Enagas SA Approving Urgent Measures in Royal Decree-Law 8/2014 Call
Jul 07, 2014 AM CEST
ENG.MC - Enagas SA
Enagas SA Approving Urgent Measures in Royal Decree-Law 8/2014 Call
Jul 07, 2014 / 07:00AM GMT
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Corporate Participants
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* Antonio Llarden
Enagas SA - Executive Chairman
* Marcelino Oreja
Enagas SA - CEO
* Borja Garcia-Alarcon
Enagas SA - CFO
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Conference Call Participants
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* Javier Garrido
JPMorgan - Analyst
* Carolina Dores
Morgan Stanley - Analyst
* Gonzalo Sanchez-Bordona
BPI - Analyst
* Javier Suarez
Mediobanca - Analyst
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Presentation
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Unidentified Company Representative [1]
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Good morning. Welcome to this conference call where we will explain the main impacts of the gas system reform in our Company, a reform that was approved by the Ministers' Council last Friday, which was published by the national bulletin, the BOE, on Saturday 5. First of all we will give the floor to the President of Enagas, Mr. Antonio Llarden, and then we will give the floor to our CEO, Marcelino Oreja, and then we will open a Q&A session. And with no further ado I will give the floor to the President of Enagas, Antonio Llarden.
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Antonio Llarden, Enagas SA - Executive Chairman [2]
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Good morning ladies and gentlemen and thank you very much for your attention. For this conference call we are going to offer you with a greater detail our first estimates with regards to the impact of the gas system reform which was announced by the government last Friday. The impact on Enagas' accounts is important and it is in line with our global figures for deficit adjustment which was commented last week by the market and the media. I would like to apologise because my voice is a bit rough, but I hope you can hear me well.
As we said, this morning the main objective of this reform is quite clear. We want to reduce the final price of energy in Spain and increase competitiveness of Spanish companies. With this group of measures for the gas system the Government is establishing that the way to be able to meet that objective would be for midstream companies to make an effort so that energy can be cheaper.
In that sense Enagas considers that having more competitive energy is something positive for Spain in general and we are aware of the fact that this will be an important cutback in Enagas' revenues. But this has three positive effects. On the one hand, it eliminates gas deficit which had been generated. On the other hand, it provides regulatory stability to the sector. And thirdly, it introduces various new elements in the legal framework for the gas system which are positive.
So this reform provides financial and economic sustainability to Spanish gas system and a legal framework, a new legal framework, which is more stable and safe. In that sense, and as we have informed you already, we have maintained a constant dialog and collaboration with the regulator with everything that has to do with regulated activities in the gas system. And that is why we will do -- we will put in place a greater effort to reach that objective together with trying to minimize impact of this reform on our shareholders and investors. So that will be our main objective now.
That is why, since the Government announced a few months ago that they would put in place a gas system reform, at Enagas we are working on a group of measures so that we can face it in an ideal manner. We are developing a plan that will last until 2020 in order to intensify efficiency and cost savings that we put in place in 2008.
And in order to mitigate the impact of this reform Enagas has other levers and other strengths, such as for instance on the one hand our solvent and powerful financial situation that is recognized by markets, and on the other hand the internationalization process that is being developed by the Company -- we are now present in Mexico, Chile and Peru -- that will allow us to keep on increasing our revenues and benefits. A week ago we announced the fact that the Odebrecht and Enagas joint venture has been awarded with the contract for operation, maintenance and construction of the Sur Peruano Gasoducto.
I wanted to say that Enagas is also showing great flexibility and a great capacity for adaptation to the economic situation and general and the gas system situation in particular, as well as a good position to maintain a good growth in the last few years, and we are committed to creating value for investors and shareholders. And from taking that engagement as a basis, you need to understand that we are working so that we can minimize this impact on the Company as a consequence of the reform. And the impact on the shareholders will also be mitigated; we will respect the dividend for 2014 and 2015.
And I will now give the floor to our CEO, Marcelino Oreja, who will explain to you the details of the reform. After his intervention we will be able to talk together with you about those relevant aspects that might be of interest to you. We have worked since Saturday analyzing the Royal Decree 8/2014 and during our next conference call we will present the results for the first semester. That will be Tuesday July 22 we will give you greater detail. I will now give the floor to Marcelino Oreja, our CEO.
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Marcelino Oreja, Enagas SA - CEO [3]
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Thank you very much Mr. President. Ladies and gentlemen, the idea is to explain to you the document which has been uploaded to our website which deals more specifically about the objectives of the reform and how it will impact on Enagas's results. And through that document we will explain those aspects to you.
First of all, the objectives of the reform are the following. First of all, the fact that it provides stability and predictability to the system. This new regulatory framework solves the incipient tariff deficit issue and the regulatory periods are six-year periods and the first one will go from 2015 to 2020.
Secondly, we establish a greater transparency. The new Royal Decree establishes a new remuneration methodology that is unique for all gas transmission assets as well as underground storage and regasification.
We also establish greater sustainability; we have thus established mechanisms to minimize differences between income and expenses in the system. It also introduces the principle of economic and financial sustainability.
Fourthly, this reform adapts the current economic environment to the maturity of the Spanish gas system. It has focused on increasing the use of current infrastructure and it is less oriented towards investments, and it deals more with the quality of the system in general. And it also establishes or provides enough returns for the owners of the assets and also looks for efficiency and competitiveness, trying to reduce the final energy price in Spain by increasing competitiveness of Spanish companies. And that is something that Enagas is ready to do, absolutely ready to do.
We will now analyze the key principles of the new regulatory framework. I have to say here that the Royal Decree was approved last Saturday so many details of the said Royal Decree have to still be fulfilled by the Ministry and we are analyzing in detail the consequences of that Royal Decree. It is based on individualized assets with two components, remuneration for availability of assets or remuneration for continuity of supply.
The first part of the remuneration has to do with the useful regulatory life. The other part, which is RCS, is a remuneration in the long term which is linked to the availability of the assets in the system with an appropriate maintenance. This component is not affected by the amortization of assets so it's fixed in time. And the distribution of RCS by the companies in the sector will be by the value over position of the assets. And the assets recognized for our assets is generalized and will not be reviewed by current unit values. And the life extension for pre-2008 pipelines assets goes from 30 to 40 years and the investment remuneration is based on the net value of assets.
Fifth, the rate of financial remuneration is linked to 10 years' financial bond yields and will be constant in each period during the next 10 years, so it will be around 24%, 25%. Sixth, the recognition of useful life extension, which is a methodology equivalent to the one that is carried out in the electricity transport. And seventh, the operation of maintenance costs will be calculated with present unit values. And lastly, the date this Royal Decree is being enforced will be Saturday July 5 so it will be based on this new Royal Decree 8/2014.
So what are the measures Enagas is working on to reduce the impact on the Company's net profit? First of all we have to try and have more operational efficiency. We have to continue with the 2008 plan that should provide greater income in this period 2014/2020. So we have to look for value creation through the operating efficiency.
Secondly, we need to have a greater investment plan with more investments in Spain, such as Gascan and international connections. We will have an international development focused on our five strategic criteria which you already know about. And we will have to say that profits coming from international and investments will start to significantly grow starting 2015/2016.
And thirdly, amortization. There will be a lesser amortization because the assets pre-2008 pipelines will have a greater life expectancy. That will increase obviously our income. We will have to have a greater financial discipline. We have to be committed to maintaining a strong investment grade. We have to have an average debt maturity of at least five years at 70% fixed interest rates and strong liquidity profile. And finally, the positive impact of the tax reform that the government has put in place.
So the impact that has been established in around EUR120m in average for 2015/2020 will be amortized by cost control, lower amortization and investments as well as international results and the regulatory reform which is linked to taxes.
So, as a conclusion, I have to say that the new regulatory framework provides stability and predictability to the system in order to solve the incipient tariff deficit issue. The regulatory impact on revenues will be buffered in profit, as I was saying, by controlling OpEx control, lower D&A, international results and an improvement of our tax situation. And thirdly, Enagas will present a new strategic plan in the last period or an update of our strategic plan for the fourth trimester of 2014 once all the regulatory developments that are linked to the gas system and tax system are before us so that we can really study them.
Thank you very much ladies and gentlemen.
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Unidentified Company Representative [4]
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Well, as the CEO has already said, this reform includes such factors which make the regulatory system much more predictable and safer, such as for instance establishing this six-year regulatory period to increase the life expectancy of facilities and other elements that guarantee a gas system that will be sustainable from the financial point of view in the future.
And, if that's alright with you, we will now give you the floor so that we can answer to your questions or listen to the comments that you want to make. Thank you very much.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Javier Garrido, JPMorgan.
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Javier Garrido, JPMorgan - Analyst [2]
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Hello. Good morning. I have three questions. The first one has to do with dividends and I wanted to clarify the first statement that you have made with regards to 2014 dividend. I understand that the commitment or the objective was to have dividends grow 2.4% in 2014. Do you maintain that objective of increasing dividend and 2.4%? That would be my first question.
Second question. I wanted to clarify when you talk about an average impact on income by the regulation of EUR120m during the first period, do you include some sort of changes in the remuneration of technical managers for the system?
And thirdly, with regard to that plan where the greater investment in international interconnections, those investments will not call for a greater demand on gas in Spain. So my question is are those investments still interesting since they don't have an impact on gas demand here in Spain or is there some sort of possibility of having a recognition of those investments as singular investments? Thank you very much.
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Unidentified Company Representative [3]
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Thank you very much Mr. Garrido from JPMorgan. First question is going to be answered by Borja Garcia-Alarcon, our Financial Director, our CFO.
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Borja Garcia-Alarcon, Enagas SA - CFO [4]
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Well, good morning Javier. Yes, dividend will grow 2.4%. We assume that it will grow. So that is EUR1.3 per share in 2013.
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Antonio Llarden, Enagas SA - Executive Chairman [5]
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As for the second question, the answer is yes. The conversations that we have had and debates and analysis carried out with regards to the regulation, together with the regulation, we understand that there will be an update of income according to the technical management of the system.
And as for international connections, I wanted to say that although it's true that international connections don't necessarily cause an increase in demand in Spain, they do mean if there are new interconnections an increase in internal traffic in the country, so an increase in income for the gas system. But you are right to say that international investments will have a singular status. They will be considered as singular investments. Thank you very much.
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Operator [6]
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Carolina Dores, Morgan Stanley.
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Carolina Dores, Morgan Stanley - Analyst [7]
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Hello. Good morning. Thank you very much for listening to my questions. I have three questions as well. The first question is what is the decrease of amortization that you expect to have in the next years due to the extension of lifecycle of transport facilities?
The second question is could you clarify what the impact on regulated income would be with that EUR120m that you were talking about? Is it longer in the short term or is it greater in the short term and lesser in the long term, or is it a bit more stable?
And my third question is what are you -- what method are you using to calculate that EUR120m impact? Thank you very much.
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Unidentified Company Representative [8]
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Thank you very much Carolina Dores. I will give the floor to our CEO, Marcelino Oreja, that he may answer your question.
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Marcelino Oreja, Enagas SA - CEO [9]
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Yes, good morning. Once again, with regards to amortization, the reduction of amortization in the next few years, we have estimated, this is our first estimate, of around EUR40m starting next year.
As for your second question, those EUR120m is the average for the period 2015 to 2020 and that increase in revenue will go in [crescendo] in the next few years. But it will be compatible with EUR238m which were announced by the Government last Friday.
As for the method and the remuneration calculation, we don't have a net remuneration. It is a different formulation and the Ministry has yet to announce the method that will be used.
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Unidentified Participant [10]
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Good morning. My first question has to do with return. You're talking about 5.2% nominal before taxes percentage. So what do you expect to reach on your asset base as the TIR? So after the tax it would be 4% more or less. Could you talk about what could be an outperformance, what you think will be able to obtain or how to contain costs? What is your TIR? What is your TIR in your portfolio?
Secondly, we're talking -- it is said in the decree of increased tariffs automatically if the deficit and the differences are over 10% to 15% every year. So would it be correct in your opinion to consider that tariffs should go up this year because it seems that we will not eliminate all the deficit if we take a look at all the documents of the [CEM]? And CEM, if we take into account everything that has been published this weekend, and should we expect an increase in tariff?
And, last but not least, the consensus with regards to net benefit per share would be around EUR1.65 and it seems that the cutback is EUR120m. But you're talking about containing costs, EUR40m less in amortization and an important decrease of the tax rate. So do you feel comfortable with that level of estimates? Thank you very much.
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Unidentified Company Representative [11]
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Well, thank you very much Alberto Gandalfi. Your first question is going to be answered by the CEO, Marcelino.
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Marcelino Oreja, Enagas SA - CEO [12]
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We have to take into consideration that the internal return rate has to be considering remuneration in base of the asset but also for the continuity or availability of the supply. So the profitability of our asset is not for the first principle but also for the second principle and is not linked to the life of the asset but is a fixed amount over time. In any case, the exact calculation of the profitability on our asset hasn't been calculated over the weekend. As you can imagine, we will do this calculation soon but these two types of incomes will be considered to evaluate the profitability of our assets.
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Antonio Llarden, Enagas SA - Executive Chairman [13]
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With regards to your second question, we're not expecting an increase on the tolls for this year and on the tariffs for this year. One thing is the accumulated deficit over the past year that corresponds with the figures that you all know about. And the difference then is the deficit generated on each specific year. Last 2013 the deficit generated was only EUR20m. This is absolutely practically nothing in terms of the whole volume. So we're not foreseeing for this 2014 an increase on the tolls or on the tariffs for the increase on the deficit.
A different thing is that the regulator considers that if the system at any specific will have a strange imbalance for whatever unforeseen reason they could use the lever of the tariff increase. But they don't necessarily have to do that. In fact in the conversations that we've maintained with the Secretary of State one of the objectives given by the Secretary of State is not to try to use this increase of the tariff lever but asking the companies a greater efficiency on the way they operate.
Finally, I think there was a third question that will be answered by Marcelino.
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Marcelino Oreja, Enagas SA - CEO [14]
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With regards to the dividend, as explained by the CFO, our commitment is to maintain the increase of the dividend per share that we established last year on that strategic plan 2013/2015. And as the CFO said, it's going to be 1.3[%] for this year.
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Operator [15]
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Gonzalo Sanchez, BPI.
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Gonzalo Sanchez-Bordona, BPI - Analyst [16]
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Yes, good morning. I have two additional questions. With regards to the dividend, as far as I understand it for 2015 it will be an increase that you've mentioned. But I want a clarification. Are you considering the possibility of changing dividend policy after this year depending on the figures and the calculations you will make after the passing of the new regulation?
And with regards to the EUR120m impact, could you clarify what part, what amount you're including there in the improvement of remuneration for the extension of the life?
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Unidentified Company Representative [17]
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Thank you very much Mr. Gonzalo Sanchez. Now I'm going to give the floor to the CEO so that he can answer your questions.
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Marcelino Oreja, Enagas SA - CEO [18]
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With regards to the dividend per share, we want to make it very clear that we're maintaining the commitment that we acquired last year of increasing not only this year but also next year the dividend per share on the same amount that we promised last year, 1.3 in the absolute value for this year and 1.32 for year 2015. That's going to be the main driver of our Company over the next months to maintain the dividend per share in absolute value.
And with regards to the second question, the remuneration of the technical manager of the system. We still haven't got any details. This will be regulated by the Ministry. We understand that there will be an increase, a significant increase of the remuneration. This is what we've been asking for. But we have no details of the impact that this is going to have on our revenues. We haven't been able to quantify it yet.
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Operator [19]
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Javier Suarez, Mediobanca.
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Javier Suarez, Mediobanca - Analyst [20]
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Yes, good morning to everyone. My name is Javier from Mediobanca and have other questions. The first one has to do with that reduction of operating expenses. You will also have a reduction on regulated remuneration. Will this be offset by amortization and depreciation, and how will this impact the EPS on the Company? Can you give me an indication and when could this happen in 2015 and it will reach 2020?
Second question is with regards to the dividend. You've already clarified your commitment with the dividend per share but I was asking about your expectation in terms of payout or the level of payout that the Company feels comfortable with for the next years until 2020.
And the next question has to do with regards to the regulation. What can we expect next in terms of regulation from the Government because there are some regulatory documents that we still have to wait for and we'll have to see the details and the impact that it will have on your corporation, and we wonder if we can expect some documents with similar figures to these remunerations where you can have an approximate value?
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Unidentified Company Representative [21]
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Let's try to answer your questions. First question will be answered by the CFO, Borja.
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Borja Garcia-Alarcon, Enagas SA - CFO [22]
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We've been analyzing on these past days and the efficiency plan for next year will be communicated over the next months and the strategic update that we will do on the fourth quarter.
And with regards to the dividend per share, this is something that we've mentioned before. We maintain our engagement and our commitment for 2014/2015 and therefore we feel comfortable in this payout environment that we've defined so far. And beyond 2016 we will see. When we update our strategic plan we'll tackle this issue.
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Antonio Llarden, Enagas SA - Executive Chairman [23]
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And with regards to the regulation, I would like to say that at this moment for these aspects the details of this regulation we'll still need to see the Ministerial order. But we're not foreseeing any changes, only some complements to understand how things are going to work out. And we need to find out about the hydrocarbon legislation to establish a second stage of this regulatory change that we consider to be important which is the creation of a hub or a secondary market on the gas market, the Spanish market.
From the perspective of Enagas we've always been in favor of this hub; it is not affecting us from the regulatory perspective but we consider it to be key within the efficiency plan for the country as established by the Government so that we will have an energy cost that is as competitive as possible, especially compared to what's going on at the rest of the Europe. This is what has been indicated by the regulator. I cannot give you the dates in which these hydrocarbon plans will be formulated, when we'll see the second package of the modification of the hydrocarbon regulation so that it will create a hub on the Spanish system.
And finally, under the new regulatory framework this remuneration parameter is not a parameter that's being used by the regulator when doing his calculations. Thank you.
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Operator [24]
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There are no further questions. Thank you very much.
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Unidentified Company Representative [25]
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Thank you so much for listening. Thank you very much for your kind attention in the conference today and I remind you that the department for relationships with investment is open for any other doubts that you may have and on the next day July 22 we will present to you the results of the semester.
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Editor [26]
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Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.
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