGAS's net leverage will increase to 2.5x by 2026, from 1.9x in 2024, which remains conservative considering its low to moderate business risk. The company is subject to natural gas consumption volatility within the industrial segment, which represents an important share of its EBITDA generation. This segment's performance is linked to GDP and gas price competitiveness. This can result in cash flow variations for the distributor. COMGAS's efficient expense structure and efforts to expand its residential and commercial customer base should mitigate the impact of industrial segment volatility.

Manageable Supply Risk: ���������ֳ� assumes no gas supply disruption for COMGAS in the coming years. Currently, Petróleo Brasileiro S.A. (Petrobras; IDRs, BB and National Long-Term Rating, AAA(bra), all with Stable Outlooks) is the main supplier, with a contract until December 2034. COMGAS also has long-term contracts with related party Edge Comercialização S.A. and other suppliers. Natural gas purchasing is the main cost for natural gas distributors, which can be passed on to tariffs, with no expectation that take-or-pay and ship-or-pay clauses will significantly pressure its cash flow.

Regulatory Environment is Neutral: The Brazilian natural gas distribution sector's regulation is neutral to COMGAS's credit profile. The current regulatory environment encourages competition in natural gas supply, which should support lower molecule purchase prices and stimulate demand. ���������ֳ� assumed some large consumers to migrate from COMGAS's customer base to other suppliers, with COMGAS continuing to receive the distribution service fee. ���������ֳ� estimates that this potential migration will not materially impact the company's cash generation capacity despite the 10% lower contribution margin for free market clients given tariff rebalancing as per concession contract.

Peer Analysis

COMGAS's credit profile compares favorably with Companhia de Saneamento Basico do Estado de Sao Paulo (SABESP; Foreign and Local Currency IDRs BB+/Stable), a water/wastewater utility operating in the State of Sao Paulo. COMGAS faces more manageable capex cycle and leverage levels. Both companies present proven financial market access.

Promigas S.A. E.S.P. (Promigas; Foreign and Local Currency IDRs BBB-/Stable) has a strong business position in Colombia (BB+/Negative) and predictable cash flow generation, but gross leverage of around 4.0x, higher than COMGAS at around 3.0x. Promigas' business profile benefits from diversification within natural gas transportation and distribution activities, while COMGAS only distributes gas and can face demand volatility.

COMGAS's business profile is weaker to that of National Fuel Gas Company (NFG; IDR BBB/Stable), a diversified and integrated natural gas company that develops, transports and distributes natural gas to consuming energy markets in the Northeastern U.S., with assets centered in New York and Pennsylvania. NFG benefits from a better operating environment and a diversified and integrated business model anchored by regulated operations. NFG also presents low-cost acreage position and conservative financial profile, which support the one-notch difference with COMGAS.

Key Assumptions

--Volume billed growth of 1.0% for residential and commercial clients in 2025 and thereafter;

--Stable volume distributed to the industrial segment;

--Gradual migration of industrial clients to free market reaching 80% of volume distributed by 2029;

--Dividend payout ratio of 100% of distributable net profit;

--Annual average capex of BRL1.5 billion in 2025-2027;

--Annual contribution margin increase in line with ���������ֳ�'s inflation estimates, adjusted by an efficiency factor of 0.57%.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

--A lower Brazilian Country Ceiling would trigger a downgrade of the company's Foreign Currency IDR;

--A deterioration in the country's operating environment would trigger a downgrade of the Local Currency IDR;

--���������ֳ�'s expectation of a sustained increase in the net debt/EBITDA ratio to above 3.0x;

--���������ֳ�'s perception of increased regulatory or gas supply risk;

--A sharp decline in distributed volumes;

--Deterioration of the liquidity profile.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

--Positive rating action on the Local Currency IDR is subject to an improvement in Brazil's operating environment associated with a meaningful higher participation of residential and commercial clients;

--Positive rating action on the Foreign Currency IDR is subject to a higher Brazilian Country Ceiling;

--An upgrade on the National Long-Term Rating does not apply as it is at the top of the national scale.

Liquidity and Debt Structure

COMGAS's credit profile incorporates a strong liquidity position and proven access to credit to support ���������ֳ�'s expected negative FCFs. At the end of 2024, cash and equivalents amounted to BRL3.2 billion, with manageable short-term debt of BRL1.5 billion and total debt of BRL9.9 billion, consisting mainly of debentures (BRL4.9 billion) and loans with Banco Nacional de Desenvolvimento Economico e Social (BNDES; BRL2.7 billion). The company had lengthened debt maturity profile on the same date and is about to refinance its short-term debt maturity. ���������ֳ� considers COMGAS has limited room to reduce dividend payments and investment plan if necessary, which moderates its financial flexibility.

Issuer Profile

COMGAS is the largest natural gas distributor in Brazil in volume billed with operations in 96 cities in the Sao Paulo state. The company assists around 2.7 million customers and is indirectly controlled by Cosan.

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.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

to access ���������ֳ�'s latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. ���������ֳ�'s macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

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. ���������ֳ�'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 ���������ֳ�'s ESG Relevance Scores, visit /topics/esg/products#esg-relevance-scores.

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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)

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