Fitch Ratings has assigned a 'AAA(bra)' Long-Term National Rating to Nova Transportadora do Sudeste S.A. - NTS (NTS)'s 5th proposed unsecured debentures of BRL3.5 billion, in three tranches and final maturity in 10 years.
The proceeds will be used to partially refinance the company's second debenture issuance. Fitch rates NTS 'AAA(bra)'/Outlook Stable.
NTS's ratings reflect its solid business model, supported by long-term contracts and the Brazilian gas transportation industry's low risk profile, which allows healthy protection of its revenues, high margins and strong and stable operating cash flows. These features should continue to preserve the company's robust credit profile. The ratings also factor in NTS's reduced capex need, high free cash flow (FCF) balances before distribution to shareholders, in addition to conservative credit metrics.
Key Rating Drivers
Robust Business Profile: NTS's credit profile is strong and benefits from a natural monopoly in the industry. The company's entire installed capacity for transporting natural gas is contracted under ship or pay clauses, which protects it from fluctuations in the volume of gas actually transported. This translates into high predictability of operating cash generation, as NTS's fees are paid for the availability of its gas pipelines, and not for the volume transported.
The company's installed capacity is 100% contracted by Petroleo Brasileiro S.A. (Long-Term Foreign and Local Currency Issuer Default Ratings 'BB-'/Stable and National Long-Term Rating 'AA(bra)'/Stable), by means of five long-term contracts, with the closest maturity in 2025, which represents about 30% of its total revenues, and tariffs adjusted for the inflation index IGP-M (General Price Index - Market).
Revenue Concentration at Petrobras: Petrobras is the only long-term counterparty of NTS's operating gas transportation contracts. The concentration risk is mitigated by the very low possibility of interruption in the supply of gas by the oil company to its customers (gas distributors), since it is a basic input of the distributors' activity. Petrobras's payments to NTS are also guaranteed by receivables from a pool of gas distributors that are clients of the oil company, which must represent at least 120% of the monthly amount to be received by NTS, a percentage that has been above this level. The gas distributors' credit profiles are robust, which mitigates the risk of default, as payments for the gas supply is a priority.
Strong and Resilient CFFO Generation: NTS's operating cash generation should continue to strengthen in 2022, with the increase in its tariffs contractually linked to the IGP-M index, which increased by approximately 17.8% in 2021. Fitch's base scenario projects an EBITDA of BRL6.2 billion in 2022 and BRL6.8 billion in 2023, with margins of around 92% in the biennium. In 2022, the company's profitability should benefit from a cost reduction, after the internalization of the services performed by Petrobras Transporte S.A. (Transpetro) as of July 2021.
The expected annual average CFFO is BRL3.8 billion in 2022-2024, and is robust and enough to sustain investments and average annual dividend payouts estimated at BRL298 million and BRL3.0 billion, respectively, in the triennium. This also allows the company to continue generating positive FCF of BRL476 million per year in the period.
Strong Financial Profile: Fitch expects NTS to maintain a conservative net leverage below 2.0x, considering the financial obligations from the incorporation of Nova Infraestrutura Gasodutos Participacoes S.A. (NISA). In addition, Fitch expects the company will maintain its robust financial profile over the next three years, despite strong dividend payouts. As of June 2022, NTS's total adjusted debt was BRL12.4 billion, mainly comprised of the second debenture issuance and the debts originally issued by NISA, in the amount of BRL6.7 billion, that were used in the scope of NTS's acquisition.
Diversification Strategy: NTS is focused on diversifying its customer base and expanding its transportation infrastructure to serve new shippers. Currently, the company operates a network of gas pipelines considered strategic for the country's infrastructure. The company is located in the southeast region of Brazil and economically most important, as 50% of the country's gas demand is concentrated in the area. Its crucial infrastructure strengthens NTS's business profile. The company's infrastructure is also important for transporting gas from Bolivia, from the Santos and Campos basins, and from liquefied natural gas (LNG) terminals in the southeast to other regions of the country.
Regulatory Changes Expected to Be Neutral: Fitch estimates greater gas market opening in Brazil , due to the sale of Petrobras's assets in the industry. The agency believes that regulatory changes may provide greater flexibility for the purchase and sale of natural gas, increasing demand and investments in transportation and distribution. The incentives to reduce the prices of gas to the final consumer and the potential increase in consumption and production of gas in the country in the coming years, strengthen the importance of assets operated by NTS, which currently transports gas volumes below the capacities foreseen in its gas transportation contracts.
Derivation Summary
NTS's business profile, characterized by its robustness and cash flows predictability, is similar to that of Fitch-rated Brazilian electric power transmission companies, such as Transmissora Alianca de Energia Eletrica S.A. (Taesa; National Long-Term Rating 'AAA(bra)'/Stable) and Companhia de Transmissao de Energia Eletrica Paulista S.A. (CTEEP; National Long-Term Rating 'AAA(bra)'/Stable), which bill for the electric network availability, and not for the transported volume. Long-term contracts automatically adjusted for inflation are also a common feature in the gas transportation and energy transmission businesses. Like NTS, both power transmission companies have strong financial profiles.
NTS's solid financial and business profile is also similar to that of Transportadora Associada de Gas S.A. (TAG, National Long-Term Rating 'AAA(bra)'/Stable), as both operate in the gas transportation industry in Brazil through long-term contracts with no volumetric risk, which allows high margins and robust operating cash flows.
Key Assumptions
Revenue based on contracted figures adjusted annually by the IGP-M index;
Average capex of BRL298 million between 2022 and 2024;
Average dividend payout of BRL3.0 billion from 2022 to 2024;
Fulfilment of transportation contracts currently in effect between NTS and Petrobras.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Not applicable, as the rating is already at the highest level of Fitch's national scale.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Substantial deterioration in Petrobras's credit profile, resulting in the company's rating being downgraded to 'A(bra)';
Weakening of the guarantee structure of Petrobras's customers who make deposits in the collection account;
Net leverage above 3.5x on a sustainable basis;
Regulatory or contractual changes altering the fundamentals of the gas transportation industry and/or NTS's business model.
Liquidity and Debt Structure
High Financial Flexibility: NTS should continue to operate with moderate liquidity ratios. The company has broad access to the debt and capital markets, and has the flexibility to manage its aggressive shareholder remuneration strategy, if necessary. Fitch does not anticipate the company will face difficulty refinancing the important maturity of its second debenture issuance. This issuance had an outstanding balance of BRL5.3 billion in June 2022, due in April 2023. NTS has an expected inflow of BRL3.5 billion from the 5th proposed debenture issuance. In the same period, NTS's cash and marketable securities position was BRL2.3 billion, according to Fitch's methodology, which excludes the restricted cash balance of BRL366 million.
Issuer Profile
NTS operates 2,048km of gas pipelines under an indefinite term authorization in the three most economically important states of Brazil, located in the southeast region: Sao Paulo (SP); Rio de Janeiro (RJ) and Minas Gerais (MG). The company's shareholders are Nova Infraestrutura Fundo de Investimento em Participacoes Multiestrategia (FIP), with 91.50%, and Itausa S.A. (Itausa), with 8.50%.
Summary of Financial Adjustments
Fitch considered as restricted cash the amount referring to the right of way under negotiation with Petrobras.
PETROBRAS 
