June 2 (SeeNews) - Fitch Ratings said on Friday that it has affirmed Romanian gas transmission company Transgaz [BSE:TGN] long-term issuer default rating (IDR) of 'BBB-' with a stable outlook.
"The rating affirmation reflects Transgaz's solid business profile as a concessionaire and operator of the gas transmission network in Romania, its solid 2022 results and our expectation of regulatory continuity into the new regulatory period from October 2024," the global rating agency said in a press release.
Notwithstanding Transgaz's growing investment ambitions, Fitch expects funds from operations (FFO) net leverage to remain skewed towards its positive rating sensitivity, aided by a favourable effect on the company's regulatory asset base (RAB).
Structural liquidity improvement coupled with a continuation of a supportive regulatory framework could be positive for the rating.
Transgaz's shares traded 0.65% lower at 15.3 lei ($3.3/3.1 euro) as at 1621 CET on Friday on the Bucharest Stock Exchange.
Fitch also said in the statement:
"KEY RATING DRIVERS
Expansion Execution Key: We expect the high inflationary environment, combined with the material planned net investments (RON3.3 billion in 2023-2026), to expand its RAB by almost 80% by 2026 (compared with 2022), lift its EBITDA to RON1.2 billion in 2026 (RON0.6 billion in 2022) and increase net debt to RON3.9 billion (RON1.8 billion in 2022). We therefore view effective control of operating costs, timely capex execution and working capital management (RON0.4 billion expected cumulative drain) as key to maintaining FFO net leverage on average at 4.0x (current positive sensitivity) until 2026.
Convergence Towards Pure TSO: Transgaz's business profile is progressively moving towards a pure regulated gas TSO, allowing better predictability in its cash flows. This is mostly due the Romanian Energy Regulatory Authority's (ANRE) recognition of the company's historical (T1/T2 pipelines), recent (BRUA/Ungheni-Chisinau) and expected (Black Sea - Podisor) inter-connections projects within its RAB. Transgaz's reliance on gas transit has been reduced further following PJSC Gazprom November 2022 non-payments. We now estimate gas transit activity at only around 5% of its 2023 EBITDA (0% thereafter).
Limited Visibility of RP5: The consultation process for the fifth regulatory period (RP5) is expected in 2024, and we therefore currently do not have full regulatory visibility beyond September 2024. We would monitor the evolution of the tariff system, which allows very large discrepancies between actual and allowed revenues, to be compensated only in subsequent years through correction adjustments to the tariff.
This approach, together with political intervention such as the tariff freeze introduced from April 2022 until March 2023 (which generated RON600 million receivables for Transgaz), resulted in marked volatility of earnings and operating cash flows. This is currently the main negative differential compared with other eastern European networks driving its lower debt capacity for the same rating.
Black Sea-Podisor Commissioning: Following last year amendments to the Offshore Law and Europe's need of alternative gas sources, we now see more certainty to the start of the Podisor inter-connection (worth around RON1.8 billion, to be built by Transgaz), which will link large black sea gas reserves to the BRUA (Bulgaria-Romania-Hungary-Austria) pipeline. The final investment decision (FID) of participating exploration and production companies is still required for the interconnection works to start. If the FID is granted this summer as expected, the interconnection should be commissioned in 2026.
Black Sea Joint Venture: Transgaz has been negotiating a 51%-49% joint venture agreement with a financial investor, Three Seas Initiative Investment Fund (3SIIF), entailing - among other initiatives - the construction of the Black Sea-Podisor connection. At completion of the Black Sea-Podisor infrastructure, we expect it to be formally sold to Transgaz and be recognised in its RAB. We therefore view such joint venture financing vehicle scheme as neutral to our rating assessment, as we treat the investments and related funding (including 3SIIF equity-like contribution) as full recourse to Transgaz.
Weak GRE Linkage: Transgaz's status, ownership and control links with the Romanian state are 'Strong', given that the latter's majority ownership (59%) and strategic and operational oversight over the company's activities. However, the support track record is 'Weak' as the company has not received any tangible support in the past and we do not expect this to change. We also view the financial implications of Transgaz's default for Romania as 'Weak', while the socio-political implications as 'Moderate', reflecting our view that the infrastructure would remain largely operational even with Transgaz in financial distress.
Relationship with Sovereign Rating: We continue to assess Transgaz's Standalone Credit Profile (SCP) at 'bbb-', which places the company's Long-Term IDR at same level as the Romanian sovereign's (BBB-/Stable). Based on our Government-Related Entities (GRE) and Parent-Subsidiary Linkage (PSL) Criteria, should Transgaz's SCP become stronger than the parent's rating, the company could be rated up to two notches above the parent's, due to 'porous' legal ringfencing and access and control.
DERIVATION SUMMARY
Societatea Energetica Electrica S.A. (BBB-/Negative) is Transgaz's closest rated peer, since they share the same operating environment, majority shareholder, regulator, as well as significant cash flow volatility, resulting mainly from correction adjustments. Fitch sees a higher debt capacity for Transgaz (4.7x negative sensitivity versus Electrica's 4.0x), mainly in light of the its lower exposure to unregulated businesses (around 5% short-term transit for Transgaz versus around 20% supply for Electrica) and national TSO role.
Both NET4GAS, s.r.o. (BB-/Evolving) and eustream, a.s. (BBB/Negative; SCP: bbb-) own and operate the national gas transmission businesses in the Czech Republic and Slovakia, respectively, but are much more exposed to gas transit to Europe, which resulted in recent rating downgrades.
Other peers include German e-netz Suedhessen AG (BBB+/Stable), which is a regional electricity and gas distribution company, as well as Czech Gas Networks Investments S.a r.l (BBB/Stable). The two companies operate in more predicable regulatory frameworks, but have significantly higher leverage than Transgaz. Another peer is Slovak gas distribution company SPP - distribucia, a.s. (BBB+/Negative, SCP 'a-'), which has close to 100% EBITDA from distribution, larger scale of operations, neutral FCF and its leverage is materially lower than Transgaz's.
A wider peer group includes distribution service operators for electricity and gas across the EU, such as E.ON SE (BBB+/Stable) and Italgas S.p.A. (BBB+/Stable).
KEY ASSUMPTIONS
-International transit revenue and EBITDA based exclusively on current bookings for 2023
-Full compensation in 2024 of the TSO tariff freeze experienced from April 2022 until to March 2023
-Fifth regulatory period in broad continuity with the current framework
-Cumulative net capex in 2023-2026 of almost RON3.3 billion, reflecting recurring network investments, and developments of the Black Sea-Podisor
-Committed EU grants of almost RON470 million
-Extension of the full monopoly tax until 2026
-Effective interest rates on new debt averaging around 6%
-Dividend on average at 50% of profits from 2023 onwards
RATING SENSITIVITIES
Factors That Could, Collectively, Lead to Positive Rating Action/Upgrade:
- FFO net leverage decreasing below 4.0x on a sustained basis (3.8x in 2022)
- Healthy liquidity and visibility over the supportiveness of the new regulatory period starting in October 2024
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
- FFO net leverage above 4.7x or FFO interest coverage below 3.0x on a sustained basis
- Adverse changes to gas regulation in Romania
- Once construction starts, failure to deliver on the Black Sea-Podisor pipeline (ie. 24-month construction period at around EUR375 million total cost) or other investments as planned
- Multiple-notch downgrade of the Romanian sovereign rating
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
Satisfactory Liquidity: As of 31 December 2022, Transgaz had cash and cash equivalents of more than RON0.4 billion and a committed undrawn capex facility from European Investment Bank of around RON0.75 billion (EUR150 million), mainly financing the Black Sea-Podisor project. This compares with yearly debt maturity of around RON0.1 billion and expected cumulative negative free cash flow (FCF) of RON0.2 billion in 2023. For 2024, we estimate the funding gap at RON0.3 billion.
All Unsecured Debt: Transgaz benefits from some institutional funding, namely the European Investment Bank and European Bank of Reconstruction and Development, which together with Banca Comerciala Romana and Banca Transilvania, would grant most of the debt that is (and would be) all unsecured at Transgaz's level. Most of the drawn facilities have a 10-to-15-year maturity and a grace period of three years for principal repayment.
ISSUER PROFILE
Transgaz is the state-owned (59%) TSO of the Romanian natural gas grid and a European operator in gas-transit services. Transgaz has a monopoly on domestic gas transmission based on its concession agreement valid until 2032.
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.
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."
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