This week, the Fitch Ratings Agency affirmed a BBB- rating for Transgaz, with a stable outlook. In this brief research piece, we bring you the main highlights that led to this decision.

Transgaz received a BBB- rating with Stable Outlook from the Fitch Ratings Agency. This rating reflects Romgaz’s solid business profile as the concessionaire and operator of the gas transport network in Romania, as well as the expectation of regulatory continuity into the new five-year regulatory period (RP5). Below we provide you with a summary of key rating drivers.

Overall, the rating agency expects for the funds from operations (FFO) net leverage to gradually fall over 2024-2027 and to remain comfortably positioned within expected rating sensitivities despite Transgaz’s growing investment ambitions. This is aided by an expected early return recognition for its Black Sea-Podisor investments and a favorable inflationary effect. However, debt-funded investment for the capacity expansion to Hungary above the current assumptions could result in higher-than-expected leverage.

Evolution Toward a Diversified TSO: In 2024, Fitch expects Transgaz to complete its transition towards a pure regulated gas TSO, eliminating exposure to international transit bookings.

Exclusive Gas TSO for Moldova: Starting from 2023, Vestmoldtransgaz, owned by Transgaz, is also the only gas TSO in Moldova. The rating agency expects this role to add around RON 110m of annual EBITDA for 2024-2027, representing about 10% of the group’s EBITDA and 7% of CAPEX. Fitch views such additions to have a broadly neutral effect on Transgaz’s debt capacity and rating sensitivities, as the benefit of cash flow diversification will be offset by the lower predictability of the Moldovan regulatory framework, whose current regulatory period will last until end-2026.

Expansion Execution Key: Fitch projects Transgaz’s regulatory asset base (RAB) to grow almost 60% by 2026 (compared to FY 2022), EBITDA to rise to RON 1.4bn (from RON 0.6bn in FY 2023), and net debt to rise to RON 4.2bn (from RON 1.8bn FY 2023) due to large planned net investments amounting to RON 4.1bn for 2024-2027 and high inflation. Overall, Fitch sees the evolution of the regulatory scheme, control of OPEX, timely CAPEX execution, and adequate working capital management as key to maintaining FFO net leverage comfortably for the rating until 2027.

Black Sea-Podisor Developments: Following a multi-year postponement, the Podisor interconnection, which will link large Black Sea gas reserves to the BRUA (Bulgaria-Romania-Hungary-Austria) pipeline, is currently under development with commissioning and RAB inclusion expected by 2026. Fitch expects the majority of CAPEX to be executed in FY 2024, with early recognition of allowed returns already in FY 2025.

Potential Threats from Interconnectivity Developments: A sharp reduction in Russian gas transit to Europe underscores the need for material interconnectivity investments in central and eastern European countries. While Bulgaria could double its connectivity capacity with Romania, Romania plans to increase its capacity to Ukraine by c. 50% without substantial investments, given its largely available infrastructure.

Relationship with Sovereign Rating: Transgaz’s rating remains ‘BBB-‘, at the same level as the Romanian sovereign rating. Based on the Government-Related Entities (GRE) and Parent-Subsidiary Linkage (PSL) Criteria, if Transgaz’s SCP becomes 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 & control. If Transgaz’s SCP becomes weaker than Romania’s rating, the rating agency would expect it not to benefit from parental support, reflecting ‘low’ legal, strategic, and operational incentives to support the company.

Updated Government-Related Entities (GRE) Criteria: The update to GRE Criteria has had no impact on Transgaz’s long-term rating. Fitch assess decision-making and oversight at ‘Strong’, as the Romanian state is Transgaz’s main shareholder. The rating agency views both the preservation of government policy role and contagion risk also as ‘Not Strong Enough’.

What could influence further rating changes?

Looking at the upside, FFO net leverage decreasing more than expected, combined with healthy liquidity might lead to a rating upgrade. On the flip side,  FFO let leverage increasing more than expected due to an increase in investments, changes in gas regulation in Romania, or failure to deliver the aforementioned investments might result in a rating downgrade.