Q1 2013 Enagas SA Earnings Conference Call

ENG.MC - Enagas SA
Q1 2013 Enagas SA Earnings Conference Call
Apr 23, 2013 / 07:00AM GMT 

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Corporate Participants
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   *  Antonio Velazquez-Gaztelu
      Enagas S.A. - Head of IR
   *  Antonio Llarden
      Enagas S.A. - Chairman
   *  Diego de Reina
      Enagas S.A. - CFO

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Conference Call Participants
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   *  Gonzalo Sanchez-Bordona
      BPI - Analyst
   *  Virginia Sanz De Madrid
      Deutsche Bank Research - Analyst
   *  Olivier Van Doosselaere
      Exane BNP Paribas - Analyst

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Presentation
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 Antonio Velazquez-Gaztelu,  Enagas S.A. - Head of IR   [1]
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 (interpreted) Good morning, ladies and gentlemen, and welcome to the presentation of Enagas' earnings for the first quarter of 2013. Figures 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. We expect it to last about 20 minutes, less than usual. And afterwards there will be a Q&A session, during which we will try to answer any questions as fully as possible.

 Thank you very much for your attention and now I'll give the floor to Mr. Antonio Llarden.

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 Antonio Llarden,  Enagas S.A. - Chairman   [2]
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 (Interpreted) Good morning, ladies and gentlemen, and thank you very much for joining us. Today we are presenting results for the first quarter of 2013. I'll try to be as brief as possible, because in February we already presented the full-year 2012 results and the strategic update for 2013/2015; and, as you all know, tomorrow we are holding our general Shareholders' Meeting.

 Now, the results secured by Enagas over this first quarter, a detailed version of which is available in the conference call presentation, have surpassed our target for the year, as a whole thanks to the third-party asset purchases. So, in like-for-like terms they have followed the trajectory envisaged in our budget and are aligned with our undertakings for the current year.

 I will now briefly describe the main figures. EBITDA grew by 9.4%, compared to the first quarter of 2012, to stand at EUR234.3 million. Such increase was due mainly to growth in the Company's asset base over the past year. In this respect highlights included the set-up of the Yela storage facility commenced operations and the incorporation of the Altamira plant.

 Now, the Company reported a net profit of EUR95 million. That is 9.6% higher than the same period last year. In addition to the Altamira and Yela facilities, our stake in the Quintero plant made a positive contribution to earnings consolidated using the equity method.

 Another key factor was that borrowing costs during the quarter were lower than our average forecast for the year. In like-for-like terms the profit increase was 6%, in line with the target of 5.5% growth for 2013.

 We have invested EUR308.4 million, chiefly in relation to the acquisition of a 90% stake in Naturgas Transporte for EUR245 million. The value of assets brought into service during the quarter was EUR268.1 million, also mostly accounted for by the addition of Naturgas assets in the Basque Country and other regions of Spain.

 Enagas financial position remains one of the Company's main strengths. Here we wish to cite the following figures.

 The Company's net debt at March 31 stood at EUR3.693 million (sic - see slide 5 "EUR3,694 million"). We are maintaining a prudent debt structure strategy with an 80% of fixed rate debt, in line with the year-end 2012, and surpassing the 70% target we had operated in recent years.

 At the end of the quarter, March, this last quarter, Enagas liquidity stood at EUR2.4 billion. This enabled us to maintain high solvency ratios and continue to pursue our investment plan without jeopardizing financial flexibility.

 During this current fiscal year, 2013, the Company has no major refinancing needs, although we are continuing our proactive policy of renewing short-term loans, striving to reduce the average cost of our debt to an absolute minimum at all times.

 Once again, these figures concerning Enagas' financial position are enabling us to continue to forge ahead with our strategic targets. These first quarter earnings will put us on track to meet our commitments for 2013. Let me remind you of our main commitments.

 First, EBITDA growth of roughly 9%. This will be achieved through higher income and lower operating cost, mainly lower operating cost. Secondly, a 5.5% -- roughly 5.5% increase in net profit; a dividend increase in the region of 13%; and investment of EUR650 million, as well as deployment of assets worth EUR550 million, in line with the target set forth in our plan. These targets were established according to the criterion of prudence, in view of a particularly volatile economic environment.

 I would like to comment on the draft law currently being debated in the Spanish Parliament on guarantees to security of supply and the increased competition for islands and known mainland power systems. The draft law is focused in power issues, and I won't comment on those, of course. But such project also takes into account that the ownership of the Canary Island regasification plant, which must be built in the future, must be transferred to Enagas.

 As you're aware, these two projects will help boost the efficiency of power systems in the Canary Islands, and provide security of supply on the islands. But, most importantly, it'll allow us to reduce cost and emissions of pollutant gases.

 Now, regarding pollutant gases, this is flagrant because emissions in the plants are lower, much lower than any of the fuel used for power generation. And in terms of costs, as you will remember, the Canary Islands have special subsidies for the overhead cost of power. So the use of gas will allow us to reduce these costs, which, at the end of the day, we are all paying; all the Spaniards are paying.

 On the other hand, the Canary Islands, unfortunately, are the only Spanish region with no natural gas facilities. Therefore, this project, in terms of gas, is aiming at improving and also solving, for once and for all, this issue.

 I will remind you of the main targets for 2013/2015, which we mentioned two months ago during our strategic presentation. And I will remind you that we were talking about an average compound annual growth rate of 4% for net profit; also, a compound annual growth rate of 6% for dividends, setting a minimum of 75% pay-out ratio from 2013 onwards. And we're also talking about an annual average investment of approximately EUR700 million in Spain and internationally.

 As I have already mentioned, these targets were set according to a criterion of prudence and on the basis of reliable hypotheses.

 Now, in terms of demand, I'd like to comment on the following. Despite the current economic situation in the first quarter of the year, conventional demand, that is domestic and commercial demand, generation and industrial demand, grew by almost 1%, following corrections for the working day and temperature, in line with our forecast for 2013. If you'd like to gain an insight into these issues, I will talk to you about this during the Q&A session.

 Conclusion; these first quarter earnings give Enagas good visibility for 2013 in this respect, and having these available data. We are on the right track to meet each and every one of our commitments, not only in 2013 but also in 2014 and '15, as we have been doing for the last six years in a row.

 Thank you very much for your attention. And should you have any further questions, please do not hesitate to ask me. And the CEO will be able to reply some of those questions along with all the Managing Directors. Thank you very much indeed.



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Questions and Answers
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Operator   [1]
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 (Operator Instructions). Gonzalo Sanchez, BPI.

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 Gonzalo Sanchez-Bordona,  BPI - Analyst   [2]
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 (interpreted) I have actually two questions. The first one is regarding the new regulation that is being drafted for ex-mainland, non-mainland systems. Would this have an impact on the investment plans published by the Company in February? I understand it would be an upwards impact.

 The second question is regarding the cost of debt. Could you please give us the exact amount of the debt during the first quarter, and whether this is going to be below 3.25% through 2013, or it's going to grow over the next quarters? Thank you.

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 Antonio Llarden,  Enagas S.A. - Chairman   [3]
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 (interpreted) All right. Good morning, Mr. Gonzalo Sanchez. Thank you very much for your questions. Now, I will answer the first question and the CFO will address your second question.

 So you are correct, the new regulation for Ireland, as soon as it's passed by the parliament, would have an impact on our investment, although the bulk of the impact would be beyond 2015. Let me explain this further.

 In our planning, we had included for 2013/2015 the opening of the Tenerife plant work. Now with the measures the government has introduced, and provided they are passed by parliament, instead of having 40% of the company, we would have 100% of the company. So, at the end of the day, we would have built both plants. The approximate cost of both would be EUR600 million. So instead of doing 40% at EUR600 million, we would be doing 100% of EUR600 million.

 Now, that said, for our 2013/2015 forecasts, we had only included the Tenerife plant because of the timing and, of course, it would not be done by 2015. We would only be starting with the other plant. So there is a possibility that from 2013 to 2015, there is a minimum effective change in the investment.

 But, of course, there are EUR300 million to EUR350 additional millions in investment which would be included after 2015, and those were not forecasted.

 For the next question, Mr. Diego de Reina will take the floor.

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 Diego de Reina,  Enagas S.A. - CFO   [4]
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 (interpreted) Good morning, Gonzalo. You are correct; the cost of debt over the first quarter was lower than our forecast for the whole year compared to the 3.25% expected for the year; the actual figure is 2.90%. This is due to a better behavior of the European commercial paper compared to our initial forecast.

 As you know, this financing instrument is very volatile, both in terms of figures and cost. So, for the moment, we are maintaining our expectations of having an average funding cost -- a growing average funding cost and, by the end of the year, it will be at around 3.25% which is our goal set.

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Operator   [5]
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 Virginia Sanz, (inaudible).

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 Virginia Sanz De Madrid,  Deutsche Bank Research - Analyst   [6]
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 (interpreted_ I have two questions. First, I want to understand why the demand for transported gas has fallen so much. I've seen the data for conventional demand, but I see that for transported demand, demand has fallen 10.7%. Could you explain that?

 Also, the government is talking a lot about the electrical reform and they are talking about how all activities should have a reasonable return. Otherwise, this means that -- don't you think that they would look into gas regulated activities at some point and work in the same direction? What are you expectations in this regard?

 And third question, I would like to know if now that Naturgas is involved in the investment and startup, has it contributed to the first quarter figures that we've seen? Thank you.

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 Antonio Llarden,  Enagas S.A. - Chairman   [7]
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 (interpreted) Thank you very much, Ms. Virginia Sanz. Now, regarding the transported gas demand, you are correct; it has a direct impact on the demand for gas for the electrical sector and only managed 10.7%.

 Now, in our forecast, and we can make very precise forecast for conventional demand, we're confident about those, but the demands of the regulator is that -- for transported gas is to be able to serve that demand. And I can assure you that we can.

 That said, an accurate forecast of the demand is really beyond our reach, since there are certain factors/issues that have an impact in this demand and have little to do with the weather and with economic situation.

 Now, specifically, the electricity sector in this quarter has fallen by 10% approx. and, well, this is what accounts for the situation. Now, that was my personal opinion and, of course, it's personal; I don't have specific figures, but this is what I think. The decrease in gas for electricity, that is combined -- the use of combined cycles, is reaching a bottom. This is my personal technical opinion.

 And I believe at some point regulators, I don't know when, but regulators will take measures in this regard, since both in terms of impact on CO2 emissions and in terms of the economy, I think it's a very interesting that combined cycles work at a higher ratio than presently. In any case, our figures are what they are right now.

 Moving on to your next question, analysts, you among them, know very well that our retribution systems are very well adjusted. A few years back, we had important changes in the regulation, specifically for assets prior to a certain date. So we do not think -- and we're speaking honestly here, we do not think we're going to be affected by these measures, because, as I said, our income, our revenue, is very well adjusted and they have little to do or nothing to do with the electrical tariff deficit.

 Now, let me share with you some data that I will mention tomorrow in the Shareholders' Meeting. We're, of course, going to talk about the strategic plan 2013/2015. We're going to talk about efficiency. A good part of our good results are due to efficiencies, financial efficiencies of course, which we have mentioned many times, and efficiencies in terms of costs.

 Now, let me share some figures with you. Through this period of time the average cost of our transportation network has decreased, staff and raw materials, so the cost has decreased by 15%. The amount of energy we need to do our job has decreased by 10%. And we have international figures comparing ourselves with our peers internationally. Our global operating costs per unit are linear, specifically in the transportation network, which are the most important costs. So our costs are below 40% of the European average.

 These data are known by the regulators, by European regulators too. And, very modestly and honestly, we can say that Enagas is very efficient, specifically over the last few years when we saw that regulators were going to add to tolls, add -- were going to put [variance] on tolls, so that the practice of energy would remain positive for clients. Thank you very much.

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 Antonio Velazquez-Gaztelu,  Enagas S.A. - Head of IR   [8]
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 (interpreted) Ladies and gentlemen, there are no more questions in Spanish; now moving on to English. Thank you.

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 Antonio Llarden,  Enagas S.A. - Chairman   [9]
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 (interpreted) My apologies, I forgot the last question, my team reminds me. Naturgas, Miss Virginia Sanz asked me about this. So Naturgas over the first quarter has not been taken into account in the results. We have included it as an investment of course, because the agreement has been signed. But it's not reflected in the P&L account yet. Thank you very much and my apologies.

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Operator   [10]
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 Olivier Van Doosselaere, Exane.

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 Olivier Van Doosselaere,  Exane BNP Paribas - Analyst   [11]
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 First, one point actually, I would like to come back to the transported gas demand that was down to 10%. I'm really surprised that you wouldn't have, actually, a full-year expectation on that one. I suppose it is quite important, because, as you say, it might be linked to regulation, because, yes, there is a big tariff deficit in the electricity sector. But if we have figures like that in the gas sector we would get a tariff deficit there as well. So if the situation does not improve in the gas sector, where do you expect the tariff deficit to end at the end of this year?

 And the second question would be on Castor, when you expect that one to come operational. And do you think the exercise of the option with your 33% could still be done this year? Or is it something that we should maybe better expect for 2014? That's it for my side. Thank you.

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 Antonio Llarden,  Enagas S.A. - Chairman   [12]
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 (interpreted) Thank you very much, Mr. Olivier, from BNP Exane. I'm going to reply to you in Spanish, because we have simultaneous interpretation.

 Now regarding the demand evolution, the current figures that we have at the moment, year-end figures, despite the weak trend in this first quarter, is that conventional demand year end would have experienced an increase of around 2%, roughly 2%; well, 1.7%.

 Now as far as the total demand is concerned, taking into account the low power demand, we are currently calculating it. But there is a flat increase. We strongly believe that the total demand year end would be roughly around 0% increase, flat. It might increase or decrease a little bit, but it's we have experienced flat demand.

 However, when we are talking about conventional demand, we believe that it'll continue to experience a good trend, not as good as the previous year, because of the weather reasons, but it'll be roughly 2%. So hopefully, the deficit at the end of the year would not increase.

 Now regarding the Castor plant, calculations and forecasts and projections is that the stake that we would take there has been included in the 2014 fiscal year, and not in the 2013 fiscal year. This is as far as the stake is concerned.

 And I think I've replied to your questions. Thank you very much indeed.

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 Olivier Van Doosselaere,  Exane BNP Paribas - Analyst   [13]
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 Thank you very much.

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 Antonio Velazquez-Gaztelu,  Enagas S.A. - Head of IR   [14]
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 (interpreted) So, if you do not have any further questions, we will now conclude this presentation of earnings. And should you have any further questions, please do not hesitate to go back to us. Thank you very much indeed.

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Editor   [15]
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 Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.




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