Nord Stream commissioning already reflected in ratings

Nord Stream commissioning already reflected in ratings

Azerbaijan, Baku, Sept. 9 /Trend, N.Ismayilova/

Fitch Ratings says that the commissioning of the first line of the Nord Stream gas pipeline has already been factored into ratings. However, the agency considers that the new gas pipeline has consequences for the financial and operational profiles of some issuers. The magnitude and direction of the impact varies on a company-specific basis.

OAO Gazprom (Gazprom, 'BBB'/Positive) is expected to benefit from the additional diversification of gas transportation routes to western Europe beyond the current pipelines running through Ukraine (and then across Slovakia) and through Belarus (and then via Poland). The cost of Nord Stream is expected to be around EUR7.4bn, funded through project finance and with a limited impact on Gazprom's credit metrics.
The new gas pipeline is likely to have negative consequences for Slovensky Plynarensky Priemysel, a.s. (SPP, 'A'/Negative) and NJSC Naftogaz of Ukraine (Naftogaz, 'CCC'). Fitch expects the gas transmission volumes and revenues of these issuers will decrease by about 20% from 2012, negatively impacting their financial profiles. The existing gas pipelines running through Ukraine and Slovakia so far carried about two-thirds of Russian gas delivered to western Europe.

The agency notes that long-term transit volume through this corridor is less predictable due to uncertain gas demand growth, plans to open the second section of the Nord Stream pipeline for commercial deliveries by 2013 (and possibly other pipelines such as Nabucco or South Stream), but also considering existing ship-or-pay contracts between Gazprom and SPP, and Naftogaz. Gas demand dynamics are also uncertain due to the glacial economic growth outlook for much of Europe, despite the withdrawal from nuclear power generation by some countries (Germany, Switzerland, Italy).

Fitch also notes that in the light of the ongoing gas price and volume talks between Naftogaz and Gazprom, new disruptions to the supply of gas similar to those experienced in 2006 and 2009 cannot be fully ruled out. Securing an alternative gas export route to western Europe may strengthen Gazprom's negotiating power with Naftogaz. This increased event risk is also largely factored into Naftogaz and SPP's current ratings.

For Naftogaz, the current uncertainty extends to restructuring plans to be considered by the government in Q411. Fitch rates Naftogaz's USD1,595m notes at 'B', in line with the sovereign rating, based on the unconditional and irrevocable guarantee from the government of Ukraine. The agency does not expect Naftogaz's potential restructuring to have an impact on the guarantee.

Fitch considers the Nord Stream pipeline should improve the security of supply for most western European gas consumers. Although it does not offer diversification of gas sources away from Gazprom, the route diversification is positive.

The effect is more complex for countries such as Poland, Czech Republic, Slovakia, Hungary, Romania or Bulgaria. However, this region has embarked upon an improvement of interconnection capacities to foster liberalisation and security of supply (for example Hungary's new connections with Romania, Croatia, and prospectively Slovakia, Poland's new connection with Czech Republic and its plans for an LNG import terminal).

Nonetheless, end users are likely to eventually face increased transmission and distribution tariffs to post-fund the capital expenditure currently born by the respective network companies. Independent gas suppliers (and customers in markets that are fully liberalised) are expected to benefit from the increased nominal supply capacity.

Fitch also notes that increased competition, the economic slowdown and a mismatch between the import price for gas (from Gazprom) and wholesale gas prices has put pressure on the profitability of incumbent gas suppliers such as E.ON AG (E.ON, 'A'/Stable), RWE AG ('A'/Negative), GDF Suez SA (GDF), ENI Spa ('A+'/Stable), PGNiG SA, SPP, OMV AG ('A-'/Stable), and Naftogaz, a trend likely to persist in the short to mid term.

Nord Stream is a gas pipeline from Vyborg in Russia to Greifswald in Germany through the Baltic Sea with a total planned capacity of 55 billion cubic metres (bcm). The first line of the pipeline (27.5 bcm) is expected to start commercial deliveries in Q411. The second line, which would double Nord Stream's capacity, is planned to be commissioned in late 2012. Nord Stream is constructed by Nord Stream AG, a joint-venture owned by Gazprom, BASF SE ('A+'/Stable)/Wintershall Holding GmbH, E.ON Ruhrgas AG (a subsidiary of E.ON), Gasunie and GDF.

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