Half Year 2014 Enagas SA Earnings Call

ENG.MC - Enagas SA
Half Year 2014 Enagas SA Earnings Call
Jul 22, 2014 / 07:00AM GMT 

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Corporate Participants
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   *  Antonio Velazquez-Gaztelu
      Enagas SA - Director IR
   *  Antonio Llarden
      Enagas SA - Executive Chairman
   *  Marcelino Oreja
      Enagas SA - CEO

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Conference Call Participants
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   *  Javier Garrido
      JPMorgan - Analyst
   *  Carolina Dores
      Morgan Stanley - Analyst
   *  Javier Suarez
      Mediobanca - Analyst
   *  Virginia Sanz
      Deutsche Bank - Analyst
   *  Olivier Van Doosselaere
      Exane BNP Paribas - Analyst
   *  Pablo Cuadrado
      HSBC - Analyst
   *  Jose Javier Ruiz
      Macquarie Capital - Analyst
   *  Jorge Alonso
      Societe Generale - Analyst

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Presentation
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 Antonio Velazquez-Gaztelu,  Enagas SA - Director IR   [1]
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 (Interpreted). Good morning ladies and gentlemen. Please be welcomed to the results conference of Enagas that corresponds with the first semester for 2014. We published the results this morning before the opening bell. And obviously, as always, they are available since at the website enagas.es.

 The President of Enagas, the Chairman of Enagas, Mr. Antonio Llarden will be hosting the presentation which will last around 20 minutes and then we'll have a Q&A session as per usual where we will try to give you answers in the greatest detail possible. Thank you very much for listening and I will give the floor to Mr. Antonio Llarden.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [2]
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 (Interpreted). Good morning ladies and gentlemen and thank you very much for being here. The results that we are presenting to you here today correspond to the first six months of the year 2014, which are in line with our targets set at the start of the year.

 I will now comment on the most relevant figures which you can see in greater detail on the presentation that is being showed together with this conference call. EBITDA grew 0.6% compared to the first half of 2013 and has reached EUR507.3m.

 In accordance with international financial reporting standards, in 2014 our participation or our shares in the Altamira and BBG plants have gone -- have been consolidated by the equity method, so the contribution to the Company's results are only reflected in benefits after tax.

 As for proforma terms, that is to say if 2013 during the first semester we had also accounted for -- by the equity method, our participation in BBG and Altamira, our EBITDA would have been there growing 3.9%. As for net profit it grew to EUR209.9m that is 3.9% higher to what was obtained during the same period in the previous year.

 On the other hand during the first six months of the year Enagas invested a total of EUR419m. This figure includes the acquisition of 22.38% of TgP, a Peruvian company, for an amount of EUR373m. During the second half of the year we will be selling 2.38% of TgP to Canadian Pension Plan Investment Board and we will acquire 30% of the Compania Operadora de Gas del Amazonas, COGA, which operates TgP's gasoduct. Including TgP has been taken account since 2014 when it started being consolidated. And it will be a higher contribution as from 2016.

 We also have been awarded on June 30 the project Gasoducto Sur Peruano in Peru where we participate with 20% stake. This investment fulfils the five strategic criteria which we have established for our investments, our international investments. It is a core business asset. It is a strategic pipeline in Peru, over 1,000 kilometers in length.

 It requires actively participating in the management of the infrastructure. We are present in the Board of Directors and we have a significant influence. Enagas will also act as qualified operator of the consortium and we will be in charge of the operation and the maintenance of the pipeline.

 Thirdly, as a criteria, it has a risk profile which is similar to the regulated business with warranty clauses and long-term ship-or-pay contracts with strong credit rating customers.

 Its fourth criteria is the fact that we have attractive returns with predictable cash flows in dollars. And we are in this project with a partner, Odebrecht, which has a long-standing in the construction of enterprise structures. And that provides us with additional assets that are complementary to us.

 As you all very well know, our financial position is one of our strengths. The Company's net debt as of June 30 was up to EUR3.69b. At the end of the first semester we had total liquidity of EUR375m -- EUR3.75b (sic - see presentation slide 6 "EUR2.475b") and this allows us to have a high solvency to continue developing our investment plan.

 And we also have diverse sources for finance. 85% of our debt is at a fixed rate. These figures confirm once again the good, sound financial position that Enagas has in order to keep on advancing in the achievement of our strategic targets.

 As for the evolution of natural gas, that which has to do with transit through the Spanish gas system, that is to say the one that will not be dedicated to internal consumption, grew almost 70% during the first six months. And it accounts for 24% of total demand.

 We also have to say that there has been a rise in tanker loading at our re-gasification plant. When closing this first six months the volume of re-loaded gas was -- amounted for what we had loaded during all of 2013. And the total gas, that is consumption plus transit, has been maintained, has been stable as compared to 2013. That means that national demand, national consumption has come down when compared to the same period in the previous year.

 The main cause has been extremely mild temperatures during this first six months which has caused a decrease in consumption of around 12 terawatts per hour. What we foresee in Enagas is for the total gas -- [managing] the gas system will be around 410 terawatts per hour by yearend. This figure is in line with the data which was considered as basis to calculate the deficit in the gas system which was the reference for the reform in the sector which was carried out.

 As for the information we provided you with during the last conference call two weeks ago, we have had no news whatsoever. The Government has a very clear objective which is reducing the price of energy in Spain and increasing competitivity, or competitiveness, sorry, of Spanish companies.

 The measures which have been included in this Royal Decree 8/2014 can be synthesized into three points. These are measures that will reduce the gas deficit, that will provide stability and solidity to the sector and that establish a stable and predictable regulatory framework by introducing some new elements which we have positively valued. During the next few weeks we will see the Ministerial Order being published in order to develop these measures regulated by Royal Decree 8/2014.

 But in Enagas we are anyhow working to minimize the impact of this reform on our shareholders and investors. Our objective, as we said two weeks ago, is to maintain the dividend for 2014 and 2015. Thus we will fulfill the objective established in the strategic plan to increase the dividend at a yearly growth rate of 6% (sic - see presentation slide 10 "2.4%") between 2013 and 2014.

 Flexibility, solidity, adaptation capacity shown by the Company will allow us to maintain that commitment of growth and value creation for our investors and shareholders. In that sense, as you probably already know, two rating agencies Standard & Poor's and Fitch have already maintained the rating for -- reaffirmed the rating for Enagas after the gas reform.

 And I have to say that our presence in Mexico, Chile and Peru is growing in importance. This has allowed us to grow with regards to results. And we are already receiving dividends from the acquisitions which were made by the Company.

 And I thank you for your attention and I invite you now to ask whatever questions you consider appropriate. And all of Enagas' team is here together with me so that we can provide you with the most in-depth answers possible. Thank you very much.

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Questions and Answers
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Operator   [1]
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 (Interpreted). Good morning ladies and gentlemen. We will now begin with the Q&A session. (Operator Instructions). Thank you. Pablo Cuadrado, HSBC.

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 Pablo Cuadrado,  HSBC - Analyst   [2]
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 (Interpreted). Good morning; good morning everyone. I have three questions I wanted to ask you. First question has to do with --

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Operator   [3]
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 Good morning ladies and gentlemen. The Q&A session starts now. (Operator Instructions).

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 Pablo Cuadrado,  HSBC - Analyst   [4]
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 (Interpreted). (Inaudible) EBITDA and you have told us that the OpEx has gone down. There has been a 5% improvement. Is that the level that you think you will be able to achieve in the future?

 Looking over to 2015, 2016 do you think those are the efficiencies that you will be able to maintain during those next few years? Is that the level that you are going to maintain when considering the onset of the regulatory impact?

 And the second has to do with the debt cost, 3.1%. I think at the -- you talked about 3.3% last year. I wanted to know if there is further refinancing during the -- there will be a further refinancing in the second half of the year or if you consider that 3.3% can be improved?

 And third question has to do with the change in the regulatory system which was proposed a few years ago. It has to do with the retribution that will be linked, or the one that is not fixed, the variable one, so that I can understand this.

 Do you think that this variable part will be calculated considering -- what? Will they consider the total demand on the system or the national demand or the transported gas, because there is quite a difference between both. Could you give us some indication with regards to that variable part? Thank you very much.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [5]
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 (Interpreted). Thank you Mr. Pablo Cuadrado. We're going to answer to these two questions. First efficiency, yes this year we think that we can maintain this efficiency with the margin that you were commenting. And for next year and maybe the following one, we think that in the OpEx management we will be able to increase our efficiency. So we're going to continue with this policy of, let's say, savings via efficiency.

 With regards the debt costs, we have no major refinancing for this year. So, from this stance, there won't be any changes in our debt structure. You must think that we do have 85% of debt on a fixed rate and that's why we think that, yes by the end of the year we will be probably at -- slightly above with the average cost of 3.3% we said and that we set as an objective. And the advantage of not having refinancing is that we will have no surprises on these major elements of the cost of the Company.

 And with regards to the variable demand, I will give the floor to Marcelino Oreja, our CEO -- our Board Member, sorry.

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 Marcelino Oreja,  Enagas SA - CEO   [6]
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 (Interpreted). Thank you. As for the payout for the supply continuity, what you see -- what you say is variable, it's the national demand of total transported. But it isn't that [TT] which is growing in our plants, which is the loading of vessels it is major for Enagas and the system but that is not included in the payout for supply continuity.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [7]
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 (Interpreted). Thank you. More questions?

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Operator   [8]
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 (Interpreted). Jose Javier Ruiz, Macquarie.

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 Jose Javier Ruiz,  Macquarie Capital - Analyst   [9]
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 (Interpreted). Good morning. I wanted to ask you if you could give us some objectives of cost reduction as you've said that you could -- in the coming three years you could expand that cost reduction.

 Secondly I'd like to know if you could give us the average return of the Peruvian Gasoducto sales and the Gasoducto del Sur and the gas tariff is institutionalized somewhat.

 And I'd like to know if the financing proposals of this tariff deficit, until we get to the maximum from which tariffs will increase is that the same as this -- are you going to be financing around 38% as you have been doing? Thank you.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [10]
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 (Interpreted). Thank you Mr. Jose Javier Ruiz. With regards to the first question, the cost reduction, if we take rough figures, for this year we have -- for the end of this year we have foreseen a greater efficiency that could be figured at EUR5m of savings and for the coming year another five years. Nevertheless this is a work in progress. The Company since long has an efficiency plan and it's proving that we are efficient. And we will continue with this path.

 With regards to the average return on the investment of the Gasoducto del Sur in Peru, as we said, it's a double-digit one and in any case above 11%. In the phase that we are in right now we cannot really give more information, but you must be certain that it is fully, fully in line with the objectives that we have set.

 With regards to the new law, the most important thing in -- with regards to the tariff deficit are two things. First of all that with the scheme set up practically there will be no deficit in the coming years; new deficit almost none. Well, minor differences may occur, but even if we had a surplus in one year that would be devoted to eliminate quickly the accrued deficit.

 And for that accrued deficit, which, as you know, is not huge in absolute terms, we have foreseen, well, the system foresees to amortize it in 15 years with even the possibility of, if in a coming year we had surplus, which could be very probable, this surplus would be destined to eliminating that. So with a tariff deficit really everything is solved with the regulator's actions. Thank you.

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Operator   [11]
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 (Interpreted). Jorge Alonso, Societe Generale.

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 Jorge Alonso,  Societe Generale - Analyst   [12]
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 (Interpreted). Good morning. I'd like to ask you for more information about the enlargement of TgP's gasoduct, some details about how much could the volumes of transported gas could increase with the CapEx and with the profitability you may get and what would be the impact that that could have in the result of the participated companies.

 And another question of the -- about the infrastructure planning spend, do you see any change probably maybe in the two major infrastructures which are the re-gas plants of Canary Islands? Do you foresee any change that could be accelerated or not with the entry of these infrastructures? Thank you.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [13]
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 (Interpreted). Well Mr. Jorge thank you very much for your question. With regards to the TgP's enlargement gasoduct we -- TgP covers the objectives of profitability of double-digits which is above 11%. And as it's under functioning, it gives -- it pays us dividend, so we include in the Company the dividends coming from this investment.

 Once having said this, it's true that the Company, TgP has foreseen to make the investments between now and 2016 of about EUR400m CapEx that the company will do with its own funds. And logically that will increase the returns and the payout of these dividends that we receive. So right now I don't have that CapEx increase for the coming two years, how much it will be, but we could calculate it when time needed. So we already have dividends and from now until two years time, there will be a greater investment done by the Company that will increase the volume.

 With regards to the infrastructures planned in Spain, well, there is nothing new. As you know, we've got two major lines. The two re-gas plants in the Canary Islands that are just following the proceedings that are already known and the interconnections, which is something which is pending the decision that the European Commission may take in relation to the -- what we call the internal market of the EU and the gasoduct grid. Nothing new there, so we could say it's business as usual from this standpoint.

 For our forecast and I'm talking just by heart here, re-gas plants, the first one will be for -- the investment is foreseen for next year. The second one from, starting from 2016, 2017. And with regards to the interconnections, for the time being, we have no specific calendar because this is pending of the final decisions of the European Commission. Thank you.

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Operator   [14]
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 (Interpreted). Javier Garrido, JP Morgan.

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 Javier Garrido,  JPMorgan - Analyst   [15]
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 (Interpreted). Good morning. Just one question asking for more details of the estimated evolution of the gas demand. Could you give us a forecast for the transported demand which is similar to last year? What would be the national demand contribution because do you still foresee a minor decrease in the second semester of 12%, which is what we have seen in the first semester?

 And I know it's maybe too early, but could you give us an estimate of how you see 2015 or what would be the gas demand that would be stable? Eliminating the effect of such a warm winter that we've had, which would be the national demand, not transported but national demand that you foresee as a stable demand for next year, 2015?

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 Antonio Llarden,  Enagas SA - Executive Chairman   [16]
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 (Interpreted). Thank you, Mr. Javier Garrido. With regards to the gas demand evolution our forecast is for the total transported demand would be around 410 terawatts. And with the forecast that we've got right now, yes, the national demand by the end of the year, with regards to 2013 would not decrease to the proportions that we've had in the first semester, which was around 12%.

 But we estimate it to recover partially and we would be talking then of a decrease of around 4% or 5%. It's just a forecast, which of course is based on the fact that the rest of the year will be, from the climate stance, a normal one and the normal is the average of the last ten years. So the demand would recover slightly and this decrease would be less than the one of 2013.

 And for 2015, although I cannot give you a specific forecast, we estimate an increase of national demand because of a whole of factors that would coincide. In the next conference call, end of Q3, we would give you more specific data. Thank you very much.

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Operator   [17]
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 (Interpreted). Carolina Dores, Morgan Stanley.

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 Carolina Dores,  Morgan Stanley - Analyst   [18]
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 (Interpreted). Good morning. Thank you for taking my questions. I've got two questions. Could you give us an idea of about net debt -- net profit for 2014 because the growth was 4% before the reform?

 And the second question more details about the costs for 2014, 2015. This cost reduction, do you expect EUR5b -- EUR5m sorry would be nominal reduction or those EUR5m will be including operation entry inflation, so in nominal terms would that cost reduction be lower?

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 Antonio Llarden,  Enagas SA - Executive Chairman   [19]
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 (Interpreted). Thank you very much, Miss Dores. Obviously our objective, our growth objective, profit after taxes 4.2% more or less. But we will try to fine-tune our figures, when we have the strictly final impact for 2014.

 Regardless of what this fine-tuning might be, we do maintain our objective of dividend in absolute values for 2014 to be EUR1.3 per share. Regardless of I said of the fine-tuning that we have to put in place at the end of the year when we know what the impact for 2014 really was.

 As for cost control as I said previously, we maintain for this year an efficiency policy which I believe allows us to maintain this EBITDA margin which we have talked about previously. And next year we think that in absolute values we will be able to add EUR5m so that we may improve our efficiency. Thank you very much.

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Operator   [20]
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 (Interpreted). Mr. Suarez, Mediobanca.

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 Javier Suarez,  Mediobanca - Analyst   [21]
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 (Interpreted). Yes, good morning. Thank you very much for listening to my questions. I have three more questions. The first one has to do with the Ministerial Order for the Royal Decree. Could you give us some detail with regards to the timing of its issuance of the regulation? And what are the details that are still to be established that could be significant and that could be important really?

 And the second question has to do with the variable component. Following some of the previous questions (inaudible), it has to do with increasing the demand, the national demand and also it has to do with the efficiency element, controlling the efficiency. I would like to know what will -- what are your forecasts with regards to this variable component for the next three to six years.

 And the other question has to do with the OpEx with the effort that you are making so that OpEx can be controlled in the next year especially in 2015. And I would like to know where the Company thinks that the EUR5m can be saved, those additional EUR5m. And I also wanted to know how this regulatory framework has considered Castor. Thank you very much.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [22]
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 (Interpreted). Thank you very much, Mr. Suarez. Now for timing we don't have any official information with regards to timing. We consider that August, September, September more or less or rather September should be the date for the Ministerial Order to be published.

 But obviously we are not the official spokespeople for the regulator, so this is just our own personal appreciation. But I do not believe that we will have any news before September. I consider that by the end of August, September that Order will be published.

 New details should not be an option really. It will simply be a fine tuning of what the Royal Decree says with a specific application for 2014. So they will, as I said, fine-tune some figures but we don't really expect any elements of the surprise or novelties in this.

 As for the variable, it establishes something that is quite important which is the fact that for the first time, we will have a stable income flow, which will be parallel and complementary to fixed retributions, that establishes an efficiency factor for the next six years of 0.97% fixed. So that has been established and obviously depending on the variations of demand. But the forecast that the regulator has put in place by calculating the system is the existence of a stable constant flow that might, together with another flow that might vary.

 And as for the OpEx efficiency or the improvement of efficiency, it's being thought of as part of an important department which is that of efficiency, of energy efficiency. That might be a bit paradoxical since we deal with energy transportation. But since we consume energy in order to transport energy, our then biggest challenge we're working on in the last few months, considering, always considering the reform of the sector, was to improve our own efficiency, our own internal energy efficiency. I'd say that over half of the efforts being made are destined to that specific parcel of our work.

 And everything that has to do with procurement, with procurement costs is also an important part of our work. We have a very efficient procurement strategy and we have high quality providers. But that is a policy that allows us to keep on saving. So those are the two main fields for saving.

 And as for Castor, I can tell you that in the regulatory reforms when calculating the costs for the system in the next few years and calculating deficits and so on we always have taken into account the total cost for Castor, if it was working, regardless of what may happen in the future.

 So in the figures, in all the calculations that have been discussed and put in place, we've always been quite conservative and we've been very cautious. And we've always included a hypothesis; you could say a numeric hypothesis which took into consideration Castor working.

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Operator   [23]
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 (Interpreted). Virginia Sanz, Deutsche Bank.

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 Virginia Sanz,  Deutsche Bank - Analyst   [24]
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 (Interpreted). Thank you. Good morning. I have a few questions with regards to your CapEx. I have seen that there have been some figures announced with regards to national investment. We see that around EUR40m will be invested in Spain.

 I wanted to know what, is your objective for infrastructure investment for 2014 and whether you could give us some sort of objective for 2015. And also your asset volume and what do you think will enter [exclusion] in 2014.

 And I also wanted to know if the debt that has been shown during the first half could be a good estimate for the end of the year or if you think it might grow before the yearend? Thank you very much.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [25]
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 (Interpreted). Thank you very much, Miss Sanz. First of all our total CapEx for 2014 in Spain including those EUR40m you were referring to should be at the end of the year at around EUR180m divided into two main lines of work. Buffer gas in [Jena] and the work carried out in the compression station, (inaudible) which is close to [Idun] for the connection with the plant's re-gassing system.

 So the assets that have been put in -- with regards to assets put in place, it will depend. We'll have to have similar figures but it will not necessarily coincide with December 31. The buffer gas, yes but as far as (inaudible) we do not think it will be done before 2015, so despite of initiating the operation in the next year.

 And as for our CapEx for 2015, our forecast would be quite similar around EUR150m. Basically, in those two assets that I've mentioned and the re-gasification plant in Tenerife in Canary Islands where we will be initiating the works. And at the end of the year we consider that we might be at around EUR2.9b, in round figures, I'm providing you with round figures. Thank you very much.

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Operator   [26]
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 (Interpreted). No further questions in Spanish. We will now be listening to the questions in English. Olivier Van Doosselaere, Exane.

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 Olivier Van Doosselaere,  Exane BNP Paribas - Analyst   [27]
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 Yes, thank you very much and good morning, everyone. I just had one question remaining really to understand a little bit better what you are saying on the OpEx savings.

 You're talking about EUR5m of savings I think for 2014 and another EUR5m for 2015. But if in the first half like you're indicating the OpEx gone down by 5.4%, I calculated that you had about EUR140m of OpEx in the first half of 2013. So already in the first half, you would have made savings by close to EUR8m on your OpEx line in 2014, actually suggesting that OpEx would go up and not down in the second half of this year.

 And even if I take away the asset that has been deconsolidated, it looks like you've already exceeded your full year target for 2014 of EUR5m. So I was wondering if you could maybe give some more details on that one. And if maybe you're actually being conservative on the target that you mentioned? Thank you.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [28]
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 (Interpreted). Yes, thank you very much Olivier. Yes, what I said previously was that apart from what has already been done regarding the efficiency in the first semester, we consider that in the second semester we might achieve a further EUR5m with regards to efficiencies. So we haven't calculated the total, but I consider that in the second semester we would be saving a further EUR5m. And for 2015 we would add EUR5m to that total.

 These are really rough figures because as I told you the work plan that we are carrying out has to do with energy efficiency. And this is work in progress and it will be evolving along the next 12 months. And all of this is linked to some technical matters and it has to do with energy flow and transportation that is not easy to create models for. So we're simply working on it. And I know that our plan is quite ambitious. Thank you very much.

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Operator   [29]
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 (Interpreted). There are no further questions. Thank you.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [30]
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 (Interpreted). Well, if there are no further questions we consider that the conference call is over. Thank you very much.

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Editor   [31]
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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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