ENAGAS, oportunidad de compra?

Release date- 30122020 - Fitch Ratings has Revised Enagas S.A.'s Outlook to Negative from Stable and affirmed the utilities company's Long-Term Issuer Default Rating (IDR) at 'BBB+'.A full list of rating actions is provided https://below.The Negative Outlook of Enagas reflects higher leverage forecast for 2020-2023, following substantially lower dividend expected from its Tallgrass equity investment, which together with decreasing regulated income in Spain, puts pressure on its funds from operations (FFO). Our projections also consider an onerous and fully committed dividend policy until 2026, but no additional international growth capex to underline management's willingness to protect credit metrics. We forecast average FFO net leverage of 5.8x for 2020-2023, which is no longer commensurate with a 'BBB+' https://rating.Fitch expects to review the rating once the company discloses its strategic update in February 2021. Lack of additional supportive measures to those already reflected in our forecast will most likely trigger a rating downgrade to 'BBB'.KEY RATING DRIVERSHigh Leverage Drives Negative Outlook: Our higher leverage forecast is primarily derived by the downwardly revised dividend income stream from Tallgrass equity investment for 2020-2023, and, secondarily, by lower operating expenditure unitary values for the regulated business in Spain for 2021-2026. Our updated scenario breaches the negative leverage sensitivity for a 'BBB+' rating in each of the years in 2020-2023 (5.8x on average, peaking at 6.0x in 2021-2022), notwithstanding our lower capex assumption for the https://period.Credit-Protection Measures to Avert Downgrade: We expect the strategic update to include Enagas' latest view on Tallgrass performance and expected shareholder distributions, and, importantly, could add visibility on credit-protection measures to mitigate the peak in leverage and protect the 'BBB+' rating. Lack of sufficient measures will trigger a one-notch rating https://downgrade.Lower Dividend Income Stream: Fitch now projects EUR0.6 billion of dividends received from Enagas' portfolio of equity investments for 2020-2023, versus our previous forecast of EUR0.9 billion. The material cut in total dividends over the period is mainly driven by Prairie ECI Acquiror LP (B+/Negative) holding company of the Tallgrass group. Fitch projects distributions from Prairie to Enagas (and other shareholders) to be meaningfully lower than 2019's https://levels.Main dividend contributors to Enagas' revenue will be Transportadora de gas del Peru (BBB+/Stable), GNL Quintero S.A. (BBB+/Stable) and Sagass (regasification plant in Spain). Its 16% stake in the Trans-adriatic pipeline will add around EUR40 million in dividends in 2023.Tallgrass Revised Dividend Policy: The board of directors at Tallgrass Energy Partners, LP (TEP; BB-/Negative), operating company (opco) of the Tallgrass group, has decided in 2020 to materially reduce dividends to its holding company compared with historical levels and to preserve cash at the opco given a challenging operating environment for the US midstream sector. Under our assumptions, we estimate that TEP distributions would be sufficient to meet Prairie's debt service and covenant obligations, leaving only minimal excess cash for shareholder https://distributions.Tallgrass Negative Outlook: Summertime oil production shut-ins affecting Pony Express, Tallgrass's crude oil pipeline, and bankruptcies at a couple of Rockies Express's shippers, a 75%-owned natural gas pipeline, have lowered Tallgrass's EBITDA, raised its leverage and clouded its prospects. The Negative Outlook on the Tallgrass group primarily reflects heightened counterparty risk coming from 'B'-rated and non-rated off-takers, potentially leading to contract default from shipper https://bankruptcy.Tallgrass EBITDA Growth Constraints: A majority of Pony Express's run-rate volumes is underpinned by minimum volume commitments (MVC), and while almost all of Rockies Express's revenues is supported by take-or-pay payments. However, structural challenges to grow above MVC levels and repricing risk from weakened shippers constrain EBITDA growth for the next three years, which in turn constrains dividend growth for Enagas and other https://shareholders.Revised Capex: We project EUR0.4 billion of net investments for 2021-2023 to be mostly in Spain, which is down 37% from the previous Fitch rating case. We have removed additional uncommitted capex from our assumptions to reflect management's willingness to protect credit metrics while the dividend stream remains weak. Enagas has demonstrated capex flexibility in the past. We believe that its recently announced involvement in green hydrogen projects could require additional investments and provide returns, but this is over a longer horizon beyond 2023.Committed Dividends to Shareholders: Enagas' commitment to raise dividends up to https://EUR1.74 per share by 2023 (2020-2023: CAGR 1%), which will then become the dividend floor until 2026, limits financial flexibility to deleverage in the medium term. We estimate dividend pay-out at a high 100% for 2020-2023, given weaker earnings forecast for the period and the committed dividend https://policy.O&M Unitary Values Update: In December 2020, the CNMC published its proposed unitary values for opex and capex for 2021-2026 that imply an additional decline in regulated revenue of EUR85 million for 2021-2026 (EUR15 million per year on average). The negative impact on opex allowance from 2021 is expected to be partly compensated by higher capitalised operating expenses (copex) although this is skewed towards the second half of the regulatory period. Unitary values had not been revised by the regulator since 2008 for transmission and 2012 for regasification https://activities.Resilient Domestic Activities: The pandemic and the resulting gas demand decline have had limited implications for Spanish regulated gas transmission, storage and regasification earnings. Enagas benefits from a recently revised regulatory asset-base framework that runs until 2026, which has maintained full asset availability that is Enagas' main revenue driver. Demand-linked regulated revenue at the company is related to the remuneration continuity of supply (RCS), which was around EUR270 million in 2019 (23% of total revenue that year).Lower RCS Ahead: Our revised rating case includes a 9% decline in gas demand for 2020, which equals to an average EUR12 million drop p.a. for 2020-2026. This comes on top of the regulatory-driven decrease of the RCS until 2026, as the 2020 RCS is set as the base for the RCS calculation for the whole regulatory period. RCS is expected to be EUR165million by end-2023 and EUR58 million by https://end-2026.Falling Spanish RAB: The regulatory asset base (RAB) is declining around EUR200 million per year due to a lack of new assets being commissioned and natural depreciation of existing assets. We forecast RAB to decrease to EUR3.2 billion by 2023 from EUR4.4 billion at end-2019. This includes a negative one-off adjustment of around EUR300 million as outlined in the regulatory circular to be applied in 2021. Domestic capex is around EUR120 million per year, which is partially non-RAB remunerated. Around EUR50 million per year related to copex will only be fully remunerated from 2023.DERIVATION SUMMARYEnagas is the sole natural gas transmission operator in Spain and the owner of regasification and storage facilities. It also holds a sizable and globally diversified equity-investment portfolio of oil, natural gas and LNG midstream infrastructure assets. We view Red Electrica Corporacion S.A. (REE; A-/Stable) in Spain, Snam S.p.A. (BBB+/Stable) in Italy and REN - Redes Energeticas Nacionais, SGPS, S.A. (BBB/Negative) in Portugal as Enagas' main peers. Enagas has a weaker business risk profile than those peers due to a higher exposure to non-regulated activities, notwithstanding certain diversification by geography and https://jurisdiction.Enagas' closest peer is the Italian transmission system operator Snam, which owns and operates the Italian gas transmission network. Snam's higher debt capacity for the same rating is supported by the company's larger scale and a transparent regulatory framework with a longer record of regulatory determinations and a more conservative approach to equity https://investments.REE, the Spanish electricity TSO, has higher debt capacity supported by scale, lower leverage and higher growth prospects amid energy transition in Spain. Finally, REN has higher debt capacity driven by higher regulated revenue and diversification across electricity and gas regulated networks in Portugal. This is partially offset by a smaller scale, exposure to shorter regulatory periods, higher cash flow volatility due to tariff deviation and slightly higher leverage metrics, all of which justify the one-notch rating difference between the https://two.Enagas' senior unsecured rating at 'BBB+' benefits from a one-notch uplift from the Long-Term IDR under Fitch's criteria given the company's large share of regulated https://earnings.KEY ASSUMPTIONSRegulated revenues based on remuneration model approved in circular 9/2019 (published in the Official Spanish Gazette on 23 December 2019) and unitary values for O&M based on CNMC 08/2020 for 2021-2023;Expiration of non-regulated gas contracts with Galp from 2021;Domestic capex on average at EUR120 million, 40% remunerated as copex (around EUR50 million) from 2022;EUR0.6 billion of equity-investment dividends received in 2020-2023, of which slightly above 5% relates to Prairie/Tallgrass;No additional international growth for 2021-2023;Gaseoducto del Sur Peruano (GSP) investment recovery delayed to beyond 2023;Dividend per share of https://EUR1.68 for 2020 (5% up from 2019) and 1% from 2021 onwards until https://EUR1.74 per share by 2023;Maturing credit facilities up to 2021 renewed at a premium of 100bps; andEstimated EUR/USD at 1.15 for 2021-2023.RATING SENSITIVITIESFactors that could, individually or collectively, lead to positive rating action/upgrade:The Outlook is Negative and we therefore do not expect an upgrade. Future developments that may lead to the Outlook being revised to Stable include:FFO net leverage trending towards 5.3x on a sustained basis, supported by management measures to protect credit https://metrics.Factors that could, individually or collectively, lead to negative rating action/downgrade:Lack of sufficient credit-protection measures in the strategic update to avoid FFO net leverage breaching 5.3x for a sustained period;Material negative changes to the regulatory framework for gas transmission or regasification activities in Spain, or a change in our view of the system's sustainability;Share of non-regulated EBITDA above 50%, on a sustained basis, could lead us to tighten our sensitivities or change our rating approach to reflect our view of Enagas as a diversified utility holding company rather than a purely regulated network. In addition, worsening of the dividend-weighted average credit quality of the investment portfolio could lead us to tighten our rating https://sensitivities.Share of non-regulated EBITDA above 50% could lead us to remove the one-notch uplift for the senior unsecured https://ratings.BEST/WORST CASE RATING SCENARIOInternational scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.LIQUIDITY AND DEBT STRUCTUREStrong Liquidity: As at 30 September 2020, Enagas had cash and cash equivalents of EUR800 million, with undrawn committed lines of EUR1.6 billion that are due in 2024. The available liquidity is enough to cover around EUR1.8 billion of debt maturities expected until end-2023. We expect Enagas to generate neutral to positive free cash flow until 2023.Enagas' debt is largely placed at holdco and finco levels (around 90% of total debt by end-2019) with only minor debt at Enagas Transporte and Enagas Internacional S.A.