Q3 2014 Enagas SA Earnings Call

Oct 21, 2014 AM CEST
ENG.MC - Enagas SA
Q3 2014 Enagas SA Earnings Call
Oct 21, 2014 / 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
   *  Alberto Gandolfi
      UBS - Analyst
   *  Jose Javier Ruiz
      Macquarie - Analyst
   *  Olivier Van Doosselaere
      Exane BNP Paribas - Analyst

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Presentation
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Operator   [1]
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 (Interpreted). Good morning ladies and gentlemen and welcome to the conference call on the presentation of Enagas results for the third quarter of 2014. The figures were released this morning before the opening bell and are available as always on our website at www.enagas.es. Mr. Antonio Llarden, the Chairman of Enagas, will host the presentation. We expect the call to last around 15, 20 minutes. After that there will be a Q&A session during which we will try to answer as fully as possible. Thank you very much for your attention and I will now hand the floor to Mr. Chairman.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [2]
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 (Interpreted). Good morning ladies and gentlemen and thank you for your attention. Today we are presenting our results for the first nine months of 2014 and they are in line with our objectives. They were influenced by three factors.

 First, the figures for the third quarter have already been affected by Royal Decree Law 8/2014 of July 4. The impact of this new regulatory framework on the company's regulated revenue in the third quarter of the year is in line with the estimate that we made after the publication of the Royal Decree Law.

 Secondly, and in order to abide by the international, by the IFRS, consolidation by equity method in 2014 of our investments in TLA Altamira and BBG plants in Mexico and in Bilbao are now done through the equity method and therefore their contribution to the company's results will only be reflected in net profit.

 And thirdly, we must highlight the especially positive contribution of the international assets, specifically the Peru gas transporter, TGP.

 I'm going to mention to you the most important figures. Net profit in the first nine months of 2014 amounted to EUR308.1m so that's a year-on-year increase of 1.5% when compared to the same period of the previous year.

 Regulated revenue for the third quarter decreased by EUR27m with respect to the same period of 2013 as a result, as we were saying, of the impact of the regulatory reform. However, we have succeeded in somehow cushioning the impact on net profit of this decline in revenue due to the following factors.

 First, we have intensified the Company's operating efficiency and this will enable us to reduce operating expenses by EUR5m in the second half of the year.

 Secondly, the reform has brought about, as a stabilizing element, a lengthening of the useful life of assets and this will reduce depreciation and amortization in the third quarter. As we said in the conference after the publication of the Royal Decree, the impact for a whole year of this new regulation will lead to a lower amortization of about EUR40m.

 And thirdly, the greater contribution of international operations is important, especially due to the inclusion of TGP which began to be consolidated from April of this year.

 Moreover, in the first nine months of the year Enagas invested EUR546m, a figure with which the Company has met its investment target for all of 2014. More than 80% of this investment figure relates to international investments. In 2014 we acquired 20% of the Peruvian company TGP, 30% of Compania Operadora de Gas del Amazonas, COGA.

 And, moreover, we've started initial investment in the South Peruvian gas pipeline where Enagas has a 25% stake and also in the European project Trans Adriatic Pipeline, TAP, where Enagas has a 16% stake. For this Enagas entered into a consortium with a Belgian operator, Fluxys, for the acquisition of the equity interest of Total and E.ON in the [company limited] project for the Trans Adriatic Pipeline.

 Allow me to remember the death of Mr. Christophe de Margerie from Total and on behalf of Enagas and on my behalf I would like to send my warmest regards to his family and to Total for this tragic death.

 Let's continue. This is the first time, when we talk about Fluxys, that two European operators, two TSOs, have undertaken a joint operation aimed at enabling the transmission of gas to Europe and thus strengthening the continent's energy security. This project fits perfectly into our core business and it consists of the construction of a gas pipeline with an 871 kilometers length that will link Turkey and Italy via Greece and Albania and it will have an initial capacity of 10 BCMs.

 This gas pipeline forms part of the so-called Southern Corridor and it will supplement the MidCat corridor project between Spain and France through the Pyrenees. Both projects are key priority projects for energy security in Europe and are listed by the European Union as a Project of Common Interest or PCI. Enagas can play a fundamental role as an expert company in this sector and as a TSO, Transmission System Operator, certified by the European Union.

 The TAP investment, as all other Enagas investments, strictly complies with the five strategic criteria which we have established for our international investments.

 Regarding the financial position, this is still one of our main strengths and that was confirmed by Standard & Poor's. Following the publication of the new regulatory framework the agency ratified recently the company's BBB rating and its stable outlook.

 The most significant financial data for this period are a net financial debt at September 30 of EUR3.911b. This figure is up by 6% on the figure reached in June, due in fact to the investments made and to the payment of the complementary final dividend that we made in July.

 Secondly, we have a cash flow of EUR2.347b and this allows us to maintain high solvency ratios and to continue to pursue our investment plan without reducing our financial flexibility.

 Thirdly, the debt profile of the Company continues to be mostly at a fixed rate and at long term. We have diversified our funding sources and the capital market now accounts for 63% of gross debt.

 And fourthly, an average cost of debt at September 30 of 3.1%, slightly below the annual target of 3.3%.

 With regard to the evolution of natural gas, regarding transit through the Spanish gas system that is not for domestic consumption in Spain, it rose by about 43% in the first nine months of the year and it now accounts for 24% of the total transported gas by Enagas. The total demand transported by the gas system, that is that of transit plus internal demand or domestic consumption, has remained stable with the respect to the first nine months of 2013.

 Finally, as you'll know, in October the government approved the Royal Decree Law 13/2014 regarding the Castor underground storage facility. As explained in the relevant facts made available to the market, through this Royal Decree we cancel the Castor operating concession and we establish the hibernation of the facility. Enagas' role will be to keep the facilities closed during hibernation and for that it will receive compensation from the gas system for the performance of this work.

 For Enagas this operation is neutral from a financial point of view. It does not affect the financial statement, it does not increase debt and it does not alter the investment targets. Standard & Poor's and Fitch published reports where they confirm that this reform has no impact on the Company's ratings.

 And before I finish I would like to reaffirm the Company's commitment to its investors, which is reflected in our dividend policy. Our objective is to deliver the dividend projected for 2014 and 2015. Thus, we will meet the target set in our strategic plan to increase the dividend at an annual growth rate of 6% between 2013 and 2015. More specifically in 2014, this year, our commitment is to pay a dividend charge to net profit or EUR1.30 per share.

 The Company's flexibility, soundness and capacity to adapt has been proven by the Company and will enable us to continue keeping up our commitment to grow and to create value for our investors, shareholders and employees.

 Thank you very for your attention and if you have any questions please feel free to ask them now and the whole Enagas team here present will try to answer them in as much detail 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). Good morning to all of you. Javier Suarez from Mediobanca. Three questions. First, regarding the national energy plan, we've seen a statement by the Secretary of State for Energy saying that he would like to approve this energy plan before the end of the year. And I would like to know your opinion about what consequences this could have for Enagas and consequences for the presentation of your new business plan.

 And when do you think you will present this new business plan and what do you expect to do regarding the payment of dividend for the next few years?

 The second question has to do with the financial statement. I would like to know if you could tell what is the debt level on EBITDA with which you feel comfortable given that the regulator risk has been left behind and we have a totally different phase in the Company. So what net debt on EBITDA percentage would you be comfortable with for the next four years?

 And the last question has to do with international investments that are taking place and which are relevant. I would like to know regarding the TAP project how much you paid for the equity and what is the return you expect to receive from this project? And how would you compare this project with the ones that you have in Peru? Thank you.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [3]
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 (Interpreted). Thank you very much Mr. Javier Suarez. I'll answer your questions.

 First of all, regarding the first question, yes, obviously we hope that there will be towards the end of the year or beginning of next year more information on the new national energy plan. Despite that, due to our regular contact with the regulator we believe that the investments that in our specific case will have to be carried out in Spain due to this new energy plan are already met, you could say, or are quite limited. There's one in the Canary Islands, the terminal in the border crossing with the MidCat when the European Union gives us the green light, and a new link with Portugal through Zamora.

 We don't believe there will be much more investments over the next five or six years and so this is quite already taken into account by our calculations. And that's why, coinciding if possible with the presentation of results, we will carry out an update of the business plan, which in the first lines we could include these CapEx commitments in Spain that we believe will have, that is to say, on average we could say about EUR120m, EUR150m per year for a period of six years let's say. That's what we think will influence.

 Even though we don't want to advance any actions, we think beyond 2015 our dividend policy will be positive for the shareholders. But, anyway, we'll talk about that when the time comes.

 Regarding the second element, the ratio of net debt on EBITDA, the average value at the moment -- or our target is about 4.2 but this 4.2 is not a magic number. We believe that everything we do is to keep our rating and, not going into details, we understand that maintaining the rating that Enagas has allows us to have certain margin for maneuver we could say. Anyway, we are within the margins that we mentioned.

 And regarding international investment of TAP, due to a confidentiality issue that we signed when we ratified this project we cannot give in public the amount that we paid, but I can tell you that this is a figure that regarding CapEx is quite small, less than EUR100m. And the return of this project, obviously and according to the strategic criteria that we have established, as it has been foreseen by the partners of this consortium that we part of, double-digit returns for shareholders and so we believe this will be very interesting profitability for our Company. Thank you very much.

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Operator   [4]
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 (Interpreted). Alberto Gandolfi, UBS.

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 Alberto Gandolfi,  UBS - Analyst   [5]
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 (Interpreted). Good morning. Alberto Gandolfi from UBS. Thank you for taking my questions. First of all I would like to ask about TAP. That strategic approach is very interesting for Europe mainly. I'd like to know what you think, Mr. President, about the interconnections in Europe, more especially because we have seen many -- we've read that you've been interviewing the ministers in order to -- we've read the minister saying that Spain wants to become a hub for Europe. So will there be a reclassification of LNG that will have better interconnections with France? The security of supply of Europe would improve if this were to be done.

 Could you talk about your vision for 3, 5, 10 years? How could Spain integrate the rest of Europe and which could be the functions of Enagas, which would be Enagas's objectives regarding this?

 Secondly, could you talk more about the growth you expect for 2015? There is another negative impact on the revenues with EUR60m. Because of the annualization of the regulation review the CapEx since 2013 has reduced and is below EUR200m so there are taxes, there are cost-cutting, amortization. So if I had to make a quick question, do you expect growth in the net profit for 2015 over 2014? Thank you very much.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [6]
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 (Interpreted). Thank you Mr. Alberto Gandolfi. About the first question, yes, the EU policy, at least the one marked on the paper with the Projects of Common Interest statement, is trying to once and for all tackle the idea -- I'm talking about gas -- of having domestic market with a north/south, south/north interconnections, allowing two objectives.

 First, as you were saying, the security of supply. And another, which is very important, which is a real domestic market that will make each one of the countries and citizens that live in those countries, and the companies that are settled and developed in those countries, to have equal opportunities to access an energy supply such as gas which is less polluting and in general terms is efficient and cheaper.

 Here interconnections have a major role. The EU has already defined two energy islands in Europe or hubs, the Iberian Peninsula and the Balkans -- Baltic countries, sorry. So we'd have to try and make all this Europe having interconnections, eliminating these differences. It's true that the Iberian Peninsula, with direct connections with the North of Africa and with eight re-gas stations or plants including the one of Sines in Portugal, that because of their nature under normal conditions do not work 100% but they've got still room, these could be one of the hubs that could complement the gas supply to Europe from and for different countries.

 Enagas can and is already playing a role. And we really trust that in some time, not too long time we may be able to consolidate the third connection with France, which is what we call the MidCat.

 Enagas's role, which is modest but which we believe can be very efficient, is being also played at the TAP consortium that we made reference to before, because these are two complementary projects that are going in the same line.

 And we're also playing this role in another area that can be useful for the EU but also for other parts of the world which is the loading and unloading GNL that we carry out in the Spanish ?- energy, sorry, in Spain but they are not consumed in Spain, but these are LNG downloads that are re-transported to other points of the world. This movement that is taking place in the gas market in the world, well, you have seen the figures that we have published in this presentation, up to September 30 we have loaded and downloaded more than 40,000 gigawatt hours of LNG when last year we only had 30,000, 31,000. So in nine months we've done more than last year.

 So there is another major role there for a specialized company in high-pressure gas [ducts] and LNG, such as Enagas is, can have this major role in the evolution of the world gas market.

 Regarding the second question, next year we are going to have the full impact of the regulation in the full year so we will a series of impacts in the revenues that you might be aware of. Of course we will have the positive impact of these stabilizers and the investments we are carrying out and we also trust that when the new legislation, fiscal legislation will be approved we will have there a positive impact.

 So these things together allow us to think that for next year we will have a growth slightly positive but certainly we cannot give you exact figures because these will depend greatly on the fine-tuning that we will carry out, not only when we have all the fine-tuned, the fine data of the regulation, but also the approval of a new fiscal norm which we believe will be approved or expect to be approved, before the end of the year. Thank you.

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Operator   [7]
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 (Interpreted). Jose Javier Ruiz, Macquarie.

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 Jose Javier Ruiz,  Macquarie - Analyst   [8]
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 (Interpreted). Good morning. I have only got two questions. The first, could you give us an update of what you expect in terms of growth of reloading, taking into account that [23%] we've seen in the last month?

 And the second question, would you be considering to be part of the joint venture of Fluxys and Snam where they're putting all their assets together, European assets? Thank you.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [9]
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 (Interpreted). Thank you Mr. Jose Javier Ruiz. I will answer your two questions. With the reloading it is very difficult to make forecasts in this kind of market because it is a very, very recent market. It's just one or two years old of age and it's a market which is tightly related to the weekly evolution of prices. So it's not easy to make a forecast for the end of the year.

 In the last weeks prices have been tightening in the different world areas and if this price convergence continues very probably the volume of this market will reduce. But once having said that it's very difficult for everybody to give some accurate figures for this new market, which is a very spot market so it's very closely related to the weekly or even daily evolution of prices.

 With regards to the Fluxys and Snam joint venture, we have a very good relationship with Snam and with Fluxys. Especially with Fluxys we've done this TAP operation together. We don't discard working again with them, but the alliance they have for the specific corridor that you were talking about, well, that's something that is already running, it's closed and it's very difficult for us to contribute there with any added value. So in that specific operation we don't think that we will take a stake there. That doesn't mean that we might join with any of them in a future operation because we've got a historical record of working together. Thank you.

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Operator   [10]
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 Oliver Van Doosselaere, Exane.

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 Olivier Van Doosselaere,  Exane BNP Paribas - Analyst   [11]
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 Yes, thank you and good morning everybody. Just had three questions on my side. One is that I would actually like to come to back to what was said about Fluxys and Snam. I was just wondering if you actually see, do you see a large amount of potential further transactions in terms of gas assets that would become available in the coming years for you and those two other players? And do you think there's a good chance that actually you would, the three of you together, start to dominate the international scene in Europe in a coordinated manner? That would be a first question.

 Secondly, in terms of the numbers and looking at the D&A, if we look at the third quarter D&A for this year it actually suggests that after the reform on a full-year basis you would have D&A at actually slightly below EUR280m. Is that something that we should take into our numbers from 2015 onwards?

 And then just the final one, a small one on the financial-linked charges in the third quarter. They look to be particularly low. I was wondering if there was any one-offs in there. Thank you.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [12]
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 (Interpreted). Thank you very much Olivier. With regard to the first question, well, I partly answered it. We have a very good relationship with Fluxys and Snam, but of course there are other TSOs in Europe. In France there are two of them. There are other operators that are powerful.

 And we don't really foresee that on the mid and short run in Europe we will have more operations. Yes, Europe has to improve these interconnections we were talking about before, but these are the two extremes, the two energy hubs of the Europe that the Commission has detected, the Baltic countries and the Iberian Peninsula. The rest of Europe is reasonably well connected with regards to gas ducts. So we don't perceive to have great activity, neither consolidation activities.

 In any case as a TSO we do have an excellent relationship and constant contact with Fluxys, Snam, but also with (inaudible), with GRT, so we have got contact with all of them.

 With regards to amortizations and the regulation stabilizer, in my introduction I said there we've estimated the whole-year impact at around EUR40m. So in this Q3 I understand that what we've done is to approximately, well, with some nuances and some fine-tunings we have done the proportional part of that figure. When we will have the full year of running we will have much more, well this is evolution, but in rough figures if you want to make calculations, we estimate that these amortizations could represent EUR40m a year.

 And the interest rate of Q3, maybe the cost has been lower and maybe due to the deconsolidation that we talked about before coming from the accounting rules. In macroeconomic terms we understand that we are behaving correctly, below budget, and I'd say that in Q3 probably the comparison is because of the deconsolidation. Thank you.

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

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Operator   [14]
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 There are no further questions. Thank you.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [15]
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 (Interpreted). If there are no more questions we shall finish this conference call. Thank you everybody.

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Editor   [16]
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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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