OREANDA-NEWS. Fitch Ratings has affirmed Enagas S.A.'s Long term Issuer Default Rating (IDR) at 'A-'. The Outlook is Stable. A full list of rating actions for Enagas and its subsidiaries is available at the end of this commentary.

The rating reflects Enagas' solid business profile as the sole national gas system transmission operator and major owner of regasification and storage plants in Spain, with 97% of regulated revenues and limited volume risk. We forecast funds from operations (FFO) adjusted net leverage to average 5.3x for 2015-2020, which is commensurate with credit metrics guidelines for the 'A-' rating level.

The ratings also take into account Enagas' strategy to allocate domestic excess cash flows to grow its portfolio of equity investments and to increase dividend per share over the rating horizon to 2020.

The Stable Outlook reflects our expectations of a stable five-year regulatory framework, a balanced gas system in Spain from 2020, unwinding of material regulatory receivables, and moderate gas demand recovery.

KEY RATING DRIVERS
Leverage Limited Headroom
We forecast FFO adjusted net leverage to average 5.3x up to 2020, compared with an average of 4.6x for 2011-2014. Although leverage metrics are within our credit metric guidelines for an 'A-' rating level, headroom is limited. We expect Enagas to use the remaining leverage headroom insofar it is consistent with an 'A-' rating.

Highly Predictable Domestic Revenues
We view regulated revenues in Spain as largely predictable, with limited volume risk (a 1% decrease in demand results in a 0.5% reduction in total regulated revenues), manageable regulatory risk up to 2020 and a well-managed and efficient cost base.

Ministerial Order IET/2736/2015 published on 18 December 2015 set Enagas' regulated asset base (RAB) revenues at EUR821m and the demand-linked component at EUR242m for 2016. These are based on a total asset net value (akin to an implicit net RAB) for transmission, regasification and storage of EUR4.9bn and 1.4% expected growth in demand respectively. In addition, the order established EUR24m as remuneration for transmission system operator functions, up from EUR11m last year. Total published regulated revenues for 2016 are around EUR1.1bn.

We expect domestic regulated earnings to reduce over the regulatory period to 2020 at around 1.3% CAGR, due to a decreasing net asset base in an environment of low organic investment and lack of revenue indexation. The demand-linked component, which is not affected by a decreasing RAB, is expected to decrease slightly given our forecast of a moderate increase in gas demand at 2% on average, in line with the government's estimates, against an efficiency factor of 0.97.

Limited Domestic Capex
RAB-based revenues from new assets commissioned over the current regulatory period will only partially offset high RAB depreciation, with most of the domestic capex in 2019 and 2020. The Spanish gas infrastructure sector has excess capacity until the end of this decade (i.e. there are mothballed facilities such as Castor, underground storage, and Musel, a regasification plant). The only major upcoming projects are two regasification plants in the Canary Islands and international gas connections (Midcat).

International Investments and Dividends
Over the rating horizon to 2020 we forecast EUR3.5bn cash flow from operations before dividends and international investments. This is mainly due to lower domestic capex, increasing dividend flow from equity investments, unwinding regulatory receivables, and lower taxes after fiscal reform in Spain. We expect Enagas to deploy this excess domestic cash flow to dividends (EUR2.1bn), its fast-growing international investments (EUR1.2bn), and only marginally to deleveraging (EUR0.2bn) up to 2020.

We expect Enagas will continue to focus on prospective investments in international projects to the extent allowed by its 'A-' rating leverage thresholds. Around half of the company's international capex for 2015-2020 is already committed and we have factored in a high buffer of around EUR600m for discretionary international capex with no associated returns over the rating horizon. Dividend per share (DPS), expected at EUR1.32 in 2015, is forecasted by Fitch to grow at 5% CAGR up to 2020. Enagas has made public its dividend policy up to 2017.

Prudent Approach to Investments
International growth takes the form of equity stakes in large greenfield or brownfield projects in Latam (Peru, Mexico and Chile) and Europe (Sweden, TAP). This weakens Enagas' business risk profile, but is mitigated by the company's conservative approach to new investments. Its investments are either long-term contracts or regulated activities, financed by long-term non-recourse funding and related to the company's core business. Geographical diversification is partially offset by the weaker operating environments in the chosen overseas markets and a less- than-mature portfolio with execution risks.

Enagas' international assets, acquired over the last five years, are expected to reach 24% of total assets in 2020 (8% greenfield and 16% brownfield). The company has not set any internal target or cap for its international investments, although these are limited by its commitment to maintain its 'A-' rating.

Increased System Sustainability
We believe domestic reform of the sector is likely to resolve the Spanish tariff deficit (TD). The system should be able to absorb the outstanding TD of EUR538m by end-2014 and around EUR1.7bn pending asset remuneration by 2020 if demand grows at a minimum of 2% on average, even if no tariff increases are implemented.

Enagas' 38% share of the total TD and receivables from regulatory assets not yet recognised within the gas system amounted to EUR402m in December 2014, which we expect to be fully cashed in by end-2020.

Regulatory and Political Risk
Inconclusive results in the Spanish general elections this week have resulted in political uncertainty. However, we view that major reforms in the gas sector are complete and that all political parties have an interest to promote natural gas consumption in the country. In a more balanced gas system, which is our base scenario for 2020, incentives to substantially change the current regulatory framework are low. However, we do not rule out regulatory and political risks due to the absence of a fully independent regulator and untested mechanisms to limit system imbalances.

KEY ASSUMPTIONS
Our key assumptions in our rating case for the issuer include
-Domestic regulated revenues for 2015 and 2016 as stated in Ministerial Orders. From 2017, the remuneration framework will be applied based on an average growth in demand of 2%.
-EUR400m of equity investment dividends received between 2015 and 2020, including a haircut to capture greenfield projects' execution risk.
-Unwinding regulatory receivables leading to expected inflow of EUR400m from 2015 to 2020.
-EUR330m total capex on average per year, including total non-contributing and non-committed international capex.
-DPS of EUR1.32 for 2015 at a CAGR of 5% up to 2020.
-New debt refinanced with a premium of 200bp.

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, result in positive rating action are:
-FFO adjusted net leverage below 4.5x on a sustained basis, supported by a gradual recovery in gas demand and sustained inflow of dividends from international equity investments.

Negative: Future developments that may, individually or collectively, result in positive rating action are:
-FFO adjusted net leverage above 5.5x and/or a decrease in FFO interest cover below 4.5x (FY14: 6.5x), both on a sustained basis
-Substantial increase in international investments leading to higher business risk, depending on contractual and funding arrangements.
-Material changes to the regulatory framework leading to a change in our view on the system's sustainability, for instance, if the government fails to apply TD control measures.

LIQUIDITY
As of 30 September 2015, the group's liquidity comprised EUR410m of cash and cash equivalents, EUR1.5bn of undrawn committed medium-term credit facilities due 2019 and available loans of EUR300m due in 2016. This liquidity position should cover debt maturities of EUR1.11bn and operational requirements for the next 24 months.

FULL LIST OF RATING ACTIONS

Enagas S.A.
-Long-term IDR affirmed at 'A-'; Stable Outlook
-Short- term IDR affirmed at 'F2'
-EUR1bn ECP affirmed at 'F2'
-Senior unsecured rating affirmed at 'A-'

Enagas Transportes, S.A.U.
-Long-term IDR affirmed at 'A-'; Stable Outlook
-Senior unsecured rating affirmed at 'A-'

Enagas Financiaciones, S.A.U.
-Senior unsecured guaranteed notes affirmed at 'A-'.