BUCHAREST (Romania), June 20 (SeeNews) – Fitch Ratings said it confirmed Romanian gas transmission company Transgaz [BSE:TGN] Long-term issuer default rating (IDR) of ‘BBB-‘ with a stable outlook.

“Transgaz’s assertion is supported by its strong commercial profile as concessionaire and operator of the gas transmission network in Romania and our expectation of regulatory continuity in the new regulatory period from October 2024,” Fitch said in A press release Friday.

This is offset in the short term by a freeze in transmission tariffs, an increase in the distribution of dividends, growing investment ambitions and a gradual contraction of its “north-south” gas transit activity in the medium term, a- he added.

At the same time, the agency said it considers the regulatory framework in Romania to be less mature than many Western European regimes, with considerable volatility in earnings and operating cash flow. La perspective stable reflète ses attentes selon lesquelles le levier net des fonds provenant des opérations (FFO) sera structurellement maintenu en dessous de sa sensibilité à la notation négative de 4,7x.

Shares of Transgaz traded up 1.05% at 241 lei as of 10:57 a.m. CET on Monday on the Bucharest Stock Exchange.

Fitch also said in the statement:

“Main rating factors

Limited dependence on gas transit: Transgaz’s activity profile is gradually evolving towards a pure regulated gas transmission service (GRT) operator, allowing better predictability of its cash flows. This is mainly due to the recognition by the Romanian Energy Regulatory Authority (ANRE) of historic (T1/T2 gas pipelines), recent (BRUA) and expected (Moldova and Black Sea) interconnection projects within its regulatory asset base (RAB). Transgaz’s indirect dependence on gas transit is now limited to its monthly fixed settlement agreement with PJSC Gazprom related to the early termination of the historical Ukraine-Bulgaria T3 gas transit contracts, which we estimate at around 7 % of its 2022-2023 turnover (0% after).

Manageable gas price increase: For 2022, Transgaz’s gas needs for technical consumption and to cover network losses have been secured at a reasonable price of 239.5 RON/MWh (approximately 49 EUR/MWh). Le règlement prévoit des ajustements des coûts et des revenus, mais qui sont ex-post et n’empêchent donc pas la volatilité annuelle des flux de trésorerie, un différenciateur négatif par rapport à de nombreux pairs. Nous nous attendons à ce que l’ajustement pour le sur-recouvrement des revenus passés érode considérablement le bénéfice d’exploitation et les flux de trésorerie de 2022, et que cet effet soit lissé par la suite. Given the cuts in Russian gas exports to the EU, the risk of gas cuts in Romania is mitigated by the fairly high share of domestic gas production.

Black Sea-Posidor Commissioning Potentially in 2025/2026: Following recent changes to the Offshore Law and Europe’s need for an alternative gas source, we now see more certainty for the start of the Podisor interconnector (worth approximately RON 1.8 billion), which will connect the large Black Sea gas reserves to BRUA. The formal commitment of the exploration and production developers involved is still required for the start of work, which, if granted soon, should see commissioning in late 2025 or early 2026.

Black Sea Joint Venture: Transgaz has publicly announced its intention to finalize by the end of the year a 51%-49% joint venture agreement with the financial investor, Three Seas Initiative Investment Fund (3SIIF), involving – among other initiatives – the construction of the Black Sea- Connection posidor. Upon completion of the Black Sea-Posidor infrastructure, we expect it to be formally sold to Transgaz and recognized in its RAB. We consider the announced joint venture financing facility to be neutral to our rating assessment, as we expect to treat the investments and related financing (including 3SIIF’s equity-type contribution) as a full recourse to Transgaz. .

Peak leverage expected: Our updated estimates incorporate a gross investment of RON 2.9 billion in 2022-2025, including the Southern Transmission Corridor (STC), which will result in a net increase in debt to around RON 3.6 billion of RON at the end of 2025, compared to 2 billion RON at the end of 2021. We therefore expect a strong increase in net FFO leverage in 2022. Thereafter, assuming a fifth favorable regulatory period (from October 2024), along with the end of the rate freeze, the normalization of dividend payments and the increase in RAB, we expect leverage to increase structurally. stand at about 4.5x.

Weak link to GRE: Transgaz’s status, ownership and control links with the Romanian state are “strong”, given the latter’s majority stake (59%) and strategic and operational oversight of activities of the company. However, the track record of support is ‘weak’ as the company has received no tangible support in the past and we don’t expect that to change. We also rate the financial implications of Transgaz’s default for Romania as ‘low’, while the socio-political implications are ‘moderate’, reflecting our view that the infrastructure would remain largely operational even with Transgaz in financial difficulty.

Relationship to Sovereign Rating: We continue to rate Transgaz’s Standalone Credit Profile (SCP) at ‘bbb-‘, which puts the company’s long-term IDR at the same level as that of the Romanian sovereign (BBB- /Negative). Sur la base de nos critères d’entités liées au gouvernement (GRE) et de lien mère-filiale (PSL), si le SCP de Transgaz devenait plus fort que la notation de la société mère, l’entreprise pourrait être notée jusqu’à two notches above that of the parent company, due to “porous” legal compartmentalization. and access and control.

Derivation Summary

Electrica SA (BBB-/Negative) is Transgaz’s closest peer, as they share the same operating environment, majority shareholder, regulator, as well as significant cash flow volatility, mainly resulting from correction adjustments and gains efficiency of operating expenses. Fitch sees a higher debt capacity for Transgaz (negative sensitivity of 4.7x vs. 4.0x for Electrica), mainly in light of its lower exposure to unregulated activities (around 10% short-term transit for Transgaz vs. approximately 20% supply for Electrica) and Role of TSO.

NET4GAS, sro (BB+/RWN) and eustream, as (BBB/RWN; SCP: bbb-) own and operate the national gas transmission companies in the Czech Republic and Slovakia respectively, but are much more exposed to the transit of Russian gas to Europe and counterparty risk, which has led to recent rating downgrades.

Key assumptions

-International transit revenue and EBITDA based on Gazprom settlement agreement until 2023

– Freeze of regulated domestic transmission tariffs ending in March 2023 and its full compensation by 2024

– Fifth regulatory period in broad continuity with the current framework

– EU grants already committed over RON 0.1 billion

-Extension of the full monopoly tax until 2025

-Conds of effective interest on average about 5%

– Dividend on average 50% of profits from 2022

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/improvement:

– Considering the large investment plan, an upgrade is unlikely. However, net FFO leverage declining sustainably below 4.0x, reduced cash flow volatility due to the correction mechanism and reduced execution risk from large investments could be positive for the rating.

Factors that could, individually or collectively, lead to a negative rating action/downgrade:

– Net FFO leverage greater than 4.7x or FFO interest coverage less than 3.0x on a sustainable basis, potentially due to the extension of the current gas transmission tariff freeze or higher distribution to shareholders provided that

– Unfavorable changes in gas regulations in Romania

– Downgrading of several notches of the Romanian sovereign rating

Best/Worst Case Scoring Scenario

International credit ratings of non-financial corporate issuers have a best-case scenario for a rating upgrade (defined as the 99th percentile of rating transitions, measured in the positive direction) of three notches over a rating horizon three years; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured negatively) of four notches over three years. The full range of best-case and worst-case credit ratings for all rating categories ranges from “AAA” to “D”. Worst case and worst case credit ratings are based on historical performance.

Liquidity and debt structure

Adequate liquidity: As of December 31, 2021, Transgaz had cash and cash equivalents of RON 0.4 billion and an undrawn committed investment facility of approximately RON 0.7 billion (150 million euros) for the financing of the STC project. This compares to an annual debt maturity of RON 144 million and an expected cumulative negative free cash flow (FCF) of RON 0.4 billion in 2022 and 2023.

All unsecured debt: Transgaz has institutional funding, namely the European Investment Bank and the European Bank for Reconstruction and Development, which together with Banca Comerciala Romana and Banca Transulvania would provide most of the debt that is (and would be) all unsecured at Transgaz level. Most drawn facilities have a maturity of 10 to 15 years and a grace period of three years for principal repayment.

Issuer profile

Transgaz is the public TSO (59%) of the Romanian natural gas network and a European operator of gas transit services. Transgaz holds the monopoly of domestic gas transport on the basis of its concession agreement valid until 2032.

ESG considerations

Unless otherwise specified in this section, the highest level of ESG Credit materiality is a score of “3”. Cela signifie que les questions ESG sont neutres en termes de crédit ou n’ont qu’un impact minime sur le crédit de l’entité, soit en raison de leur nature, soit de la manière dont elles sont gérées par l’entité.”

(1 euro = 4.9472 lei)

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