Transgaz: Story goes on, but with higher risks

Important developments with an impact on the company’s business have occurred over the last few months, calling for a revisit of our forecasts and valuation model.

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I. Tariff update


The update of tariffs, starting in April 2013, is in our view the most important event for Transgaz, especially because of the fact that a long-awaited change in the structure, with a larger weight granted to the fixed component (capacity reservation tariffs) has finally been implemented. This will result, based on our estimates, in additional revenues of over RON 250mn per year from the regulated business, which, in 2013 and even 2014, will offset higher operating expenses incurred as a result of gas price liberalization and the monopoly tax.


Our view, however, is that major tariff increases are at least likely in the coming years, given the expected social pressures in the context of the assumed gas price liberalization. The gas bill should effectively increase by about 60-65% up to the end of 2014 for industrial consumers and until the end of 2018 for households only as a result of domestic gas price convergence, with the imported gas price and with the other components of the final gas price to customers (i.e. transportation tariff, distribution tariff) remaining unchanged. Moreover, gas consumption will most likely stagnate in the coming years given the substantial price increase.


II. Monopoly tax


In January 2013, the government approved a set of taxes affecting energy companies over the period February 2013-December 2014, including a monopoly tax levied on quantities of gas/electricity transported and distributed. In the case of Transgaz, the tax is RON 0.1/MWh for quantities transported to distribution grids and RON 0.85/MWh for quantities delivered directly to end-customers.  The latest annual report reads that 67% of gas transported goes to the distribution grid. Therefore, when computing the monopoly tax charge, we employed a 67/33 split between natural gas transported to distribution grids/gas transported to end-customers. Consequently, we computed expenses of RON 40mn for 2013 and RON 47mn for 2014.


III. International transit   


Gas transit was carried out via three dedicated pipelines based on contracts with Russia’s Gazprom and Bulgaria’s Bulgargaz. Owing to the fact that these pipelines are not connected with the domestic transportation infrastructure, this activity has not been regulated and contributed about 20% to sales and 40-45% to EBIT (based on our calculations).


Given that, in 2009, the European Commission initiated infringement procedures against Romania for not granting free access to all interested operators to the transportation network, the regulatory authority decided in mid-2012 to implement a bidding system for capacity allocation for the transit pipe serving the contract with Bulgargaz. As regards the other two pipelines servicing the contracts with Gazprom, discussions on how they will be operated in the future are ongoing.


We prefer not to speculate on how the transit business will be run in the future. What is certain is that, if revenue-cap methodology were to be applied, operating profit would be hit, as the assets corresponding to this business line, and based on which the profitability would be linked, are quite low.


In our forecast scenario, we have assumed contracts with Gazprom remaining in force while revenues from transit through the pipe serving Bulgargaz remain at levels quite close to those recorded in recent years.


IV. Gas price liberalization


The Romanian government assumed a calendar for liberalizing the gas price, with prices charged by domestic producers (the largest being Petrom and Romgaz) to reach RON 119/MWh by end-2014 for industrial consumers and by end-2018 for households. Transgaz will be affected in two ways: 1) technological consumption costs and 2) benefits to employees of ~6,500cm of gas/year/employee. Both expenses are recognized in tariffs and thus the company should recover them, but with a delay, namely via next year’s (i.e. following the year when the gas price is raised) tariffs. For this reason, we expect a contraction of the company’s EBIT in 2014 and especially 2015, followed by a slight recovery. We have assumed that tariffs will be adjusted below the levels that would be justified in order for the company to cover the higher expenses incurred. As already mentioned, our view is that the regulator will be tempted to increase tariffs by less than they should be or even to avoid updating tariffs, in order to further reduce pressure on the final gas price in the context of gas market liberalization.


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