Q4 2012 Enagas SA Earnings Conference Call
Feb 20, 2013 AM CET
ENG.MC - Enagas SA
Q4 2012 Enagas SA Earnings Conference Call
Feb 20, 2013 / 09:00AM GMT
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Corporate Participants
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* Antonio Velazquez-Gaztelu
Enagas SA - Head of IR
* Antonio Llarden
Enagas SA - Chairman
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Conference Call Participants
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* Pablo Cuadrado
BofA Merrill Lynch - Analyst
* Javier Suarez
Nomura - Analyst
* Carolina Dores
Morgan Stanley - Analyst
* Felipe Avaria
Espirito Santo - Analyst
* Virginia Sanz
Deutsche Bank - Analyst
* Jose Martin-Vivas
Mirabaud Securities - Analyst
* Fernando Lafuente
N+1 Equities - Analyst
* Gonzalo Sanchez
BPI - Analyst
* Isidoro del Alamo
BBVA - Analyst
* Olivier van Doosselaere
Exane - Analyst
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Presentation
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Antonio Velazquez-Gaztelu, Enagas SA - Head of IR [1]
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(Interpreted). And good morning, ladies and gentlemen. Welcome to Enagas 2012 results presentation, where we will also be updating our forecast for the 2013/'15 period.
Figures for the 2012 period were released this morning, before the opening bell, and are available on our website, www.enagas.es. Mr. Antonio Llarden, the Chairman of Enagas, will host the presentation, which will approximately last for a half-hour. And afterwards there will be a Q&A session, during which we will try to answer any questions as fully as possible.
Without further ado, thank you very much for your attention and I will now hand the floor to Mr. Antonio Llarden.
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Antonio Llarden, Enagas SA - Chairman [2]
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(Interpreted). (Technical difficulty). Again, good morning, ladies and gentlemen, and thank you very much for joining us today.
My speech today will have three main sections. During the Q&A session, I will reply to all your questions in detail and then I will present the rest of the team to answer those questions. As I said, my speech today will have three main sections.
First and foremost, I will give a summary of Enagas 2012 earnings and comment on the most important aspects. I am pleased to say that for the sixth year running, and despite the harsh economic environment, we have beaten all the objectives that we have set ourselves for the year. In the second section, I will explain the key aspects of our strategic reflection process and the most attractive possibilities for our shareholders. Finally, I will talk about the outlook and specific prudent objectives in this context for Enagas over the 2013/2015 period.
2012 was the fifth year of the current economic global crisis, the sixth if we also include 2007. Now, in Spain macroeconomic indicators continued to worsen through 2012. Nonetheless, since the final quarter, the market's perception of Spain appears to have started to change, and this shift is reflected in a market for -- in the risk premium. Likewise, Spanish exports and the balance of payments have improved substantially.
In summary, 2012 was a year of a crisis, but also one which gave some hope to believe that our country could soon be back on track. And this will also benefit the energy sector, which has been especially hard hit by the crisis and the regulatory uncertainty. At Enagas, we are proud that our 2012 results have been met and even surpassed the targets set for the year, given the adverse economic environment. Another plus is that this year we delivered one of the best relative performances on the Spanish stock market among domestic utilities and among most comparable companies in Europe.
Key figures now. I will now comment on the 2012 key figures. EBITDA grew by 5.5%, reaching EUR934.3m. This increase is slightly lower than our target for the year due to, as you all are aware, to the delay in the acquisition of Naturgas, which will now go ahead in 2013. As we have already announced, the deal was completed last Friday.
Net profit was EUR379.5m, 4.1% higher than in 2011 and ahead of the target that we set at the beginning of the year. As a result of the rise in the net profit and of the increase in the payout ratio from 65% to 70%, the shareholder dividend will increase by 12.1%, compared with the 8% initially forecasted.
Finally, in 2012 we invested EUR761.4m and brought into operation assets worth EUR994.4m. Both figures are much higher than forecast at the start of the year, largely due to the investment in the GNL Quintero regasification plant. Also worth noting is the startup of the Yela storage facility in Guadalajara. This facility, which began operations in August, is key to ensuring the security of the Spanish gas supply system.
In the current context, shaped by events such as the tragic terrorist attack in Algeria and all the conflicts in North Africa, I believe we must pay particular attention to the issue of strategic gas reserves, which are still far lower in Spain than in neighboring countries.
In summary, in a specially harsh economic environment, we have reported a very positive set of earnings based on the three cornerstones. First and foremost, Enagas' commitment to efficiency and strict control of the operating cost, which fell by 1.8% in absolute terms. Secondly, the volume of assets brought into operation, with an execution schedule that saw no delays. And thirdly, the improvement in the average borrowing cost, which was lower than our specific target for the year, one of the lowest among the IBEX 35 companies.
In addition to these three pillars, other key factors also made a notable contribution to the result, which include first and foremost the stability of the regulatory framework, and secondly the acquisition of assets from third parties in line with Enagas objectives.
Now, in terms of Enagas' financial performance in 2012, first and foremost, we shall note that the net debt at December 31 was EUR3.5b. This implies a net debt/EBITDA ratio of 3.8 (sic - see presentation "3.9") times, the same level as in December 2011. Additionally, and in line with Enagas' financial policy, at December 31 the Company had around 82% of debt at a fixed interest rate, up from 70% at the start of the year.
Finally, at the end of 2012 Enagas had total financial resources of EUR2.2b, which means we are in a position to finance all our planned investments beyond 2015 under excellent terms and cost conditions. These data once again confirm our sound financial position.
Today, as a summary, Enagas has a balanced financing structure. Only 22% of our debt corresponds to bank financing, another 38% to long-term institutional funding, European investment banks and the ICO, the Spanish ICO, and the remaining 40% is funding obtained on the capital market.
Finally, I would like to mention the recent organizational and shareholder changes at Enagas that we mentioned in the conference call for the third-quarter results presentation, but it's worth noting at this moment. In the recent months of -- the Company has successfully culminated its process of high [stance] at subsidiaries and accreditation by the Energy National Commission Regulator and the European Union as an independent Gas Transmission System Operator in its Spanish acronym TSO.
In addition, free float now represents 85% of the Company's capital, one of the highest levels on the IBEX 35 index. We are also one of the companies on the Spanish continuous market with the highest percentage of foreign investors, which now represent around 75% of our share capital.
It is because of all these factors that Enagas Board of Directors, at my proposal, resolved to appoint a CEO, Mr. Marcelino Oreja Arburua. This appointment will help strengthen the Company's management in its new capacity as a holding company, and is also in keeping with the most stringent international corporate governance recommendations. Likewise, this reflects the fact that our assets today are 180% larger than six years ago; that is, we have almost doubled in size.
As promised, we have updated our 2013/2015 business plan. For those who are just listening, not seeing me, I am just drinking water from a glass, not a bottle, as opposed to the American Congressman Marco Rubio, which was the source of [capital] in the social networks.
Now, Enagas has always disclosed to the market the most realistic investment scenarios. As you know, the growth of the Spanish regulated business is slowing down. Nonetheless, there is still a significant volume of regulated investment planned for the 2013/2015 period, which Enagas will carry out.
The Company's Spanish regulated assets will remain the top priority for Enagas, as they have been throughout the Company's 40-year history. The Company's investment drive in recent years has been key in achieving a highly deregulated gas market and providing an efficient and high-quality service to the Spanish energy system.
Secondly, another strategic priority over the coming years is increasing shareholder remuneration. Accordingly, we have decided to propose to the shareholders' meeting in 2014 an increase in our payout ratio to 75% for 2013, in line with our European peers. This is the third consecutive increase in our payout ratio since 2011, which underlines the Company's commitment to its shareholders.
Thirdly, we also think that we can leverage growth opportunities by investing outside of Spain, in countries identified as strategic and in accordance with our proven and stringent risk/return criteria, financial structure and core business asset type.
The strategic pillars of international growth are, first of all, leveraging on our experience as transmission system operator, consolidating our position as specialist in LNG regasification, unlocking the value of our knowhow in this activity, and developing natural gas infrastructure in growing markets similar to the Spanish market, such as Mexico or Chile.
As you know, Enagas entered Mexico in 2011, when it acquired 40% of the Altamira plant, and it is currently working with other partners in the country on the Morelos gas pipeline. Our close relationship with Mexico's regulatory bodies and the scope for growth offered by its natural gas market represent a unique opportunity to actively participate in the [vertebration], consolidation and integration of the country's gas system.
As I have already mentioned on previous occasions, Chile is another country where Enagas is actively working and contributing its expertise in regasification. The acquisition in 2012 of a 20% stake in the Quintero LNG plant has enabled us to collaborate with the Chilean regulators, which has made a firm commitment to LNG to secure the country's long-term energy requirements.
We are already working on the Quintero plant, where tanker loading facilities and emission capacity are being expanded, and also a new LNG tank is being installed. These investments will enable us to maintain a certain level of growth going forward, both in profit and dividends and in shareholder value creation.
Having outlined the future strategic cornerstones, I will now move on to the main financial and investment targets for the 2013/2015 period. First and foremost, we will invest EUR2.1b. Of this amount -- out of this amount, EUR750m correspond to assets that will be completed after 2015, which means that in 2013/'15 period we might have some debt and cost which correspond to these assets but we won't release the earnings related to them.
The average annual investment in the 2013/2015 period is approximately EUR700m, which is a very large amount that guarantees delivery of the investment plan announced in 2010. Approximately EUR450m of this amount will be invested in Spain, while EUR250m will be invested internationally, in line with the plan which is functioning correctly, as we have already noted.
Second, we will maintain our robust financial profile. We have sufficient funds secured at a good cost to carry out our investment program. The level of debt envisaged will enable us to ensure that the leverage levels remain below the maximum established by the Company, ending 2015 with a net debt/EBITDA ratio of around 3.8 times.
Third, we will strive to obtain average annual net profit growth of around 4%. This target was established based on prudent assumptions in light of the current economic environment, not only in Spain but throughout the world, which does not provide much visibility in the short to medium term.
Finally, we are aiming for an annual dividend growth rate of 6%, with a minimum payout ratio of 75% over the 2013/2015 period.
The specific targets for 2013 are within 2013/2015 -- we will now focus on the next fiscal year. We will invest EUR650m in 2013, and we will put into operation assets worth EUR550m. We will also increase our EBITDA by around 9%. We will achieve growth in net profit of 5.5%. We will raise the dividend paid by around 13%, with a payout ratio of about 75%, and we will keep the average cost of the debt at around 3.25%. That goal is lower than the goal that we set for the 2012, which was 3.3% initially.
Now, in terms of demand in Spain, and despite the current adverse environment, domestic conventional demand, that is, domestic commercial demand along with co-generation and industrial demand, grew by 6% in 2012, and furthermore set an absolute record in the year. So that's the greatest record of conventional -- domestic conventional demand in Spain.
Despite the market demand for natural gas for electricity generation, total demand for transmitted gas, as I mentioned at the start of the year, grew by 1% in 2012. Our latest forecast for 2013 points to growth this year of around 1% in conventional demand, thus maintaining total consumption in a flat rate, completely flat compared to 2012. The forecast that we draw at the beginning of the year might be updated on a quarterly basis, based on the latest data and improvement of the forecast.
As a way to conclude now, allow me to drink some water again. In an extremely difficult economic environment, both in Spain but also in Europe and internationally, at Enagas we are making an even greater effort and we have succeeded in adapting ourselves to the new situation. This has allowed us to meet each and every one of our commitments. The results that we are presenting today and the outlook for the future show that we offer a robust business model and attractive levels of remuneration for the shareholders in the coming years.
I would also like to repeat that the targets set for the coming period are both prudent and realistic. It will be a challenge both for me and the entire organization to continue delivering and even beating our targets, as we have been doing so since 2007. Over the six years period, Enagas has been making and achieving forecasts, putting the Company on track for sustained long-term growth in its results and dividends, and enhancing its debt profile.
My main objective as Chairman is to ensure that Enagas maintains its sustainable long-term growth over the coming years. I believe this goal sits with the fundamental role of Enagas as transmission system operator in Spain and its core objective, that is, to guarantee the security of supply and encourage competition. And this goal also reflects the interests of our shareholders, both institutional investors and long-term investment funds and small shareholders who hold us in their portfolio, those who wish to see Enagas to continue creating value in the medium to long term.
For me, it is an additional source of satisfaction that in 2012 Enagas was recognized as one of the 100 top sustainable companies in the world, world leader in the utility sector and number one Spanish company according to the Global 100 index. Furthermore, Enagas is the only Spanish company to form part of the prestigious Vigeo World 120 index. This commitment to quality excellence and sustainability is essential as the Company goes about rising to the latest challenges, both in the management of resources in Spain and delivering international growth.
I would like to thank you for your attention. And now I invite you to ask as many questions as you wish. We will try to answer them as fully as possible. Thank you very much indeed.
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Questions and Answers
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Operator [1]
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(Interpreted). Good morning. (Operator Instructions). First question, Pablo Cuadrado from Bank of America Merrill Lynch. Please go ahead.
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Pablo Cuadrado, BofA Merrill Lynch - Analyst [2]
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(Interpreted). Hello. Good morning, everyone. My name is Pablo Cuadrado from Bank of America Merrill Lynch. I have three, four questions for you. The first question is could you give us further details on the assumptions that you have included in the new business plan 2013/2015 regarding inflation levels, bonus? And also the OpEx fell 1.8% last year, so I will like to know the assumptions made for the near future.
The second question is regarding the payout. You have announced an increase in the payout in this presentation, and you have explained it fairly well in this presentation. 75% ratio would be the minimum and you have highlighted that, the minimum. Are you telling us that there could be an upside in the future? Also -- and what would be the alternatives if the payout increases above 75%? Are we talking about less international investment, or what scenarios would provoke a payment higher than 75% of the payout?
And then the third question, regarding international investments. You have mentioned this in the presentation, opportunities in Chile, Mexico. So in this regard, I would like to know if these are the two countries where you are going to focus in terms of international investment, or are there other areas where you are considering investing as well?
And the last question, very quickly. Within the assumptions looking at the CapEx and other data, have you included Castor or not? Thank you very much.
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Antonio Llarden, Enagas SA - Chairman [3]
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(Interpreted). All right. Thank you very much, Mr. Pablo Cuadrado. I didn't introduce my -- I did introduce my colleagues in the beginning, but my mike was off. I apologize for that. Marcelino Oreja, the CEO, is here. The General Manager for Planning, Juan Pons, is here. The General Manager -- the CFO, Diego de Reina, is here. And the Investor Relations Chief Manager is here as well. The Communications Manager, Felisa Martin, is here. In short, the entire management team is here.
Now, moving on to the answers to your four questions. First, the assumptions for the '13/'15 period that we have taken into account is 2.5% inflation in terms of our cost of debt. For 2013, we have assumed 3.25%, according to very realistic data that we have, and for subsequent years approximately 4%. Obviously, as you are very well aware of, it's really hard in these times to accurately know what the financial costs are going to be, but given our structure I think that we are pretty much on target.
And then finally, regarding the OpEx, we've been able to lower the operational expenses over the last year. And this year, because we haven't added to the investments, we do think that OpEx costs could increase as inflation increases.
Regarding payout, we have clearly said that payout will be increased from 70% to 75% in 2013. You always know that this is a decision to be made by the general board meeting that approves the results for the year. So this will be formally approved in the general board meeting of 2014, which is the one approving results for 2013.
Now, for the next year, for 2013, we've said that this is the minimum, and right now the Board has not made any other decision. The economic volatility in the markets in the world right now calls for prudency and caution, but we do think that the 75% is sustainable without problems. That's why we said this is a minimum. But depending on the evolution of costs and the economy, we will see how this goes in the future.
But I think you agree that -- you will agree that this is a clear priority of the Company. We have proven, for the fourth time, we increased dividends in [1970], in 2011, 2012 and 2013 as well. And rest assured, over this period of time, if conditions -- conditions permitting, this is one of our priorities.
And this line I would like to say again, that we follow the guidelines of our European peers. That's to say companies that are similar to ours. And we have decided to move from 70% to 75% payout ratio, and with that we would be in line with similar companies in Europe.
Now, your third question. Yes, we are very much focused on Chile and Mexico, because these two countries offer all guarantees of energy growth and legal certainty. And we must say that Europe, as we have mentioned in our strategic axis as well, Europe is an area of interest for us. And we will follow up on this, on investments that could be interesting.
Regarding LNG in general, that's our area of expertise and of course we will pay attention. And if one of the countries that we believe has legal certainty and opportunity comes up, we will be paying attention. Nonetheless, let me insist on the fact that this Company has proven once and again what are the four strict criteria that we apply when we study investments, and we will continue to apply our criteria. So rest assured, if we carry out an investment of this type, it will be very well measured and controlled.
Now, Castor, the answer is yes. We have calculated that over 2014 the regulator may give the final declaration statement on what's the regulatory value of this asset. And once that is done, we can execute our partial purchase right as per the contract. We are excessively cautious and that's why we have put this in the 2014 investment, although we have not included income until this is done and we have all the regulatory details clear. But we have included it in our investment evaluation and in our debt evaluation, but it does not have a clear impact on the income in this '13/'15 period, yet.
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Pablo Cuadrado, BofA Merrill Lynch - Analyst [4]
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(Interpreted). Thank you.
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Antonio Llarden, Enagas SA - Chairman [5]
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(Interpreted). Thank you.
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Operator [6]
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(Interpreted). The next question will be asked by Javier Suarez, Nomura. Please go ahead.
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Javier Suarez, Nomura - Analyst [7]
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(Interpreted). Hello. Good morning, everyone -- to everyone, and thank you very much for answering my questions. I do have three questions as well. First, regarding the CapEx, you mentioned that the yearly CapEx for the 2013/'15 period will be at around EUR700m and you've divided it in EUR450m for investments in Spain, EUR250m for investments outside Spain. Now, regarding the EUR450m invested in Spain, could you please break down what investments are these? Is it transmission, regasification or storage systems?
And also, could you quantify what's the value of Castor? Of course this is a follow-up on the previous question, the CapEx for 2014 for Castor.
Now, regarding the EUR250m invested outside Spain, I understand these are purchases, acquisitions of activities. This is not organic, right? Could you please give us further details what type of activity and country are you considering? And should we assume a linear distribution of the EUR250m, or is it subject to volatility in the CapEx?
Now, another question regarding debt. What's your assumption on the peak of the net debt/EBITDA ratio in your business plan? I think you mentioned that in 2015 you will be at around 3.8 times, which is more than the level we have right now. What do you think the maximum level of this ratio is going to be?
And then a final comment from a regulatory standpoint. The National Energy Commission, I think at the end of November, opened a public consultation on the methodology to assign costs to tolls and access to gas structures. Could you please share an update on this document and the possible implications it could have for Enagas?
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Antonio Llarden, Enagas SA - Chairman [8]
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(Interpreted). All right, Javier Suarez. Thank you very much for your questions. Now, first the investment, the organic investment for Spain. Roughly -- the rough figures, we could say that approximately EUR700m -- and I am talking about over the three-year period -- EUR700m would be for underground storage, EUR400m approx for gas pipelines and the rest for regasification. And if we want to go into the specifics, we would be talking about natural gas, Castor, some activity in GASCAM, and so forth. In any case, if you want further details, I don't have the entire math in front of me, we could give you more details.
Now, moving on to the next question, the debt. We've calculated that we would hit the peak in 2014. And the consolidated ratio would be 4 times net debt/EBITDA ratio, 4.1 times, and the period effectively, as you mentioned, on the 3.8 times ratio that we mentioned before.
Now, finally, regarding the report from the National Gas Commission, I understand we are okay with that. We understand it's a work-in-progress on toll methodology. And I think it's related to the general idea that they have in the European Union to move on in a given period of time to a toll system that's an entry/exit system, which is what works in most countries.
We think this is a good project. We are collaborating with it. And the model for Enagas is neutral, initially. It's more about the general energy policy could prioritize one toll system above another one. We will continue to collaborate in this process with the regulatory operators. Thank you very much.
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Operator [9]
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(Interpreted). Next question will be asked by Carolina Dores from Morgan Stanley. Please go ahead.
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Carolina Dores, Morgan Stanley - Analyst [10]
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(Interpreted). Hello. Good morning. Thank you very much for taking my question. Now, I have two questions. The first question is also regarding this plan. The Musel, is it going to start operating or is it going to be paralyzed through 2015?
And then the second question, what's the minimum rate of return that you are looking for in international investors? The 12% of equity that they received in the past, is that the minimum rate? Thank you very much.
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Antonio Llarden, Enagas SA - Chairman [11]
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(Interpreted). Thank you very much, Ms. Carolina Dores. Now, initially, Musel, correct, we are not contemplating for this period to start up this plant. According to the instructions of the ministry, this plant is under hibernation and we are receiving the corresponding compensation for that. Whenever the ministry believes it is necessary, we will put it into operation. But we haven't included it for this period, trying to be cautious.
Now, the 12% rate that you mentioned we believe is the minimum for this type of investment, also taking into account a nuance. This is for investments that are working already, that are under operation. If there is a greenfield investment at some point, then the rate would much higher and the synergies, because then we would have synergies to contribute with in terms of project and construction. Thank you very much.
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Operator [12]
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(Interpreted). The next question will be asked by [Felipe Avaria] from Espirito Santo Investment Bank. Please go ahead.
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Felipe Avaria, Espirito Santo - Analyst [13]
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(Interpreted). Hello. Good morning. I have two questions. The first one is regarding cash store and the guidance for 2015. And now, where income from Castor are you including, if something is being included; I understood so? And what would be the netting figures and the peak net debt/EBITDA ratio? Would that be above what you're expecting from Castor?
And then the next question is regarding the tariff. In 2012 I think that there was EUR70m of extraordinary investments. And if Castor comes into 2013 or '14, how do you think the tariff deficit is going to affect it in the next few years? What do you need for the deficit not to go up? Does the rate have to go up, and to what numbers? Thank you very much.
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Antonio Llarden, Enagas SA - Chairman [14]
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(Interpreted). Thank you very much, Mr. Felipe Avaria. Now, firstly, let us repeat, we have not included the income from Castor, trying to be cautious. We have included a volume of investment, approximately in mid-2014. Why have we not included the income? Because it will depend on the final evaluation of the regulatory authorities and the final date of putting it into operation. So, we've been prudent. We do believe that this will start in this period, but we will adjust the income when we have the correct model. You know that we've always been very cautious with our forecasts.
Now, regarding the tariff deficit and the revenue deficit, the good news is that in 2012 the deficit did not increase. So, the measures put into place were useful. That was the first objective of the government, to stabilize it. And if you will allow me, the Minister did make some statements at -- in a meeting at [ESA], in a technical meeting at ESA. And he mentioned clearly that the gas deficit has nothing to do with the electricity deficit, and we are talking about two very different things.
Now, our forecast is the following. In the next few years, if a moderate, moderate increase in toll tariffs is maintained along with a positive evolution, however small, in the gas demand, then the deficit will not increase. It would actually be reduced and even eliminated.
Now, let me remind you that conventional gas, as I've mentioned before, in these years of crisis, despite the crisis, the volume has increased some years more than others. In 2013 -- for 2013 we maintain growth for conventional gas. We've been very prudent and for 2013 we have assumed that gas for combined cycles will go down again. But our technical opinion, which is just an opinion and is not part of the forecast so far, is that in the mid-term, and mid-term could be end of 2013, beginning 2014, we are convinced that the gas for combined cycles electrical generation will not go down further for many reasons, among others because, as we understand it, we have touched bottom.
You should think that combined cycles in 2008 worked 51% of the time. And in 2012, which is the year that has just closed, they've worked only 19% of the time. And I think that this figure could not go lower; quite the opposite. The appropriate measures will be taken. And that's not part of my decision, but this decision will be made when necessary. And this energy park, which is very efficient in terms of C02 emissions, flexibility and cost, this will be used by Spain at a time when the competition companies and energy costs are one of the main goals set by the government. So if this comes to fruition in the period 2013/2015, well, we are not concerned with the deficit issue. Thank you very much.
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Operator [15]
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(Interpreted). The next question will be asked by Christina Sanz (sic) from Deutsche Bank.
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Virginia Sanz, Deutsche Bank - Analyst [16]
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(Interpreted). Thank you. Hello. Good morning. I have several questions. Some questions are regarding the fiscal year 2012. I saw that during the fourth quarter the staff costs have increased. I wanted to ask if there are some extraordinary costs there.
Now, the evolution of general costs is quite surprising in general, so I wanted you to explain how are you achieving these many efficiencies and if your assumption is that they are going to increase along with the inflation over the next few years. Is that realistic or is that conservative?
And then regarding investments, EUR250m per year internationally, I think that's very ambitious in terms of finding those investments with the risk profile that you are aiming at. So have you identified for 2013 or 2014 some of those investments? And is that -- does that make them more likely?
And then, in page 13 you show the profile of regulated income in Spain. I wanted to understand if that profile assumes the CapEx that you have informed -- reported to 2015 and then we assume it continues to 2020 based on the table. And then, inflation assumptions, it's been set to zero for that year. What's your assumptions for the future then?
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Antonio Llarden, Enagas SA - Chairman [17]
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(Interpreted). All right, Ms. Virginia. Thank you very much. Now, the staff costs over the fourth quarter correspond mainly to two issues. One is that at the end of the year there are some pre-retirements, not many of them, but they always take place during the fourth quarter and hence the slight increase. And then an accounting adjustment in terms of Gaviota staff who for several reasons, in the beginning of the year, some of them were in outside operations and finally they were correctly replaced to staff -- under staff costs chapter.
Now, in terms of efficiency, we do believe that in the next few years we are going to be able to maintain this efficiency when we said that staff costs were going to grow along the inflation. This takes into account that we are including new investments. If we didn't, the situation would be different. But since there is going to be more investment, then there is -- costs are slightly higher, not so much staff but maintenance and things like that.
Now, regarding international issues, let me clarify something. In 2013, the EUR650m that we mentioned is basically entirely organic investments. So, in 2013, we have not included a specific international investment. This amount, as you can see, based on our record, is the average of what we do every year. We are always studying different issues, and that you are very well aware of. There are always confidentiality agreements, so I cannot share with you fany more specific information in this regard. We are going to continue with the same pace that we've kept till now, and over this period probably this figure will be met. But let me share with you that in 2013 we have been very cautious as well, and what we have is basically entirely organic investment.
Now, moving onto the table on page 13 regarding the invest -- the income profile, you are correct. We've included a conservative profile with the CVG factor equal to zero, which includes -- which has a very small impact on our income profile. What we wanted to say with this slide is that our income profile for the future is robust even if we stopped investing in 2015. Of course, there will always be some level of investment.
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Operator [18]
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(Interpreted). The next question will be asked by Jose Martin-Vivas from Mirabaud Securities. Please go ahead.
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Jose Martin-Vivas, Mirabaud Securities - Analyst [19]
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(Interpreted). Hello. Good morning. Thank you very much for taking my questions. I had three, four questions. Now, first, regarding the investment plans, the weighted strategic planning for 2012/2020 has not been approved yet. I think you have had some sort of conversation with the Ministry regarding whether it's going to be checked off or not, this level of investment in Spain and the horizon that you've set.
Now, linked to the issue of investment, what were interconnections, how is the [Med Gas] project in [Larrau] evolving? Mr. Llarden at some point mentioned that they could be increasing their projections and the volume could increase to 15 times, which would have an impact on the toll. So I would like to know how these projects are evolving.
Now, third question, regarding the rating. Have you talked to rating agencies? According to Fitch and the Kingdom of Spain and according to Fitch the rate is not very good. But given the stability of demand and given your industry and the regulatory stability, do you think that your rating at Standard & Poor's or even Fitch could go up again?
And then regulation. We've mentioned this on [third] quarter, but I would like to talk about this again. Have you talked to the Secretary of State recently? I know he is very busy with the electricity sector, but it's very important for you to have stability in this regard. Do you think gas transportation is going to be affected from a regulatory standpoint? Thank you very much.
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Antonio Llarden, Enagas SA - Chairman [20]
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(Interpreted). Thank you very much, Jose Martin. Now, regarding the energy plan, all the organic investments that we've included in the '13/'15 period are organic investments that have already been approved by the public administration. We have not included any new investment from these energy plans. And given the information provided to us by the Ministry, we understand that this is an energy plan entitled 2014 or 2020 or 2022, and we understand that until 2014 it won't be ready. But in order to clarify this, all the investments that we have included, for example natural gas, are investments that have been approved and that are being carried out according to the regulator's investment -- instructions.
Now, in terms of the international investments, in 2013 we will take a big step forward. We will do the interconnection with Larrau. And during the first quarter, hopefully, we will start having 5.5 bcms in both directions, north/south, south/north. And with the purchase and acquisition of Naturgas, we took on the commitment to increase vis-a-vis 2016 the interconnection between Spain and France through Irun, which will allow us to build a compression station. So the only thing to be done is to see with the European Union the cap increase, the Med Gas, and so far this is a pending issue; it's work in progress.
Now, yes, regarding the rating agencies, we have held recent meetings with them, both the CFO and his team and also the chief of relationships with investors. They both claimed that our rating, for all the above mentioned reasons, is higher than the Spanish average rating, and that's the reason why we are two steps above the Spanish rating. And we strongly believe that all the companies' ratings, not only Spanish ratings but other companies, the main factor is the company -- the country's sovereign debt.
So the rating agencies say, despite the sovereign debt, we will give you an additional improved rating because of the circumstances you recently mentioned. Nevertheless, we believe that the 2012 earnings and results and the forecast for the incoming period will only reinforce this opinion, if you allow me, the opinion of the credit rating agencies.
And last but not least, we have held several meetings with the Secretary of State to deal with specific issues. And my own humble subjective opinion after these meetings is that he believes that the gas sector, in general terms, is a highly liberalized sector which does not present any objective hurdles or problems that should concern the Ministry at the moment. And on the opposite, the greatest concern for the Ministry at the moment deals with the tariff deficit. And as I said, the consultations were highly fruitful and interesting, and this is our opinion. So therefore the gas sector in Spain, for good or worse, is at the moment no source of concern for the regulator. Thank you very much indeed.
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Operator [21]
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(Interpreted). The next question will be done by Fernando Lafuente from N+1. Thank you.
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Fernando Lafuente, N+1 Equities - Analyst [22]
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(Interpreted). Hello. Good morning. I am sorry to repeat the Castor issue again, but because we have included it in the investments -- recurring investments in Spain, could you please detail the value of Castor because you're including debt plus equity? So could you please deepen on this issue, please?
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Antonio Llarden, Enagas SA - Chairman [23]
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(Interpreted). Thank you very much for your question, Fernando. Until the final assessment takes place, we cannot give you an opinion in this respect. But we have calculated approximately the total value of our participation; this is EUR500m. But we need the final assessment by the regulator. So that's the reason why we said we were prudent not to include them in income, but we have included this investment, though. Thank you very much indeed.
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Operator [24]
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(Interpreted). The next question will be done by Gonzalo Sanchez from BPI.
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Gonzalo Sanchez, BPI - Analyst [25]
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(Interpreted). Good morning, ladies and gentlemen. I have an additional question with regard to foreseen investments overseas. Having seen the presentation, you have foreseen certain investments in Enagas assets or certain enlargements. So out of this EUR750m for the next three years, which ones correspond to those projects and which ones correspond to acquisitions? I assume that the visibility regarding enlargements of existing assets is quite high. For the other projects, I believe this depends on the arising opportunities and whether there is room. If there is an additional opportunity, you will be able to or willing to change the figures or you have a very strict cap.
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Antonio Llarden, Enagas SA - Chairman [26]
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(Interpreted). Thank you very much, Mr. Gonzalo Sanchez. Well, the limits have perfectly -- have been perfectly defined, not only in terms of risk criteria but mainly because we have to maintain certain debt levels. And this is an average, obviously. But we are sure that one of the leading criteria that we'd never want to surpass or exceed is the debt levels. And I think this will reply your questions that you kindly asked. Thank you very much indeed.
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Operator [27]
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(Interpreted). The next question will be done by Isidoro del Alamo from the BBVA Bank.
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Isidoro del Alamo, BBVA - Analyst [28]
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(Interpreted). Yes. Good morning. I have a very quick question. In the press, I've recently read that perhaps you were interested in acquiring a stake in another company. Can you please give us an in depth view on this?
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Antonio Llarden, Enagas SA - Chairman [29]
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(Interpreted). Thank you very much, Mr. Isidoro del Alamo. We are always paying attention to arising investments and interesting opportunities. This is all I can tell you at the moment. But please remind that Med Gas is an international gas pipeline and therefore it is one of the leading priorities given to -- given by the government in the energy plan. And we are already involved from day one in the functioning of Med Gas, because it can work thanks to the fact that some time ago we invested in Spain in order to connect Med Gas to the general network. This is all I can tell you at the moment, and I am sure you will understand, Mr. Isidoro. Thank you.
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Operator [30]
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(Interpreted). There are no additional questions in Spanish. We will now move on to the --
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Operator [31]
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The first question comes from Olivier Van Doosselaere from Exane. Please go ahead with your question, sir.
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Olivier van Doosselaere, Exane - Analyst [32]
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Yes. Thank you very much. Three questions on my side. Firstly, apologies, again on Castor, you have it currently in the investment for 2014. I was wondering if from a time horizon you think that that is conservative. And do you still see any possibility of that one coming in 2013, or would that be too optimistic?
And then secondly, on the cost of debt, I was wondering if you could indicate what the current level is of the cost of debt. So, after the refinancing that we've seen in the fourth quarter of 2012, I had the impression that that would be below 3%. And therefore I was wondering how you would explain, actually, still a significant increase in the cost of debt in 2013 to 3.25%, given that there seemed to be very little refinancing needs in that year and also given that a very big part of the cost of debt is at fixed rates and actually that the spreads in Spain have actually gone down recently.
And then finally, third one on the gas tariff deficit. You've indicated that you expect a 1% growth in conventional demand in 2013, and so flat total demand. So I guess that implies that what you expect in terms of demand from combined cycles would be still down but much stronger than what we've seen in 2012. So I was wondering if you could be a little bit more specific in terms of what you expect from conventional -- sorry, from combined cycle demand in Spain. Thank you.
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Antonio Llarden, Enagas SA - Chairman [33]
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(Interpreted). Thank you very much, Olivier Van Doosselaere. I will reply in Spanish, because we have the simultaneous interpretation. So I will now reply to you in Spanish, in order to avoid any potential technical complications.
Now, with regard to your first question, when you asked about Castor, yes, we -- this is just merely a forecast. It might be prudent. And we believe that in 2014 this would have been recognized by the regulator, the final value of the asset. Again, this is fully independent of the fact that -- or to the moment in which this asset will start into operation, which will be probably before that.
Let me explain myself. In Enagas, when we include an asset, we finish, for example, a gas pipeline, we start it into operation. From that moment onward, the asset will come into operation. And that precise moment in time is different from the moment in which, from the regulatory point of view, the regulator will acknowledge the existence of that asset. In Enagas, for example, the average between those -- the average of that timeline is one or two years. That's the main criteria that we've applied to Castor.
Now, regards to the cost of debt, now regarding the last appraisal for 2013, we believe that this is quite adjusted. Because at the moment, fortunately, we have about 80% of fixed cost, and we know for a fact that this is a very important part of the cost of debt of the Company.
Now, when we talk about the difference in cost compared to the previous year, we've issued bonds worth EUR750m that took place in the last quarter of 2012, which weren't very significant in terms of the average cost of 2012 but are now very significant, though, in 2013, which mainly explains the increase in cost, the cost of debt. This has been done, however, taking into account the situation of our investors and analysts, because we have removed uncertainty. So short-term funding, which is cheaper, of course, but it carries lots of uncertainty, we have exchanged it for medium- to long-term funding, which is more expensive but will not provide any surprises in terms of financial availability.
To summarize, in 2012 we moved to a maturity of our debt with a seven-year period value. And this Company four years ago, the average debt had a value of approximately two years, two and a half years. So we have been very prudent once more from the risk point of view.
Last but not least, for 2013 we deemed that the total demand may grow, may experience a flat growth, because we have foreseen that in 2013 there will be a slight decrease in absolute value of gas for combined cycle generation. However, with the new order of tolls for 2013, and additionally taking into account the new request, we strongly believe that this shall not be too concerning.
Finally, and again this is my own personal opinion, but I believe that in the short term combined cycle gas demand shall increase compared to the exceptionally low levels that we are living at the moment. In 2012 in Spain, despite the enormous representation of renewable energies, electric generation increased C02 production. So last year I think that electric generation increased C02 by 11%.
And it's obvious to say that there is some sort of inadequate functioning of our matrix, and the government is currently mobilizing all the efforts, because despite the importance of renewable energies, it is unbelievable that we are increasing our C02. The Minister and the Secretary of State are fully aware of this situation. So either in the short or medium term, we will solve these problems and therefore gas demand will not experience double-digit growth, as in the booming years that we experienced in the past.
But anyway, in the short to medium term, the gas demand will increase a bit. In Enagas we are prudent, but we are very precise in our forecast regarding demand.
So we will now terminate this conference call. Thank you very much indeed.
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Editor [34]
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Portions of this transcript that are noted Interpreted were interpreted on the conference call by an Interpreter present on the live call. The Interpreter was provided by the Company sponsoring this Event.
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