Transgaz’s ‘BBB-‘ IDR mainly reflects its solid business profile as a concessionaire and operator of the gas transmission network in Romania as well as the expectation of a progressive contraction of international gas transit business deriving from traditional routes. The rating is supported by the country’s regulation for gas transmission and our expectation that a significant current investment related to the Bulgaria-Romania-Hungary-Austria corridor (BRUA) will be added to Transgaz’s regulated asset base (RAB), supporting future earnings. The 6.9% pre-tax real allowed weighted-average cost of capital granted in the fourth regulatory period (September 2019- September 2024) incentivises investment in the network, which at a cumulative gross level of RON5.1 billion in 2019-24, we view as ambitious and with execution risk, a release posted on Thursday on the agency’s website reads.
Transgaz’s financial profile is currently strong as the company had a net cash position at end-2018. We expect funds from operations (FFO) net adjusted leverage to rapidly increase to around 5.5x at end-2020 due to increased capex and temporarily weaker transmission earnings due to regulatory corrections of past allowances, before reducing to around 3.6x over 2021-2024.
Fitch evaluates the Romanian transmission regulation as relatively transparent and stable and therefore supportive of Transgaz’s rating. Romania is entering the fourth regulatory period (October 2019-October 2024) for gas transmission with key parameters comparable with other regulatory frameworks across Europe. The allowed real rate of return of 6.9% (7.72% in the prior regulatory period) remains in the higher range for European peers and encourages investment in the network and strategic project such as the BRUA pipeline.
Transgaz’s earnings and operating cash flows are markedly more volatile than most utility peers. The tariff system, based on estimated volume and opex parameters, allows significant discrepancies compensated through ex-post correction adjustments implemented in the tariff of the subsequent years. The return of efficiency gains to customers and historical revenue over-recovery is expected to particularly affect fiscal years 2019 and 2020, resulting in a projected contraction of EBITDA and FFO by over 40% compared with 2018.
The new regulatory period offers broad continuity with the prior regime, but it introduces some changes that we view as supportive of Transgaz’s earnings visibility, including the recognition in regulated revenues of certain non-capitalised financial interests, reduced sharing of efficiency gains with customers to 60% and progressive reduction of volume-related tariff components to 15%.
Transgaz is implementing a far-reaching investment plan that targets an extensive development of the national transmission system improving the interconnectivity with neighbouring countries (especially Hungary, Bulgaria, Moldova, Ukraine). The major projects under the Ten Year National Development Plan (TYNDP) are the development of the gas transmission corridor, which will enable the transmission of Caspian gas through Romania (BRUA), as well as the connection of the Black Sea discoveries (the latter is not yet included in Fitch’s projections), the release reads.