NET4GAS: Necessary decarbonization as challenge
NET4GAS holds an exclusive license as gas transmission system operator in the Czech Republic, and thus plays a key role in transporting natural gas predominantly from Russia to Europe. For 2021, consolidated revenues of CZK 10,373mn (+3.4% y/y) were reported. Profitability remained high. Operating cash flow was strong, free cash flow has improved due to lower investments and dividend payments but still lay in the negative territory. Net debt increased in 2021 by 30.9% y/y. Consequently, credit metrics have weakened despite good operative results. In order to strengthen financial resilience, dividend payments were suspended as of mid-March 2022.
At end-2021, Moody's (Baa2, stable) and Fitch (BBB, stable) confirmed their ratings, but in early-March 2022 they put NET4GAS on the watchlist for downgrade in view of the Ukraine war. Moody's downgraded NET4GAS to Ba2 at end-March 2022, Fitch' downgrade we expect shortly. 76% of annual revenues come from Gazprom, 10% from another unstated major customer; thus, there is already a very high cluster risk concentration. In combination with European efforts to become independent from Russian natural gas, the exposure strongly increases. Further sanctions against Russia could additionally exacerbate the situation. According to NET4GAS, there have not been any interruptions in gas transit or payments so far. Business relations are mainly based on long-term contracts with a ship-or-pay clause.
NET4GAS does not provide any guidance for 2022. The decarbonization process is addressed with a feasibility study that investigates whether and how the existing or a new infrastructure could be used for the transport of other (renewable) gases in the future. We anticipate here a high need for investment that could weaken credit ratios not only temporarily, despite strategic shareholders. ESG information is sparse.