Q3 2013 Enagas Earnings Conference Call

ENG.MC - Enagas SA
Q3 2013 Enagas Earnings Conference Call
Oct 22, 2013 / 07:00AM GMT 

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Corporate Participants
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   *  Antonio Llarden
      Enagas SA - Executive Chairman

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Conference Call Participants
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   *  Javier Suarez
      Mediobanca - Analyst
   *  Jose Martin-Vivas
      Mirabaud Securities - Analyst
   *  Gonzalo Sanchez-Bordona
      BPI - Analyst
   *  Javier Ruiz
      Macquarie - Analyst
   *  Javier Garrido
      JPMorgan - Analyst
   *  Olivier Van Doosselaere
      Exane BNP Paribas - Analyst
   *  Martin Young
      RBC - Analyst

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Presentation
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Unidentified Company Representative   [1]
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 (Interpreted). Good morning, ladies and gentlemen, and welcome to the presentation of Enagas for the third quarter and the first nine months of 2013.

 The results were released this morning before the [opening bell] and are available on our website, www.enagas.es.

 Antonio Llarden, the Chairman of Enagas, will host the presentation which will last around 20 minutes, after which 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 I will now give the floor to Mr. Llarden.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [2]
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 (Interpreted). Good morning, ladies and gentlemen, and welcome to the conference call. Thank you very much for joining us.

 Today we are presenting our earnings for the first nine months of 2013, which are in line with our targets set at the very beginning of the year and leave us on track to meet our guidance for 2013.

 I'm going to talk to you about the key figures. Enagas had a net profit for the first nine months of 2013 amounting to EUR303.6m, a 7.9% higher than the same period last year. In 2013, unlike last year, we have consolidated all the investments in the Altamira plant in Mexico and the LNG plant in Quintero, Chile, as well as the Yela Underground Storage facility which began operations around the middle of 2012. We have also completed in 2013 the acquisition of Naturgas Transporte.

 These were two important drivers of earnings in the period and meant that the figures weren't fully comparable with the last year's figures. However, as I pointed out in our previous conference call at the end of the year, the impact of changes in the consolidation scope will decrease. Meanwhile the average cost of debt should remain -- the net profit should be around 5.5% target for 2013.

 This increase in the net profit and the 75% ratio approved by the Board of Directors for 2013 mean that the dividend should increase by at least 13% in 2013. Meanwhile we've invested EUR450m until September, and also we've brought assets worth EUR321m on stream. Both figures include the acquisition of 90% of Naturgas Transporte.

 Regarding our financial position, which remains one of our strong points, I'd like to point out the following. First, our net financial debt at September 30, 2013, stood at EUR3.55b. As the slide shows, net debt fell between December 2012 and September 2013 because the generated cash flow had allowed us to undertake investments and to pay out the final dividend for 2012 while generating additional cash flow for the Company.

 Second, we have a healthy debt structure with an average maturity of six months -- six years, and a high percentage of debt at fixed rate of 72%, with an increasing weight of international funding. Enagas, at the end of the third quarter, had EUR2.49b of untapped available financing, allowing us to maintain high solvency ratios and to continue our investment plan without jeopardizing our financial flexibility.

 As I noted in the July presentation, first of all, we do not have any major financing need at present. In sum, these figures confirm Enagas' sound financial position, enabling us to continue to forge ahead towards -- to achieve these targets.

 Before I conclude, I would like to take a quick look at the trends and demand for natural gas. So far this year, demand for transmitted gas in the Spanish system went down 4.5%, partly due to numerous factors, such as the increased usage of coal and other technologies, but mainly the fact that 2013 was exceptionally good in terms of rainfall, which we probably won't see again any time soon.

 In 2012, last year, the total power generated with hydraulic technologies were around 19,000 gigawatts per hour. However, in 2013 we expect to have a year-end figure of generated power of around 35,000 and 38,000 gigawatts per hour. And the average for the past 10 years stands around 27,000. Therefore 2012 was exceptionally low, 20,000. The average is 27,000. And hopefully we will reach 38,000 at the end of this year.

 However, our forecast for the next three years is that total demand for transmitted gas will grow around roughly 4% yearly given the limited investments expected for this year. This increase in demand could help to reduce the minor gas tariff deficit.

 Let me clarify something now. I'm sure you've noted that in previous conference calls we've been seeing demand for gas transmitted and non-domestic demand because demand for gas transmitted refers to total demand for gas that passes through the Spanish gas system, which impacts on the system's revenue.

 Before wrapping up, there have been two exceptionally good news. A, last week, the European commission unveiled its list of priority energy projects, called projects of common interest, which included two Spanish gas connections or interconnection projects. This means that they will be both eligible for European funding and support. These two projects are, A, the development of a 310-kilometer-long gas pipeline between Zamora and Portugal; and the MidCat project, which I'm sure you are familiar with, as an extension of the Mediterranean access, which will boost gas flow with Europe through the Pyrenees both ways.

 As the Commission noted, these are the key infrastructure projects that will help Europe to physically integrate its energy market and to diversify its energy sources, two objectives that bode extremely well for both the region and Spain individually. Last Thursday the Spanish MPs approved definitely the law for the supply guarantees and increase in boosting competition of insular and extra-peninsular systems. This law will positively Enagas in the coming years as the Company will be the holder of the regasification plant for the Canary Islands.

 In order to finalize this conference call, I would like to share with you the main leading conclusion which confirms the results I just presented. We are right on track. We have a very adequate policy and cost of debt. And all in all we are right on track for the seventh year in a row since we launched our first strategic plan to comply with the commitments towards our shareholders for 2013.

 Thank you very much for your attention. And I kindly invite you to ask as many questions as you might deem necessary, which we will try to reply as swiftly 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). Javier Suarez, Mediobanca.

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 Javier Suarez,  Mediobanca - Analyst   [2]
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 (Interpreted). Good morning. My name is Javier Suarez from Mediobanca. I have three questions. First and foremost, the public discussion regarding Castor storage underground facility. I'd like to know your opinion about it. I'd like to know your opinion about the approval process for this infrastructure, the potential impact on the tariff deficit in the gas sector, but mainly your expectations of the approval calendar for these infrastructures.

 Two, I would like to know your latest update regarding the need to increase access tariff for these types of infrastructures. I think you've talked about the 4% of the total volume of transmitted gas.

 Then I'd like to know regarding the new projects, the primary project in Zamora and MidCat for the European Union. How would this impact your CapEx increase in the next years?

 And finally the Ramones project in Mexico. It looks like it hasn't been allocated to the consortium to which Enagas belongs. Can you please walk us through the reasons that led them to reject your participation and what would be the international impact thereof? Thank you very much indeed.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [3]
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 (Interpreted). Good morning, Mr. Javier Suarez. Thank you very much for your question. First and foremost, regarding Castor, as you all know it's an issue where we are not directly involved. We are neither involved in the management of this asset and therefore are not going to issue any opinions, apart from what we discussed on the media. We have no calendar whatsoever at the moment unless the Department for Industry finishes all the reports requested. We do not have a specific calendar regarding this plant.

 And then you asked about the access tariff and the reasons why we strongly believe that in the next three years it'll be an average increase in transported or transmitted gas. Well this is partly due to two reasons. Conventional gas consumption grows steadily. In 2013 the net growth year on year will be around 1.5%. And for the next three years the growth would be around 2% or even higher.

 And regarding electricity, this year had experienced a massive fall compared to 2012, and this is partly due to the extraordinary one-off rainfall season in 2013. And with these statistics it is difficult to think that this extraordinary rainfall season will be repeated in the future in order to create electricity through water or with water. Therefore our calculations led us to believe that there will be a slight [upturn] for this type of electricity or power, but just enough to think that for the next three years the demand -- increased transported demand will be positive as opposed to 2013 or 2012.

 Now regarding the common interest EU projects, the two leading EU projects, I strongly believe that they might impact our CapEx increase positively for 2014 and 2015, what we have planned so far. We won't experience any impact whatsoever, but especially from 2015 onwards because specifically the Portuguese interconnection project requires numerous studies and paperwork. And I believe that CapEx increase will take place from 2015 onwards. As long as we have the necessary information, not in the next weeks but hopefully in the next months, and we will manage to give you a more accurate answer.

 Regarding the Ramones plant, Mexico, for us, is a very interesting area. We have numerous activities that can provide us with the necessary critical mass. And in the Ramones project we are in high cooperation with Pemex, which is the company with the responsibility of the handling paperwork over these gas pipelines. And not only in Ramones but in other projects we have capacities to keep on working with Pemex.

 Again, Mexico, it's of paramount importance to this Company, not only because of the positive economic situation in Mexico, but also because of the huge power and electricity consumption increase in Mexico, but also because of the leading role the country will represent in the world arena. Thank you very much indeed.

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Operator   [4]
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 (Interpreted). Jose Martin-Vivas, Mirabaud Securities.

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 Jose Martin-Vivas,  Mirabaud Securities - Analyst   [5]
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 (Interpreted). Yes. Good morning, ladies and gentlemen. I have three questions. First, in line with Javier's comments and remarks of international investments, your cash generation will probably cover up your 2014 investment needs and the payout ratio. If you do not find interesting investment, would you increase your payout ratio?

 Secondly, regarding the regulation in Spain, can you shed some light on what is going to happen and what Red Electrica is going to do about it? Do you know any dates?

 Can you talk about the guidance for 2014 here in Spain in terms of the functioning and the cost of debt, please?

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 Antonio Llarden,  Enagas SA - Executive Chairman   [6]
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 (Interpreted). Thank you very much, Mr. Jose [Maria]. Well first of all, regarding the investment plan and the payout policy for 2013, 2014 and 2015, we have set a policy approved by the Board of Directors that is 75% payout ratio. That's maintaining it so the changes are inconceivable at the moment. Obviously in 2014, perhaps in 2015, if the figures allow us to do so and if we have to take any decisions, I think we have proven in the past that we can make positive deviations in this regard. But again, it is not the time to take any changes so far.

 Regarding regulation and possible changes, to be honest, we have no news -- formal news in this regard. And they've only said that, yes, when the whole regulation, electricity regs or power regulation process finishes, they will undergo a review of the gas system. And the minister talked about this a few days ago, 15 days ago, and in order to reduce the potential tariff deficit, decreasing this problem. But the minister stated, and I quote -- the figures of both sectors do not relate at all.

 Again, we have no calendar and neither in our industry do they have a calendar. But we fully agree with this idea. A, this small deficit should not become a hurdle and a problem that will increase in the future, as it happened with the other utilities. And B, it is reasonably easy to find solutions for this problem, not to increase in 2014 with the expected investments in Yela in Spain, in BBG and the Canary Islands and the initial investment in Castor, but we have to wait and see, which might be slightly postponed.

 I think I have answered fully to your three questions.

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Operator   [7]
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 (Interpreted). Gonzalo Sanchez, BPI.

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 Gonzalo Sanchez-Bordona,  BPI - Analyst   [8]
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 (Interpreted). My name is Gonzalo Sanchez-Bordona. Thank you very much for answering to my questions. Please could you clarify regarding Castor? I understand that your investment plans until 2015, you've included it indeed. And I'd like to know that the plant won't be put to a halt if the EUR1.3b are not taken into account. Are you going to invest overseas or would you generate further cost? Thank you very much indeed.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [9]
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 (Interpreted). My colleague has just told me that I didn't answer one specific question to Jose [Maria], the potential cost of debt for 2014. I'd like to answer to this question first.

 For 2013 we've expected a cost of debt of around 3.25% net. And for 2014 our provisional budget is around 3.5%. But to be honest, I expect 2013 -- we want to reach the 3.25%, which leads us to believe that at the end of the year we'll probably improve our net profit for 2013. We'll be prudent and we'll see the evolution for the fourth quarter. But in 2014 we'll be talking about this figure, although we have to review our forecast year on year. So again, for 2014 our financial cost will be 3.5%.

 I'd like to reply to Mr. Gonzalo. Now regarding our strategic plan and the potential delay of the Castor investment, it has a minor reduced impact on our basic net profit figures and therefore it won't impact our payout ratio. However, if in 20 years this investment doesn't take place, well we'll talk about one impact. But therefore in the coming years some of the situations may arise, some of our potential investments may arise. And therefore we do a year-over-year review of our payout ratio, linked to three factors.

 A, the profit generation capacity of the Company; B, the cash needs due to the investment plans, year-on-year investment plans; but C, because of the evolution of the ratio among our European peers, the Board of Directors examines on a yearly basis our strategic plans and these specific issues.

 And, as I said before, I believe we have constantly given a positive response regarding our payout ratio and the review thereof. And so far we are not going to undertake any additional measures. We have one measure approved for 2014 and 2015. However, in the next years we will carefully review this issue. Thank you very much indeed.

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Operator   [10]
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 (Interpreted). Javier Ruiz, Macquarie.

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 Javier Ruiz,  Macquarie - Analyst   [11]
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 (Interpreted). Yes. Good morning, ladies and gentlemen, and thank you very much for your answers. A, I'd like to ask Enagas, as the manager of the system, if Castor isn't put into operation, what would be the impact of this over the Spanish gas system? Would you require additional investments?

 Can you give us some guidance on the closing debt figures for the end of the year? Thank you.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [12]
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 (Interpreted). Thank you very much, Mr. Javier Ruiz. Regarding the functioning of the system in the short to medium term, Castor won't have any impact whatsoever. The Spanish gas system has hopefully worked very well in the past years. And again, in the short to medium term, we won't experience any impact.

 Generally speaking, I'm sure that you know that the strategic storage capacity of our country falls way below the European average. And therefore it is always positive to have enough interconnection capacity with other countries and storage capacity. Therefore it is very interesting to have this type of [facility] in the long term. However, in the short to medium term, the fact that they are under operation or not doesn't really affect the system that much.

 Now regarding the year-end debt closings, this is the end of October. I can make a guess, saying that this net debt would be around EUR3.7b. Thank you very much indeed.

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Operator   [13]
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 (Interpreted). Javier Garrido, JPMorgan.

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 Javier Garrido,  JPMorgan - Analyst   [14]
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 (Interpreted). Good morning. I really have a couple of questions regarding the gas demand. The first one regards the segment of coal generators and what perspective within that 4% yearly growth you have given us, which are the expectations you have for the total generation amount?

 Secondly, I'd like to know how your demand expectations or demand growth has evolved in the last 9 to 12 months. I mean whether that 4% of yearly growth that you have told us about, how do you think will compare towards your expected 9 to 12 months ago regarding the gas demand in Spain? Thank you.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [15]
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 (Interpreted). Well, thank you very much, Mr. Javier Garrido. First of all, the electric reform has not yet finished. Therefore it's not easy to make forecast of the gas demand for electricity generation with this volatile environment we currently have. I'm going to give you some [cautious] data, because this is real but only for October. So far in October we have seen a decrease in the cogeneration. However, we have seen an increase in the combined cycle generation, which actually breaks the trend of the last few years. And again, this may not be generalized. But it really shows the volatility of this issue.

 In principle, as I was saying, for the next few years, the forecast we are making is based on two parts. One is totally settled. It's a rise in conventional demand, a small rise but sustained throughout the years. So actually we have in that, since 2009 and 2010, it will be maintained. And then in the procedural case of the electrical generation by gas, even though we think that this will definitely -- will not reach the growth that these had before the recession, this is not really linked to the recession, it's obviously linked to all the removal issues you know about.

 But there are two factors here. The main one, i.e., the first one that I talked about at the beginning of my presentation is the extraordinary hydraulic [current] of this year -- this current year, with lower statistics according to the mobile average of the last 10 years regarding hydraulic demand. So the usual thing would be to think that in the next few years we'll have a hydro-water generation that will be lower or much lower than the one that took place in 2013.

 Now all this demand will be replaced by gas electricity generation. But you have seen the quota that we have this year is maintained. We could think that we'll have the figure that we gave you before.

 And on the other hand, there's an [incipient] of the movement in Europe, and it might not affect us in the next year, but probably in the years after. And it seems we are going into a sort of turning point regarding the rise of coal usage for electric generation. So these two factors combined could cause a change in the downward permanent trend that we have had in the last few years for gas usage for generating electricity. This does not mean that we will reach the figures of 2008 when we had the peak of gas usage for generating electricity, but these figures may change from next year onwards. This is what the situation is like.

 And regarding how the trend of the nine first months of this year and how that trend changed, we could say the conventional electricity had kept the evolution we had foreseen, but the electricity generated by gas do not give this trend due to this big hydraulic factor. Last year we started with about 9,000 gigawatts per hour. This year to the average, which was 26,000, 27,000, and by the end of the year we may reach between 35,000, 38,000, which explains mostly, rather than any electrical reform issues, this will explain the variation in the forecast. Thank you very much.

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Operator   [16]
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 Olivier Van Doosselaere, Exane BNP Paribas.

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 Olivier Van Doosselaere,  Exane BNP Paribas - Analyst   [17]
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 Yes. Thank you very much. This is Olivier from Exane. Just one question left on my side, please. You have reiterated your target of investments to make this year and also assets to be put in operation. I just had in mind that part of that was actually including the [cash on gas] to put on Castor, which I suspect now has been delayed. So I was wondering actually what are the key investments that you expect to make in the fourth quarter and how confident are you actually that you will be reaching your target? Thank you.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [18]
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 (Interpreted). Thank you very much, Olivier. I'm being told that I should be allowed to answer in Spanish.

 So to sum up [the cash on gas], this investment we have foreseen for this year will probably be late, for sure. First of all, as I mentioned before, it does not have -- does not affect at all the Company figures. But anyhow, throughout the year we have had and we'll also be able to have in the fourth quarter certain investments that we hadn't envisaged at the beginning, for example the compression station investments in Soto la Marina that we mentioned in the conference call in July in Mexico, this having initially being included in our investment plan. So without going into further detail, maybe in the fourth quarter we may have some sort of investment that will complete this.

 To sum up, this will not affect our figures. And whenever our investment extends for more than a year, such as this investment that we're currently talking about, maybe in one year we'll have a bit less and another one a bit more. But to sum up, for 2014/2015 plan regarding the Company fundamentals, this will not (technical difficulty).

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Operator   [19]
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 Martin Young, RBC.

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 Martin Young,  RBC - Analyst   [20]
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 Good morning to everybody. The first question just a clarification of what you were saying about your expectations around the increase in transported gas over the next few years. Is the 2% plus including or excluding power generation?

 And then secondly, on your international strategy, clearly not being selected for the Los Ramones pipeline project has to be a blow to that strategy. Where will you look now to compensate internationally with further investment? Thank you.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [21]
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 (Interpreted). Thank you very much, Mr. Martin Young. First of all I would like to confirm that in fact the demand forecast we gave for the next three years includes the power generation, that is the gas for electricity generation. Otherwise this 4% of average increase of the transported demand includes the two large markets, the conventional demand market that is about 70% of consumed transported gas, and 30%, to round up the figures, may be the gas for electricity generation. So we were including that.

 Regarding Los Ramones, even though I talked about this before, we keep thinking that Mexico is an important focus of our international activities. As you know, it's very focused on our skills, that is what we usually do, high-pressure pipelines, regasification plants and so on. And we think that there is an investment plan in this country, and it's pretty important, where we could have a relevant role.

 Therefore we want to keep focusing and keep looking at different issues that may give results [slowly]. As you may know, we started this investment policy about three years ago with a cautious policy. At the same time, every time we do something and we do not go ahead, there are positive results for the Company figures. We will keep being cautious but being tenacious and determined.

 Thank you very much. I think this is the last question. I would like to avail of this occasion to mention that this conference call, that all the team around this table feel satisfied with, that despite the strong recession that has hit our country in terms of Spain in general, also in Europe and the energy system in the last few years, we keep having a good path with this Company. We will surely comply with the most important target for this Company in 2013, so we keep focusing on good policy for our shareholders and our employees.

 Thank you very much, everyone, for your attention. And if you have any other questions, the Investor Relations department today and any other day will be available to answer your questions, and also our whole team and myself. Thank you very much.

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Editor   [22]
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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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