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Rating agency Fitch recently published a report on the state of Brazil's natural gas distribution market and what the future may hold for it. In the report, Fitch describes distributors as companies with strong financial profiles.
Gustavo Mueller, a senior analyst at Fitch and the main figure behind the study, spoke to BNamericas about what puts these companies – most of which are small – in the perfect spot to make new investments.
BNamericas: Why do you say that natural gas distribution companies have a strong financial profile?
Mueller: Most of these companies have almost no debt and post consistent results in terms of cash flow generation. Financially speaking, Brazilian gas distributors have a great capacity to increase leverage and acquire debt to invest in market expansion. Today, the pipeline network is very limited outside the southeast region. These pipelines [outside the southeast] are used to carry natural gas to some industrial facilities, a few shops and commercial buildings and almost no houses. In most cases, the distribution network is based on a single thermal power plant. For these companies, this scenario represents huge growth potential.
BNamericas: Does the lack of a diversified portfolio make gas distributors more exposed to market fluctuations? Was that a relevant factor in Fitch's report?
Mueller: Yes, it does make distributors more exposed. In Brazil, there is a natural gas distribution company for each state, since the activity is authorized at state government level, but only the companies from the southeast region have slightly more diverse portfolios. Comgas, for example, São Paulo state's gas distributor, serves a significant number of industrial facilities, but it also supplies gas stations and commercial and residential clients. One benefit of this strategy is to mitigate the negative impacts of an economic crisis, such as the one that Brazil is currently going through. Why? Because the industrial sector is highly affected by changes in the macroeconomic climate. Therefore, companies that rely heavily on industrial consumption are also hampered by those fluctuations.
BNamericas: Do you believe the trend, in the medium and long terms, will be that distributors from other Brazilian regions take that same path?
Mueller: We have noticed that distributors are increasingly looking for other consumption segments, trying to expand their pipeline network in new areas, outside industrial centers. They really should do that, especially because residential and commercial clients are more profitable per consumption unit. And, yes, it is a time consuming job that will only show results in medium and long-term scenarios.
BNamericas: The Brazilian natural gas industry as a whole is undergoing a series of changes, with several aspects being reviewed by the regulatory body. How might changes in issues such as gas pricing and chain links organization impact the growth prospects of distributors?
Mueller: There is no doubt that the uncertainty regarding such aspects of the natural gas market has big impacts on the distribution companies' future. The scenario of gas supply, for example, is still uncertain, particularly because Petrobras is leaving the natural gas market and may not even take part in the renegotiation of the supply contract with Bolivia. These changes make some distributors more conservative regarding new investments, and they avoid accessing long-term funding because the future is unsure. There are also many LNG projects arising, but how many of them can Brazil support? We are sure that all of those aspects will be solved and none of them will bring a real threat of shortages. However, those are significant changes that might have different results in each Brazilian state.
About Gustavo Mueller
Gustavo Mueller has worked for Fitch since 2010 as a senior analyst focused on the infrastructure sector, which encompasses natural gas distribution, water and construction. Mueller has more than 10 years of expertise in corporate credit risk analysis.