Q1 2014 Enagas Earnings Conference Call

ENG.MC - Enagas SA
Q1 2014 Enagas Earnings Conference Call
Apr 29, 2014 / 07:00AM GMT 

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Corporate Participants
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   *  Antonio Velazquez-Gaztelu
      Enagas - Director of IR
   *  Antonio Llarden
      Enagas - Chairman
   *  Borja Garcia-Alarcon
      Enagas - CFO

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

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Presentation
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 Antonio Velazquez-Gaztelu,  Enagas - Director of IR   [1]
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 (Interpreted). Good morning, ladies and gentlemen, and welcome to the conference on the results of Enagas for the first quarter of the year 2014. Results were published this morning before the markets opened and they're available as always on our webpage, enagas.es.

 Mr. Antonio Llarden will direct the conference. We've prepared about a duration of 20 minutes for his conference. And after that we'll have time for questions and answers that we will try to fulfill with the greatest information possible.

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 Antonio Llarden,  Enagas - Chairman   [2]
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 (Interpreted). Good morning, ladies and gentlemen. Thank you very much for your attention. The results we present today corresponding to the first three months of 2014 are in line with the objectives that we have foreseen and they keep a positive line for commitment of what we have committed to for the year 2014.

 I would like to give you information on the most relevant figures that we will be giving out in this conference call. The EBITDA, as you see, grew 4.9% compared to the first quarter of 2013 and it stands at EUR245.9m.

 In accordance with the International Financial Reporting Standards, in 2014 our investments in Altamira and BBG plants are consolidated under the equity method. And therefore their contribution to the Company's results will only be reflected in net profit. In pro-forma terms, that means if we had consolidated also our investments in the Altamira and BBG plants in the first quarter of 2013 under the equity method, EBITDA would have advanced by 8.7%.

 Net profit stood at EUR99.7m, 5% more than the same period a year earlier. This increase is due to the fact that Naturgas did not make a contribution until the second quarter of 2013. Therefore from the second quarter of 2014, net profit growth is set to converge towards our annual target of 2.4%.

 Also during the first three months of 2014 the Company invested a total of [EUR4b]. This figure includes the acquisition of 22.38% of the Peruvian company TgP for an amount of EUR373m, as you are aware, in line with the agreement struck with CPPIB. In the second quarter we will sell 2.38% of TgP to this company and in turn we will acquire from it 30% of Compania Operadora de Gas del Amazonas, COGA, TgP's operating company. With the purchase of TgP, the Company has virtually met its CapEx target for 2014.

 TgP begins to consolidate in April 2014 even though TgP will make a major contribution to results from 2016 and beyond. This investment is completely in line with established strategic criteria for our international investments.

 In first place it is a core business asset. Secondly, the company will be actively involved in infrastructure management. Thirdly, with a risk profile similar to that of the regulated business due to the existence of long-term ship-or-pay contracts with customers with strong credit ratings. Fourthly, with attractive returns and stable and predictable cash flows in dollars. And lastly, with partners in Peru that have capacities that dovetail perfectly with those of our Company.

 In terms of financial position, Enagas remains one of the Company's main strengths. At March 31 net debt stood at EUR3.9b. This includes the financing of a bridge loan for the acquisition of TgP, which was cancelled this April and replaced with long-term financing from the bond issue. And we are still below the gearing target set in our strategic plan.

 At the end of the quarter, Enagas had liquidity totaling EUR2.41b. And this enables us to maintain high solvency ratios and continue to pursue our investment plan without jeopardizing our financial flexibility. Once again these figures confirm Enagas' sound financial position, enabling us to continue to forge ahead towards the achievement of our strategic targets.

 On March 27, Enagas successfully completed a EUR750m bond issue with an eight-year maturity at a record low financing cost for a corporate debt issue in Spain. And this is a clear indication that the Company is well regarded in the capital markets.

 In terms of gas demand, I would like to mention specifically the highlighted milestone with regards to the trends in demand for gas, and that is the 71.7% jump in demand for gas transmitted by the Spanish gas system for consumption outside Spain. That was in the first quarter of 2014. And this means that approximately 18% of the total demand transported by our gas system corresponded to natural gas consumption outside our country, a figure that was still relatively insignificant just a couple of years ago.

 This transmitted gas includes, as you know, exports to France, transmission to Portugal and loading of LNG tankers at regasification plants, an activity that has increased significantly in importance. I can also confirm that at the end of the first half, Enagas will update its year-end demand forecasts, factoring in demand at the end of the winter and the latest figures for electricity consumption and transmission demand.

 And before I finish, I would like to mention briefly the reform which, as many of you are aware, is planned for the gas sector and scheduled to go ahead over the next few months according to the regulators. And the main objective of this reform is to prevent a further increase in the incipient gas deficit.

 In any event, I would stress that this deficit is not remotely comparable to the electricity sector shortfall. And with this in mind, the industry ministry recently announced the following planned lines of actions. And they will be to stimulate competition by creating an Iberian gas hub and to boost the use of existing gas infrastructures in Spain, leveraging our status as a gas transit country.

 In this regard, Spain is well placed to serve as a destination for gas that is subsequently exported to other countries. Enagas has an ongoing and constructive relationship with the regulator and we are looking at all aspects of this review of regulator gas sector activities to have the proper information. And as soon as whenever we have new information we will share it with you.

 And in short, to wind up, these first-quarter earnings show that we are on track to comfortably meet our commitments for 2014 as we have seen for the last seven consecutive years.

 Enagas' burgeoning international footprint continues to drive earnings momentum. And the acquisitions made by the Company so far are already paying dividends.

 The economic outlook remains a challenge but there is a tentative upturn in some fundamentals and there has been a discernible shift in the market's perception of Spain, I would say enormously, according to our international investors. And we are therefore at a moment in time when opportunities are opening up for Spain, for Spain's companies and more specifically for Enagas.

 The Company continues to show great flexibility and ability to adapt to the economic environment generally and to the energy sector situation in particular and is well placed to continue to deliver sustainable long-term growth over the coming years, with the firm commitment to create value for investors and shareholders. And I think that the results of this first quarter once again show this.

 Thank you for your attention. And if you have any questions, please feel free to ask and we will endeavor to answer them as fully as we can

 Thank you very much.



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Questions and Answers
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Operator   [1]
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 (Interpreted). (Operator Instructions). Javier Suarez, Mediobanca.

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 Javier Suarez,  Mediobanca - Analyst   [2]
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 (Interpreted). Hello. Good morning. Good morning, everyone. I'm Javier Suarez from Mediobanca. I have two or three questions, and the first has to do with the debate -- the discussions with the regulator and what do you think that --.

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Operator   [3]
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 (Operator Instructions).

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 Javier Suarez,  Mediobanca - Analyst   [4]
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 (Interpreted). -- possible points of debate in these conversations underway with the Ministry now and the Company to the discussions between the two. Do you consider that even though things -- the second point has to do with international investments, and we have seen a big investment in Peru? Could you give us some details about the effect that this could have on the Company in different ways?

 And tell us a little bit more about the risk profile, the change in the risk profile that this adds to the Company, because this is not a regulated asset. And we would like to know how you calculate yields in this investment and what the Company expects.

 The last point, I was very interested in hearing about the increase in gas transmitted from the Spanish system outside Spain. And I'd like to know about the opportunities that this could open up for a company like Enagas. Traditional companies in the first quarter are in a different situation and I would like to know about the policy that you have for creating transmitted gas from Spain to other countries or outside the peninsula. Thank you.

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 Antonio Llarden,  Enagas - Chairman   [5]
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 (Interpreted). Well, thank you very much, Mr. Javier Suarez at Mediobanca. I will answer your questions. First of all, given the discussions we've had with the Ministry, the Ministry would be initially interested in the next two or three months, but there's no official calendar. They would like, however, to see the revision of the gas system, not just Enagas', but all of it, to see it finished.

 And given the conversations we're having, although right now we don't have on the part of the regulator any specific proposals, I can tell you that the three main axis that are lines that are concerning the Ministry and that we're interested in resolving are, first of all and in general is to eliminate the deficit, an incipit deficit in the gas sector and to take measures so that in the future this cannot happen again in a way that, how would I term it, in a cancerous way as we saw in the electric sector.

 And then to try to reduce cost in all elements that influence the chain of the gas system. And also, although this is included in the previous answer, we're going to look for efficiency. And we're looking at statistics, information, etc., now. And I hope that in the next two or three months the regulator will be able to give us an overall view of this.

 And when we speak of two or three months' time, I don't want to say with this that this would be totally finished in that period, but rather probably in that time period we would have a general framework of time where we would need a few more months later for legislation development.

 And then the next question that you pose on TgP is not at all dissolutive. We're going to have a positive impact from these investments in our PL account. And what we have indicated is in addition to what this positive impact this year will mean, as of 2016 or the end of 2015 we will finish some investments that right now are underway by TgP and this therefore will increase enormously its value.

 And also the risk profile is not at all greater because you have to remember that this investment, like all international investments we've undertaken, is not regulated as it is operations in Spain. To the contrary, they have ship-or-pay contracts, off-takers with a BBB rating. So we have -- there's security to this that is maybe not in most of the regulated systems. So we feel very satisfied in this respect.

 And lastly, regarding whether or not the increase that we'd call -- come from these re-exportings, we're very happy with what has happened this quarter and also what's happening in this month of April. We don't have the figures yet though. But we do have to remember that this type of activity, given its nature, has a certain volatility about it. And we cannot be sure that these activities will be sustained throughout the year. But this is an activity not just for Enagas but for the whole sector.

 And as I said two or three years ago, this was hardly of any weight. And at this point in time I'll give you 50%, I'll say, of the reloadings of ships and tankers that have been done in the world have been done in Spain. So there is a clear opportunity for Enagas and for the gas sector inasmuch as this represents extra income from tolls for the system which we weren't counting on initially. And when I say that the Ministry is working or the regulator is working to create a hub, we're talking about a national Iberian peninsular hub.

 But it is also true that the decision by the European Union at the end of last year to include a third connection with France, called MIDCAT, in the package of infrastructures that are priorities has meant that we are seeing a confirmation of the [CCs] which we had been talking about a few years back even. And European policies are going probably in that direction independently of other solutions.

 Anything that is -- means having a high-pressure north/south network is good for the European Union, regardless of politics. And so it's possible that we have opportunities even at this moment. It's very difficult for me to predict calendars or any specifics. Thank you very much.

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Operator   [6]
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 (Interpreted). Javier Garrido, JPMorgan.

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 Javier Garrido,  JPMorgan - Analyst   [7]
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 (Interpreted). Hello. Good morning. I just have two questions. The first is regarding the toll fees that are paid for using the network. Could you tell us what proportion exists between the tolls paid by the conventional demand and those that are paid for reloading tankers? Could you tell us how this and this different mix of volumes affects the income revenues of the system and the tariffs?

 And then a second question regards your opinion about a possibility published in the press, the possibility of negotiating regasification from the regulator's side and making this a free business, a deregulated business. Do you think that's feasible or not? And if so, would you support it or not? Thank you.

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 Antonio Llarden,  Enagas - Chairman   [8]
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 (Interpreted). Well thank you, Javier Garrido. I'll tell you in terms of tolls, at this point in time I don't have exact figures. But you have to bear in mind that conventional consumption is much greater despite the tolls because it's not just the unloading at the plants and the storage and the later transportation, but also in this case we're talking about the ships that unload, store during a few days gas and then they go back and load up again.

 So our relationship with investors will allow us to give some precise data that is very clear. But the weight in any case at this point in time is not very great. But it's something that certainly a few years back was practically non-existent.

 And in terms of regasification in Europe, it's true that the Spanish model is different from the European model inasmuch as Spain, going back in history 15 years, started -- the gas system started just with regasification plants. So from the first moment we included this in the system -- they were included in the system open to all operators, etc., etc.

 But it's true that in Europe, the plants are outside the system. So it's perfectly feasible to think that the plants could be in another scheme of things. But it's also true that plants in Europe outside the system have therefore, in their construction and operation, certain agreements, ship-or-pay agreements that mean that the plant works differently from a financial point of view and yield point of view. No-one is building a gasification plant unless they have assured already certain revenues, fixed and others. But there could be, in any case, some elements that might be competitive. This is something we could contemplate, but I cannot give you a more specific opinion at this point.

 As I said though, we -- in a gas system you always have to have, from an efficiency and competitive point of view and from a security and supply point of view, is you have to ensure that the system meets these three objectives with one solution or others, as in other countries in Europe. Thank you very much.

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Operator   [9]
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 (Interpreted). Gonzalo Sanchez-Bordona, BPI.

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 Gonzalo Sanchez-Bordona,  BPI - Analyst   [10]
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 (Interpreted). Hello. Good morning. I have two other questions related to investment. With the investment of TgP, you've basically covered your objectives for the year 2014. And I wanted to know if this means that -- if you're looking at other assets at international level or national level.

 And secondly, regarding the debt cost, does the 3.2 -- 3.3 for 2014, is it still in effect when we've got a quite stable sovereign debt right now? But do you think there could be something different in this respect? Thank you.

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 Antonio Llarden,  Enagas - Chairman   [11]
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 (Interpreted). Thank you, Gonzalo Sanchez from BPI. Regarding investments, what we've done, as far as I remember, is a package 2013/2015 where we have committed over the three years to make a certain amount of CapEx, EUR2.1b. And therefore we're still looking at other opportunities. Not necessary do we have to do them immediately, but in -- over -- in that period, from 2013 to 2015, we want to have that global volume of investment.

 We're including both national and international investments. And we always -- we're always studying opportunities that might fit in with the five points that you are familiar with, and this of course to ensure that the global figure of investments for the strategic plan 2013/2015 is met.

 And in terms of the cost of our debt, I must say that the aim that we have for 2014 is 3.3%. And operations with bonds that we've undertaken and described in this presentation give us an average cost of 3.2%. So we're totally in line with the objective, a little bit under, of course, but I wouldn't dare say that at this point in time we're going to overtake that objective. But we're in line with the cost for this budget.

 And as -- and I recall that this is lower than what we had included in our strategic plan for 2013/2015. And also we have another thing that's resulted in the last weeks and been positive is we've been able to extend the average life of our debt and postpone for later on maturities. So it's not just about cost. That's also important, of course, in these operations and we're very satisfied with this. But we think we've also globally improved quality, the quality of our debt. Thank you very much. Thank you.

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Operator   [12]
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 (Interpreted). Jose Javier Ruiz, Macquarie.

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 Jose Javier Ruiz,  Macquarie - Analyst   [13]
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 (Interpreted). Yes. Good morning. I just have two questions. The first has to do with the position of treasury, EUR660m. And I would like to know how long we will be seeing this treasury position. I suppose that it's a little costly in terms of opportunities.

 And my second question has to do with the expectations for a recovery of electricity demand in the second half of this year, in so much as what the officials foresee and if we expect -- can expect the electricity demand to improve the gas demand for the second half of the year. Thank you.

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 Antonio Llarden,  Enagas - Chairman   [14]
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 (Interpreted). Thank you very much, Mr. Jose Javier Ruiz. I've got Borja Garcia-Alarcon's responses, our Financial Director, and I'd prefer that he be the person to speak now. Borja?

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 Borja Garcia-Alarcon,  Enagas - CFO   [15]
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 (Interpreted). Well this EUR664m from treasury is something for the last months which has been quite cheap, and in the next few months we'll see this more stable.

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 Antonio Llarden,  Enagas - Chairman   [16]
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 (Interpreted). Thanks. Great. Well in terms of the second question, certainly we're foreseeing for the second half of the year being able to predict the consumption in the electricity sector is something that's impossible for me. But we have to look at cogeneration. As you know, in the last month of the year 2013 and the first month of this year, we are seeing an evolution that's different from what we had seen before. Also this has to do with weather.

 And as I said earlier, perhaps quickly, we made a formal forecast of demand at the beginning of this year and we will do a second formal forecast for the rest of this year at the end of the first semester. So we expect then to have a little bit more statistical information and be able to give you more data. But right now I don't have enough information to make a forecast for demand.

 But also, as I think I mentioned at the first conference call this year when we presented our results, in order not to create any confusion among the experts, we're going to try throughout the year to make three forecasts in demand. One at the beginning of the year, a second one which we will do just at the end of the first half of the year, and a third at the beginning of the winter, gas winter in October, more or less, where we will have a better idea about the closing of the year.

 And if we're giving -- because if we're giving out information all the time, these can vary month by month and this can cause some confusion. So we'll try to come out with three formal official forecasts for demand on our part. And the first -- the second we will do at the end of the first -- after the year. Thank you.

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Operator   [17]
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 (Interpreted). There are no more questions in Spanish so now we will go to the English.

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Operator   [18]
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 Olivier Van Doosselaere, Exane BNP Paribas.

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 Olivier Van Doosselaere,  Exane BNP Paribas - Analyst   [19]
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 Yes. Good morning. Thank you for taking my questions. I have three questions. One is your interpretation of the big drop in the conventional demand for gas. Do you think this is mainly a weather effect or do we have more behind this drop of 9% of conventional demand in Q1?

 The second one is on gas stock. If you have any views and any more information on what can be expected from -- for gas store. Have you received any indications on the timing on when a decision could be taken, if, yes or no, the plans would be put into operation and how that should affect the tariff deficit?

 And then the third one, just to confirm that you have at the moment a cost of debt of indeed 3.2%. That's all on my side. Thank you.

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 Antonio Llarden,  Enagas - Chairman   [20]
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 (Interpreted). Thank you, Olivier. I will answer you in Spanish. In first place, regarding the drop in conventional demand, there are three factors that influence this. Of course, the mix that at this point in time Spain has had for some time, with an important part of renewables. Mainly that is what has influenced not so much in conventional demand but in gas for electricity generation.

 And one thing that has influenced a lot in the first quarter is the weather, the climate. That has been, globally speaking, a very soft or warm winter and so conventional consumption has dropped. And also, and I mentioned this earlier, cogeneration is experiencing demand right now that we don't know if it's situation or structural, but there is a lower demand than we were used to. And it's one of the reasons we're studying and we will continue -- it's something we'll continue to look at in the few next months.

 And in terms of gas store, we don't have any new information. But I can say, because I was there and the press was there at a public conference, that the Ministry of -- Minister Mr. [Soria] gave last week, he specifically mentioned in answering a question similar to the one you've just asked that until he -- the Ministry did not have all the technical reports that could ensure that they could reopen this facility, they wouldn't guarantee it. So he mentioned no dates and just said they were waiting to receive different reports. And once they had gotten those -- until they had gotten those, no decision could be taken and he couldn't make any further precision.

 And regarding debt, in the first quarter of the year the total net cost was 3.2%, a little lower than the 3.3% which was the budget for our year. And therefore we believe that we are headed in a very good direction in this sense. Thank you very much.

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Operator   [21]
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 There are no more questions. Thank you. The conference call is over. You may now disconnect. Thank you.

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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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