Full Year 2014 Enagas SA Earnings & Strategy Update for 2015-2017 Call

Feb 24, 2015 AM CET
ENG.MC - Enagas SA
Full Year 2014 Enagas SA Earnings & Strategy Update for 2015-2017 Call
Feb 24, 2015 / 08:00AM GMT 

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Corporate Participants
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   *  Antonio Llarden
      Enagas SA - President
   *  Borja Garcia-Alarcon
      Enagas SA - CFO
   *  Marcelino Oreja
      Enagas SA - CEO

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Conference Call Participants
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   *  Javier Garrido
      JPMorgan - Analyst
   *  Alberto Gandolfi
      UBS - Analyst
   *  Javier Suarez
      Mediobanca - Analyst
   *  Jose Ruiz
      Macquarie - Analyst
   *  Fernando Lafuente
      N+1 - Analyst
   *  Carolina Dores
      Morgan Stanley - Analyst
   *  Pablo Cuadrado
      HSBC - Analyst
   *  Olivier Van Doosselaere
      Exane BNP Paribas - Analyst

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Presentation
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Unidentified Company Representative   [1]
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 (Interpreted). Good morning, ladies and gentlemen. Please be welcome to the presentation of results for 2014 of Enagas and the strategic update and outlook 2015-2017. The 2014 results have been published this morning before the opening of the market and are available in our website enagas.es.

 Mr. Antonio Llarden, President of Enagas, will lead this conference. We foresee a duration of half an hour and then we will open the Q&A session, during which we will try to answer any question as thoroughly as possible. So thank you for your attention, and without further ado I will hand the floor to Mr. Antonio Llarden.

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 Antonio Llarden,  Enagas SA - President   [2]
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 (Interpreted). Good morning, ladies and gentlemen. Welcome to the conference call and, of course, thank you very much for your attention.

 I'm going to structure my intervention into two parts. First, I will briefly present Enagas's 2014 earnings and comment on the most relevant aspects. I am really pleased for our team to confirm that for the eighth year in a row and despite the tough economic environment and the gas sector reform, we have beaten all the objectives set in our strategic plan in force 2013-2015.

 In the second part and as we committed, I will present our strategic update for the 2015-2017 period and I will do so in three stages. I will start by sharing with you our analysis of the current energy backdrop in the Company, focusing in particular on the challenges and opportunities for the natural gas sector for the coming years. Then I will review our strategic and financial lines and mainly our pillars for growth. And finally, I will summarize the specific goals that in this context and with a lot of caution Enagas has set for the period and that you will see with more detail in the presentation that is uploaded in the website.

 The year 2014 has been a major year for Enagas due to the convergence of three factors. First, the gas sector reform. The results we're presenting you today reflect already the negative impact of the new natural gas sector regulation published in Royal Decree Law 8/2014 of July 4, which immediately affected our figures. The reform has had a substantial impact on Enagas's accounts, but it is in line with the overall deficit adjustment figures that I have been mentioning in the recent conferences where we have presented the quarterly results. On the positive side, the reform has enhanced the Spanish gas system's economic and financial sustainability and provides a more stable and secure regulatory framework.

 The second factor that has had an influence is the fiscal reform approved by the government of Spain in December, which reduces the corporate income tax rate from 30% to 20% (sic -- see slide 3 "28%") in 2015 and to 25% from 2016. In addition, our 2014 results include non-recurring income of EUR58m for accounting purposes from an adjustment to deferred taxes on our balance sheet.

 The third factor that has influence in our results is the stepping up of our international expansion process. The investments made in 2014 include three key projects that safeguard our future earnings growth. First, the acquisition of 20% of Peru's largest transporter of natural gas and condensates, Transportadora de Gas del Peru, TGP, and also the acquisition of 30% of the operator, which is COGA.

 Secondly, the initial investment in Gasoducto Sur Peruano, the largest gas transmission project awarded in Latin America in 2014, in which Enagas participates at 25%. And we have been selected by the Peruvian government to correctly manage the gasoduct when it is put into operation.

 And thirdly, in Europe, the investment of Trans Adriatic Pipeline, TAP, a gasoduct connecting Turkey with Italy through Greece, Albania and the Adriatic Sea. This project, in which we have a stake of 16%, has been listed as a European Union Project of Common Interest.

 So you have in the presentation with greater detail the main key figures for 2014 that I will summarize. The net profit amounted to EUR406.5m with a year-on-year increase of 8 -- 0.8%. The negative impact of the reform on our regulated revenue has been buffered by a net profit level, by the stepping up of our efficiency drive, thanks to the lengthening of the useful life of the assets and to the contribution of the international earnings.

 In addition, I will remind you that the Company has pledged to pay a total dividend from 2014 net profit of EUR1.30 per share. This figure is in line with our goal of growth of 2.4% in net profit, which was set at the start of the year before the gas sector regulatory reform. The evolution of the share price has again outstripped the performance of the IBEX35 since 2007 when we started with our strategic plan that has led us to the situation where we are at.

 In 2014, we have registered the third strongest performance of the Spanish blue-chip index, rising by 38%, beating the performance of the IBEX35, which as you know has gained an appreciation of 4%. On the other side, in 2014, we have invested EUR625m, which represents meeting the target set for the year. Out of this figure, 75%, more or less, have been international investments.

 The solid financial position of Enagas is one of the strengths of the Company. The net debt at December 31, 2014 stood at EUR4.6b. We still have an appropriate debt structure, with an average maturity of approximately 6 years, a high percentage of fixed-rate, 81%, and a prices of funding in capital markets, which is increasing.

 Our average cost of debt has been -- is at 3.2%, below 3.3%, which we established initially at our budget for 2014. Our updated available financing at year end stood at EUR2.44b. This has allowed us to maintain high solvency levels and continue to develop our investment plan in a prudent and flexible manner.

 A financial recent milestone has been the latest bond issue amounting EUR600m that has been done in January, with the lowest ever issued coupon, 1.25%, the lowest for a Spanish issuer but also for a European utility for a 10-year horizon. This transaction has enabled us to cover our financial needs for 2015 and, at the same time, to amortize early a major part of the bond that matured in 2017. And this, of course, has a positive impact on the Company's borrowing costs.

 Finally, both Standard & Poor's and Fitch have in their annual reviews for 2014 confirmed their ratings for the Company from BBB, Standard & Poor's, A- Fitch, and maintaining these rating is a priority for Enagas.

 ,

 So in short and in order to conclude my explanation of the results 2014, in a challenging economic environment and following the government's regulatory reform, at Enagas we are carrying out extra efforts to adapt to the new situation. This is what has allowed us to meet on the eighth year on a row the commitments to our shareholders and the results that we have just presented are a good foundation to start working in the goals we have set in our strategic update up to 2017 that I shall now comment.

 Why are we presenting this strategic update today? First, because we have already met all the objectives that we set two years ago in the update of our strategic plan 2013-2015. In terms of investment, the outlay in 2013 and 2014 together with the pledged investment in 2015 exceed our goal, with a larger proportion of international investment in relation to our initial plans. On the other side, the dividend foreseen for 2014 and 2015 will achieve our goal of increasing the dividend at a rate of 6% per year between 2013 and 2015. In conclusion, we have met the target set one year ahead of schedule.

 Secondly, because we have also the forward view and stability that the current regulatory framework provides, this enables us to establish fresh commitments until 2017 at least.

 Thirdly, because in this period 2013-2015 we have developed a process of internationalization that we started in 2011, and we have really reached the firm conclusion that Enagas has the skill and the know how that is worthwhile to continue exporting.

 And lastly, because the energy industry and more in particular the world of natural gas has evolved in such a way that we have opportunities to invest in other countries that are really adequate for our Company.

 In order to develop the strategic update we have first done an analysis of the sector framework internationally, because its development will influence in our activity in markets, national markets but also international markets.

 You have more details in the slides, but I will just give you three major ideas. Enagas operates at a global market, with demand for gas forecast to grow by more than 2% annually until 2020, mainly in the countries of Asia-Pacific, Middle East and the Americas. From the supply standpoint, all the regions except for Europe will increase their production capacity and conventional gas is playing a major role and has made the United States to become the biggest producer, even before Russia.

 In this environment we expect a growth of -- with the world gas trade, with a larger of countries with infrastructures to import and export, in which LNG plays a major role, because it balances supply and demand. In this sense, Asia as just a fact has overtaken Europe as the main gas importer. The steady growth of the global demand of gas will entail hefty investments in the natural gas sector and infrastructures. For the period 2014-2020, as you can see, it will represent around $2.5b mainly in non-OECD countries.

 In addition, we may find new opportunities coming from the disinvestment carried out by vertically-integrated companies and institutional investors. Therefore, in the midterm, the expectations for the gas market is positive in our scenario. At Enagas, therefore, we're working to consolidate ourselves internationally as a relevant key player in the midstream based on our know-how, our track record, our independence, and of course our robust financial position.

 Once defined the context, I will tell you that for the coming years Enagas is going to maintain and reinforce its strategic and financial lines; efficiency, profitability, completing the gas network in Spain, international expansion, steady growth of profit and mainly adequate remuneration to shareholders. All this underpinned by a solid financial structure and the best practices in sustainability and corporate governance.

 In Spain, for this period 2015-2017, we estimate a growth in the gas demand of 4% average annually, boosted by the improvement of the economic situation and a greater penetration of gas in the energy mix. Later on, if you want, during the Q&A we can give you more data about the demand.

 On the other side, the sector has been affected, of course, by the regulatory reform of the gas market approved in 2014, which has as its ultimate aim to reduce the final price of energy in Spain and increase competitiveness of Spanish companies. The main principles of the new regulatory framework, you are aware of them, but they are the adaption to a mature gas system, focusing on its quality and sustainability through the elimination of the tariff deficit. And the other major principle or objective is the stability and predictability. The impact of this reform represents for Enagas, as was already said, an annual negative impact of around EUR120m a year.

 But the Company's net profit in this period will continue to grow thanks to, first, the intensification of the efficiency drive; the lower depreciation and amortization charges stemming from the lengthening of the useful life of assets; the financial discipline, certainly, as we have been proving; fourthly, because we still are investing less than before but we're still investing in Spain and because we are investing in the international arena; and also, the last but not the least, the positive impact of the fiscal reform for companies such as ours.

 In our country the gas market is mature, but for the coming years we will continue to develop a major part of activity in Spain since we still have investments to do. And the second growth driver is international market, which will be the one ensuring the long-term growth of the Company.

 Regarding our international growth drivers, let's just mention them; we will recall that they are the following. First of all, we have to make the most of our experience as transmission system operator in the EU within the European market. Secondly, developing natural gas assets in growing markets. And thirdly, consolidating our opposition as global specialist in LNG, giving greater value to our experience and technological and commercial experience in this activity.

 I will now briefly outline our plans. In Europe, a mature market with growing import needs owing to the decline in local production, Enagas is committed to playing its part in market integration and guaranteeing supply. As an example of this is our 60% stake in the Trans Adriatic Pipeline, TAP. This project forms part of the corridor to supply Europe with gas from the Caspian Sea and it's strategic for the supply security.

 I do not have this on my presentation, but I just received a very important figure. About a week ago, in Baku, we had a meeting of the Advisory Council for the South Corridor. This meeting brings together the European Union, the US and all the countries from the Caucasus, including Turkey. And in this meeting, they had a presentation -- they had the presence of all the energy ministers as well as the presentation of -- sorry, as well as the presence of the US ambassador, reached a very important agreement, which was to confirm the great importance of strategic and energy importance of this Trans-Adriatic Pipeline. And I'm sure that all the companies involved and all the countries involved will make sure that it is successful.

 Continuing with Europe, we have supported the development of the connection with France through the Pyrenees, the so called MidCat represents a commitment to transform the Iberian Peninsula into a platform that enables Europe to diversify its supply sources and furthermore to facilitate the development of a true internal gas market that enables permanent prize arbitrage.

 In this sense, I would also like to mention that last Friday, so three days ago, there was a very important milestone, which was the inauguration of the electricity high-voltage connection between France and Spain. This event was given great institutional importance and Mr. Mariano Rajoy, the Spanish Prime Minister and the French Prime Minister and both energy ministers were present. Also the Commissioner of the European Union, Mr. Canete, was there as well as Mr. Monti, the former Commissioner, which somehow did all the study that made it possible to unlock the block situation, as well as Mr. [Pistori].

 And I can say here, and I'm not disclosing anything, that they took the opportunity that those prime ministers from both countries were there to have a meeting behind closed doors with both energy ministers and the commissioner, in which they finally reached agreement, which I guess we'll get to know over the next few weeks, about interconnections. So I think that is good news. At least for the electricity sector we already have this connection. And it seems from the comments made by both prime ministers in the inauguration, which I was personally invited and I could check first hand, that there's a real interest from the French and Spanish governments and from the European Union to promote gas connections. So I guess over the next few months, or even maybe during the next few weeks, we may get specific news on this.

 So, I've spoken about Europe. Regarding growing markets in Mexico, Enagas is present there in the Altamira regasification plant, the Morelos gas pipeline and the Soto La Marina compressor station. The possibilities stemming from the growth of the Mexican natural gas market under the country's energy reform, represents an outstanding opportunity to play an active role in the plans for the development of the country's gas system over the next four or five years.

 Regarding Peru, in 2014, as you know, Enagas entered and consolidated its presence in the country, first by acquiring stakes in Transportadora de Gas del Peru, TGP, and COGA and subsequently by successfully bidding in tandem with Odebrecht for the Gasoducto Sur Peruano gas transmission project. So Enagas has become a strategic operator in Peru, a market that has an excellent growth potential, thanks to its large gas reserves.

 Chile is another country where Enagas is actively participating, contributing with its operational expertise and helping with expansion of the Quintero LNG plant. We will be closely monitoring fresh opportunities for growth in the Chilean gas market over the next two or three years.

 And finally, in the global LNG market, our third pillar, Enagas is striving to interconnect markets, exploring opportunities at a global level in both regasification and liquefaction.

 Based on these growth pillars in Spain and abroad, since we started our new strategic plan in 2011, we have analyzed over 200 investment opportunities, always abiding by very strict strategic criteria regarding the types of assets. They have to be core business assets with an appropriate risk return, with corporate governance and with a good selection of partners that are a good fit. Thanks to our rigorous approach to analyzing and selecting opportunities during 2014, Enagas, as you know, has improved its international presence considerably in major projects that meet the strictest financial criteria established by the Company.

 And so in the managing of our international investments, Enagas always plays an active role in the governing management bodies of its international investments, making sure there's efficiency and profitability within a framework of quality, excellence and sustainability. We manage our international assets as independent businesses, to which we provide services with high added value without overstretching our corporate structure.

 We insist on rigorous project risk return criteria and, whenever possible, we work with partners who contribute with their experience and/or knowledge of the country. All you know, these international investments that we are making will enable Enagas to continue to deliver growth in profit in short, mid and long term, in profit, dividends and shareholders remuneration going forward.

 So now let's have a look at the key figures for this 2015-2017 strategic update that somehow quantify the qualitative objectives I mentioned. Just allow me to take a sip of water. In total, we are going to invest about EUR430m annually, which is about 50% on international projects and 50% on Spanish investments.

 In fact, in Spain we hope to invest an average investment pace of EUR220m per year, because there's still some investments that are important. I will mention them. First, those that are still important in strengthening the connections with Europe, increasing our country's potential as an entry point for gas to the continent.

 Secondly and in line with monetary planning, existing monetary planning, we're going to start working on the regasification plant in Tenerife, one of the two facilities that were planned for the Canary Islands. Those plants will efficiently safeguard security of supply to the island, easing also the current dependence on oil for power generation, providing significant environmental benefits because of a lower emission of CO2 and reducing the final cost of energy on the islands.

 Moreover, and you also know about this, on January 14, Enagas reached an agreement to acquire an interest in the Saggas plant in Sagunto and to increase our stake in the plant in Bahia de Bizkaia Gas in Bilbao. Those deals are subject to the related approvals from regulatory authorities and to the possible exercise of preemptive rights by other shareholders, as it's usually with this kind of operations.

 With regards to international investments for 2015-2017, our goal is to invest outside Spain an annual average of EUR210m. Of this sum about EUR90m per year is already committed to greenfield projects, in which we are currently involved in the Gasoducto Sur Peruano and the Trans-Adriatic Pipeline.

 Additionally, of course, we continue to analyze further investment alternatives that fit with our strategic criteria and which we believe could easily amount to an additional average outlay of EUR120m per annum over the 2015-2017 period. So in total, we reach that annual average of EUR210m.

 This pace of investments guarantees us appropriate growth over the coming years. Specifically, we expect currently pledged international investment, currently pledged, to represent 3%, while in 2017, we expect it to account for 13% of net profit in 2017. So today's 3%, by 2017, it will account for 13% of net profit and the same investment, by the year 2020, will account for 25%. So, as you can see, there's great growth in the participation in the net profit of currently pledged investments.

 As for the dividends that we receive from our international projects, they will increase the contribution to cash flow of the Company, going from 20 -- from the present EUR24m, EUR24.5m more exactly, we believe that by 2017 these net dividends will account for EUR60m and they will be over EUR100m by 2020. Of course, taking into account only currently pledged investment, as a consequence of the above, we forecast an average annual profit growth of approximately 1%. This target was established based on prudent assumptions.

 When looking into the forecast I'm not sure if you are aware that most of the investments I'm talking about will give a performance, will perform really after they start execution. So for the period 2015-2017, this growth is lower than the one that we will have for sure after 2017, just bearing in mind the currently pledged investments. If necessary, during the Q&A session, we can talk a little bit more about that we decided to be cautious in the forecast of up to three years and we believe that it wouldn't be necessary to do it after three years.

 So during this period, of course, we do not include profits that will only be present after 2017, not only just for international investments. This is also the case for Spanish investments. For instance, the Tenerife plant has works duration process of 24 months. We'll start in 2015, so we will not finish our investment and so there will not be any new income till the mid of 2018.

 Regarding the Company's financial policy, the main objective is to maintain our current credit rating, the BBB with Standard & Poor's and an A- with Fitch ratings. With regards to the protected level of debt in 2007 -- 2017, sorry, it will enable us to ensure that gearing ratios remain below the maximum level set by the credit rating agencies.

 Finally, we estimate that the average cost of debt for this period or by 2017 will be between 3.1% and 3.3%. As you are well aware, we have successfully refinanced some of the maturities during the next two years, thus extending the average debt maturity with resulting positive impact in our net financial expense.

 With regards to our dividend policy, achieving sustainable and steady dividend growth is one of our main strategic priorities and that is why for 2015 we're committed to pay a dividend of EUR1.32 per share and to maintain a 5% annual dividend growth from 2016 and for 2017 in line with the best in class of European peers.

 For 2015 more specifically and within this period 2015-2017, I'm here coming to the end of the presentation, the specific targets for 2015 are the following. A dividend of EUR1.32 per share, a net debt level of around EUR4.24b with an average cost of debt of 3.1% expected, an investment of EUR430m and a growth of net profit of 0.5%.

 So to conclude, the results that we presented today show that we have met and even bettered the objectives set two years ago. This was possible for the eighth consecutive year, thanks to the Company's efforts to adapt to the new economic context, both nationally and internationally, which is a context that remains challenging.

 Shareholder remuneration is one of our strategic priorities and we will continue to offer attractive returns over the coming years, as you have seen. We have a robust business model and our objectives set for the 2015-2017 period are prudent and achievable. It will be a challenge for me and the organization as a whole to continue meeting them and even surpassing our targets, as we have been doing since 2007.

 And what do we have to achieve this? Well, we have a stable and predictable regulatory framework for the next six years. This is something that we have not had before and so this is very important. We've gone over that time when we had lower profit and we are finally working with a framework, which for the first time in the gas Spanish system is highly predictable for the next six years, until the year 2020.

 For the next years, we will maintain a level of investment in Spain that will allow us to deliver significant organic growth. We will continue to pursue our international strategy, which provides opportunities for growth and long-term value creation, and a cautious financial strategy that will enable us to maintain our current credit ratings.

 I would not like to conclude my intervention without empathizing Enagas's strong performance in sustainability and adherence to the best international corporate governance practice. In this sense and as an example, we can mention others, but it is a great satisfaction for me to say that we have been recognized recently, just three weeks ago, as one of the 100 most sustainable companies in the world and leading player in the gas utility sector and the only Spanish representative in the global 100 index published recently due to the World Economic Forum, that's a place in Davos, Switzerland.

 So this is a recognition that we were not aiming for, so we were greatly surprised, when a few hours before making it public, they told us that we were the only Spanish company present in the list and that we were leading the utility sector. And so, this success underscores Enagas's commitment, as well as others', to sustainability as a driver of the Company's business development.

 So today, we have once again presented a set of results that are consistent with our goals and a realistic and attractive strategic plan that will allow us to continue growing to maintain our ratings and to offer a very appealing dividend policy.

 I would like to thank you for your attention and I now invite you to ask as many questions as you wish and we will endeavor to answer them, me and all the directors that are present here in this conference call. So I thank you very much for your attention and let's now go to the Q&A session. Thank you.

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Questions and Answers
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Operator   [1]
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 (Interpreted). (Operator Instructions). Javier Garrido, JPMorgan.

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 Javier Garrido,  JPMorgan - Analyst   [2]
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 (Interpreted). Hi. Good morning. I have several questions, but I'm going to focus on two sets. First, on the results for 2014, have you quantified all the non-recurring -- some non-recurring impacts, but there are other recurring impacts that have not been quantified. One of them would be other maintenance expenses that appear under other operational expenses; they appear as non-recurring, too. Could you tell us a figure of non-recurring expenses that you have within your operational expenses?

 And also there's another item in the equivalence, in which you have initial costs of construction, certain non-recurring costs there. Also could you quantify that figure, so that we know the net profit, the recurring net profit for 2014? That's the first question based on -- for comparison.

 And for the objectives for 2017, you talk about a net profit growth of 1% annually and a [substitution] within this Company, I believe this is quite conservative. But even taking into account that this is a conservative hypothesis, bearing in mind that the international figure accounts for 30%, this means that the equivalent would be a total of EUR54m which will be lower than the dividends of EUR60m that you expect to receive. I know that you probably don't want to be especially accurate with those figures but my general question is to what extent could we believe that this 1% growth annually until 2017 is extremely conservative? And does it only include the contribution of current assets without the contribution of new investments of the international business that will take place from now until 2017? I imagine it is so. I would like to know how conservative you have been when you have set your objectives. Thank you.

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 Antonio Llarden,  Enagas SA - President   [3]
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 (Interpreted) Thank you very much Mr. Javier Garrido. Regarding the first question, I'll give the floor to the CFO, Borja.

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 Borja Garcia-Alarcon,  Enagas SA - CFO   [4]
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 (Interpreted) Good morning. Good morning to all of you. Good morning, Javier. Yes, in fact, in the expenditure items we have three main elements of our non-recurrent. On the one hand, the adoption of a generic expense of EUR24m and non-recurrent of EUR11m. The equivalent -- in equivalent items there is a provision for specific work of EUR7m that also are non-recurrent.

 With regard to the objectives for 2017, in fact the growth that we have mentioned is bearing in mind the currently pledged investment. And so I can accept that, yes, maybe this growth for this period will be higher due to investments that we may study that have not occurred yet. So maybe yes it's a bit conservative. However, we are in such a Company that, as you know, Mr. Garrido, we prefer to be conservative rather than giving large figures and then after one or two years having to explain what's happened, why we didn't meet the goals, etc.

 And yes, regarding what you mentioned, yes, for 2017, and here with the CFO, we see a focus of the PAT of EUR55m whereas we have the dividends received about EUR50m or so, a little bit more. So, yes, there's a slight difference. But yes, the fact is that our growth for this period is a bit conservative because a great part of the investment and expenditure that we have during this period will start giving profit after 2017, both regarding investment in Spain but also investment abroad. However, yes, it is possible that over these three years we may carry out investments, international, that may bear fruit before then. In that case the net profit will be higher. Thank you.

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Operator   [5]
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 (Interpreted) Alberto Gandolfi, UBS.

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 Alberto Gandolfi,  UBS - Analyst   [6]
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 (Interpreted) Good morning and thank you very much. I have three questions please. First, I can see that you have seen a 2% growing demand in Spain and abroad but I guess the penetration will also go up and in Spain the demand will be 4% higher. The demand will have to be very high in other contexts. What would be your plan if, as well as an increase on demand, if demand stays flat until 2020? How would this change your scenario? Would you be able to maintain the dividend policy if there is not that growing demand because it's all related to that driver?

 Second question, could you please talk a little bit about your expectations of EBITDA? I'm talking here about [borderline]. Of course it's going to be less if greater international growth but just so that I understand from an operational point of view, there are some non-recurrent expenses that you have mentioned, etc. Could we see between zero and minus 2% on the growth of EBITDA? Could you talk about that?

 And also could you mention the supported bottom line that comes from amortizations -- lower amortizations and cost saving plans? Because these are pillars that you have in your plan but I haven't seen any figures. Could you talk about that?

 And the last question, could you talk a little bit more about what are your criteria to invest internationally? I don't know, just your objective of -- is it at a level of equity or per project or what is the capital cost that you see in Mexico, in Peru or in Asia? What are your criteria for international investments basically? Thank you very much.

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 Antonio Llarden,  Enagas SA - President   [7]
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 (Interpreted) Thank you very much. Let me answer to the first part of the question and let's go in parts. The world demand, of course we think it can have a growth -- an average growth of 2%. The Spanish demand we assume might have a growth of 4% and even for 2015 more specifically we have drafted forecasts where we think that the Spanish demand, and I will explain afterwards why, it might be even higher than 4%, between 5% and 6%. Why? In the specific case of Spain, because last year it was a very -- let's say a year that -- it was not a statistical year talking about weather, it was below the average. And simply if this year we get back to the statistical average of the last 10 years this demand could increase by 3%.

 On the other side, it is true that we have got a series of data that I cannot provide you fully but I can make them available for you, that depending on the evolution of the amount of customers, in Spain the amount of customers, despite the crisis, it has grown year on year, with figures lower than those we had before the crisis. But we're estimating that for the coming two or three years this amount of -- the figure of our clients will continue to increase.

 Then the industrial gas demand in Spain is very closely related statistically to the growth of the GDP. Almost it's a perfect correlation. So if this year all macro indicators say GDP may grow between 2%, 2.5% and even something more, we can say that this industrial demand will continue this path. All this together allows us to think that if the year is normal in weather terms the gas demand in Spain would grow for the first time. National demand would grow (inaudible) percent since the crisis. So it would be between 4% and 6%.

 Please let me give you the data I've got before me until Sunday. The accumulated gas demand conventional but also for the electro system has grown 7% in this almost two months of the year. This cannot be extrapolated; it's a month and a half. But right now, if we compare year on year, we have got a demand that has got positive growth.

 Let me answer your last question. We have dividend figures that are fully compatible even with a flat demand. If despite all this in the coming years the demand remains flat, the impact that will have in the revenues will be assumed and we will be able to maintain this figure. But having said that, with regards -- with the data we have we think that the demand will not be flat. An average would be -- and I'll give the last figure. Last year we thought thoroughly in the sector about which would be the impact of cogeneration of the regulatory measures for the electrical plants and how would this impact gas.

 The data that we have been used cautiously at Enagas, you must bear in mind that there is no direct measurement with meters of cogeneration demand but we have to deduce it from the industrial demand. But the last estimate we have produced says that in general terms cogeneration demand in these two first months of the year is approximately 90% of what it was last year during the same period. The impact of the measures represents only 10% because at a certain time some say that half of cogeneration will disappear but the data that we use cautiously is that the impact has been much, much minor than what we were expecting.

 And I'm talking about gas terms, I'm not talking about how many units are working but with cogeneration demand has consolidated almost by 90%. So all this allows us to say that for 2015 we expect demand to grow 3%, 4%, and even get close to 5% or 6%. And as an average, during this period we think that a growth of 4% of course, in the context of economic recovery, yes, we think we can get to these figures.

 For the second question on EBITDA I will give the floor now to Borja Garcia-Alarcon, CFO.

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 Borja Garcia-Alarcon,  Enagas SA - CFO   [8]
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 (Interpreted) Thank you, Mr. Chairman. In order to build the recurrent EBITDA of the Company the best figure is to take the 2013 EBITDA, EUR995m. We impact the impact -- taking into account the impact of the (inaudible) in it EUR836m of the EBITDA we must take for 2016 when the one-offs disappear for this year and next year. This impact of EUR120m has been shared, as we've said , will be neutralized through the increase of -- the reduction of tax and the dividends coming from the international department, as the President has explained.

 With regards to amortization, which is the next question, we this year -- for 2014 we have had amortization levels of EUR350m. This EUR350m includes the plot of land, an impairment of a series of assets, an activity that we have just finished to do of impairment, and includes EUR40m of extraordinary amortization. So from the next year on the additional impact of this six months of the regulatory reform, the amortization that you must have in mind is closer to EUR280m, EUR285m.

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 Antonio Llarden,  Enagas SA - President   [9]
------------------------------
 And the third question which were the investment, international investment criteria, I shall now give the floor to the CEO, Marcelino Oreja.

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 Marcelino Oreja,  Enagas SA - CEO   [10]
------------------------------
 (Interpreted) Good morning. Thank you, Mr. Chairman. We have got five criteria for our international growth. Our main activity regards gas transport and underground storage. The risk profile for these activities has to be reasonable and similar to the ones we do nationally. We must have covenants criteria that allow us to influence in our investment and via technological partner we have to look for partners helping us locally or globally to find reasonable returns. So these are the criteria we always have in mind when we look for an international project and they are in the presentation.

 On the other side, we also look for returns in those countries where we are operating, in Latin America mainly, of a double digit, but always project on project; each project is different and we take into account who is the counterpart or who are the [stakers], especially for the long-term project. So we cannot say of having a fixed return because it's not the same when we talk about investing in Lat Am countries or higher risk countries. So we will take a look at projects in our countries and we always look for reasonable returns for our Company. Thank you very much.

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 Antonio Llarden,  Enagas SA - President   [11]
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 (Interpreted) Thank you. Next question.

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Unidentified Company Representative   [12]
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 (Interpreted) The next question by Javier Suarez, Mediobanca. You have the floor.

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 Javier Suarez,  Mediobanca - Analyst   [13]
------------------------------
 (Interpreted) Hello. Good morning, everybody. Thank you very much. Two or three questions. First regarding the debt and the Company's payout, insisting on the questions asked by my colleagues, I'd like to know if you can give us some kind of sensitivity in the gas demand instead of growing at an average of 4% did grow at 2%. Which would be the impact in the net income of the Company? And how much should the payout grow to sustain the dividend? Can you give us that analysis if the demand to be growing at 2% didn't grow, which would be the impact in the net profit for 2017 and which would be the payout necessary to sustain that level of dividends that you have mentioned? That's the first question.

 The second question, you said that one of the elements you can use as management to compensate the regulatory changes are the improvement in the efficiency. But I haven't seen any quantification of that improvement in efficiency. Can you give us an estimate of the room the Company has to improve?

 And a more general question on the context that we are at. From your standpoint, what's the level of net debt over EBITDA and the payout level that a Company such as Enagas should have for 2015/2017? And I'm really interested about the comment you've done, the growth of 1% could be higher in 2018/2020. Could you give us an estimate of how much that (inaudible) growth could be for 2018/2020? Thank you very much.

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 Antonio Llarden,  Enagas SA - President   [14]
------------------------------
 (Interpreted) Well, thank you very much, Javier Suarez. Let me answer. Demand, we estimate -- just to take the specific example. If we had this average growth of 2% instead of 4%, our revenues of EUR1.3b for all the concepts maybe would have EUR10m less of revenue, less than 1% effect. So I stress that though we are probably related to growth or decrease of demand, our impact in revenues and therefore net profit on the demand evolution, with reasonable parameters, is almost [despicable] in mathematical terms. It's minor; it's less than 1% that could be balanced by any other variation in our revenues. So, as I was saying before that our revenue evolutions and dividends and income evolution, honestly we don't think that is going to be affected by a bigger or lower demand. If it were stronger it would be the contrary; we would have more revenues but with the same magnitude.

 With regards to efficiency, what we have been taking into account in the 2017 plan is we've taken all forecasts, thinking that our operating costs will be below the inflation evolution. So we're going to be in relative terms more efficient than what we are here. I cannot tell you right now which is the addition of impact but we have done some forecasts with this percentage.

 With regards to net debt ratios over EBITDA, I stress what we said before. We have done all the estimates of this period and we're thinking that we are going to be in line, within the limits set by rating agencies, and comfortable. So we're going to -- in net debt over EBITDA we're going to meet these ratios. And we have done all the debt estimates with the basis of -- and we have done even the contrary. We're starting -- we've started to meet -- we wanted to meet these ratios so we have analyzed the financial capacity to make investment.

 Regarding the payout, I think I explained in the last conference call that we're following other companies because it's more clear and more direct. We're not so much going to give data on percentages of payout but rather euros per share which is easy for everybody to understand and estimate at all times. So that's how we have set our commitments for 2015 and for the 2016/2017 for growth on this 2015 data.

 And lastly, yes, I stress that 1% growth of the profit after tax is not too -- I won't say that's conservative but realistic bearing in mind what we know right now that we're going to be realizing in this period. Yes, most of the investments that we're talking about will start running in the period 2018 to 2020. This of course allows us to think that the net profit will be higher if everything runs smoothly.

 As we have done a plan 2015-2017, we have not done profit and loss accounts for 2018, 2019 and 2020. We could estimate, bearing in mind -- taking into account this impact in the profit, plus the new investments that may happen in this period and that will [see the light] during this period. We didn't take this into account because we thought it would be -- it was out of the period. But for your specific question, for 2020 the impact of international will be more than double the activities or the profits. Well, we can think that they will increase but we have been focused maybe for formal reasons on the period 2015-2017 and we didn't make details on the next period.

 But of course you're right; 1% is I would say a bottom line, a minimum over which 2018-2020 will be higher. And for 2015-2017 it might be also higher but let's not exaggerate because you know that we tend at Enagas not to put -- to sell the merchandise we have before it's produced and we have (inaudible) everything with the data that we have been telling you. Thank you, Javier, for your questions.

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Unidentified Company Representative   [15]
------------------------------
 (Interpreted) Next question by Jose Ruiz, Macquarie. You have the floor.

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 Jose Ruiz,  Macquarie - Analyst   [16]
------------------------------
 (Interpreted) Hello, good morning. I just wanted to make two questions. One, can I ask you that if you leave the payout policy by dividend, is there any possibility that you will go back to that 75% of the payout after 2018?

 And secondly, I'd like to know if for your projection you have taken into account any extraordinary revenue due to the opening of the Iberian gas market and the storage -- the gas storage services? Thank you.

------------------------------
 Antonio Llarden,  Enagas SA - President   [17]
------------------------------
 (Interpreted) Thank you very much, Jose Javier Ruiz. We have set specific figures for dividends and dividend growth for this period. The question that you're making after 2018, that let's say is out of the radar of our planning. So right now we haven't taken any decision either against or for it but the logical thing is to continue with this growth track but I cannot dare to say that for 2019 or 2020 if we're going to have a stronger slope or not.

 But I think that we have a dividend policy which is very clear until 2017 and we have met this policy during the last two years. And for 2018, from what we have been answering to the previous questions on the net profit, etc., etc., starting 2018 we think that it will be higher than the one we have now but we can expect for the dividend to continue to grow. But I cannot commit right now because we're just making a plan for 2015-2017 and we cannot just make commitments for later on. But the conclusion I can say that what's normal is that we will continue with this growth track which will be similar.

 As for extraordinary revenues, we haven't foreseen in these accounts 2015-2017 extraordinary revenues coming from these possible activities in Spain due to the hub, etc., etc. First because these have not been realized and whenever they're realizing they will have a minor initial impact. But we haven't taken that into account. But it is true nevertheless that we think that there are a series of activities that are not carried out today but that in the coming years in some cases even will have even more than an impact on 2017 that will be used. For example the LNG bunkering, the activity in Spain is zero, zero.

 So we think that this is an activity that is going to grow in Spain and elsewhere but I cannot give you a figure and that's why we didn't include it in the results. But we do think that there's a line of activity and growth for revenues which is modest because we're just in the midstream, we're not the owners of the gas. But it's true that we don't have the risks they have but we do think that there's a line of revenue that is today there zero. In four, three, five years' time that will change. But we do study and work actively in this direction and in the case of bunkering, not only in Spain but also elsewhere, we are already thinking about it. Thank you.

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Unidentified Company Representative   [18]
------------------------------
 (Interpreted) The next question by Fernando Lafuente from N+1. You have the floor.

------------------------------
 Fernando Lafuente,  N+1 - Analyst   [19]
------------------------------
 (Interpreted) Hi, good morning. Yes, I wanted to ask a couple of questions first regarding the cost of debt, the objective that you have set 3.1% to 3.3% during this period. If we look at the latest issuance of the Company, it seems quite conservative, even let's say in constant -- in the current portfolio and refinancing in two levels. So I would like to know first if there is certain room for maneuver there in that aspect too, whether we have been conservative when calculating it, whether this 3.1%, 3.3% includes debt, international debt or for the financing of international projects that could have a greater cost.

 And my second question has to do with, well, I would like to know the level or ratio that you have used to assess your expenditure during the period?

------------------------------
 Antonio Llarden,  Enagas SA - President   [20]
------------------------------
 (Interpreted) Thank you very much for your questions. First of all the debt cost, I'm going to give the floor to the CFO, but obviously when we put this 3.1%, 3.3% for the period, it's because obviously for the total debt there is a part of it that's international and that is in dollars and so the cost could be higher than the remaining debt that has a lower cost. I'm going to give however the floor to the CFO.

------------------------------
 Borja Garcia-Alarcon,  Enagas SA - CFO   [21]
------------------------------
 (Interpreted) Yes, good morning. Regarding the evolution of the cost of debt, there are several things. First of all, the volume of debt that the Company has (technical difficulty) and the impact is lower. Also as the President was saying, the amount of debt in dollars continues to increase and so the debt in euros is cheaper will be offset we could say by the debt in dollars. Also there are other debts that have very favorable interest rates and so it doesn't translate into high cost. And also everything that has to do with the refinancing for this year has already been done. We have no maturities until next year, the end of 2016 (technical difficulty). But I think we have quite a lot of visibility with regards to the net cost of debt.

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 Antonio Llarden,  Enagas SA - President   [22]
------------------------------
 (Interpreted) Thank you very much, Borja. And with the other question I think is very important. With the new regulation, the regulator, we do not include the figure because it would lead to mistakes if we have a hypothetic figure. We used to calculate a specific rate but now our income, our revenues could be more than the RCF which I find an important issue. So there is no figure (inaudible) that allows us to do this. It's not -- we have the net (technical difficulty) but you have the calculation of that figure then which is a total of EUR5.3b, then you can see that there are no impacts.

 As I mentioned before, we do not work with this [RAP] anymore because it's (inaudible). We wouldn't give the proper figure; we would just be giving partial figures and that's not what we want.

------------------------------
Unidentified Company Representative   [23]
------------------------------
 (Interpreted) Next question is by Carolina Dores from Morgan Stanley. Thank you very much. Go ahead.

------------------------------
 Carolina Dores,  Morgan Stanley - Analyst   [24]
------------------------------
 (Interpreted) Good morning. Thank you for the questions. I have two questions. The potential acquisitions of BBG and Saggas, is that included?

 And secondly, is the contribution of the international investment net for 2015 ultimately higher or lower than the dividend contribution of EUR100m? Thank you very much.

------------------------------
 Antonio Llarden,  Enagas SA - President   [25]
------------------------------
 (Interpreted) Thank you very much, Carolina. In the case of BBG and Saggas operations, we hope to consolidate throughout 2015. Yes, in general we have calculated an investment figure that would be included in the figures that we have given. However, we haven't put the impact on the P&L account. So once we know for sure the percentage that we have, that we keep for each case, then this will be (technical difficulty) of the P&L account.

 And with regard to the 2020 expected figure of international dividend of about EUR100m that will come to the Company and also the [PPI] figure will be higher than that. So the [PAT] figure would be higher than that.

------------------------------
Operator   [26]
------------------------------
 (Interpreted) Pablo Cuadrado, HSBC.

------------------------------
 Pablo Cuadrado,  HSBC - Analyst   [27]
------------------------------
 (Interpreted) Good morning. Just two very quick questions, first of all regarding the OpEx. I was wondering whether you could (inaudible) exercise for PAT. It seems that it included EUR18m of non-recurrent and I would like to know if that is the case. Is this the clean figure that you expect for 2015?

 And another issue is the CapEx in Spain. I seem to see that it includes the investment on the reclassification plant in Tenerife because of its size, etc. and not much more. Could you confirm that this is correct, that it includes this plant? Or whether the investment plant includes two plants and not just one?

------------------------------
 Antonio Llarden,  Enagas SA - President   [28]
------------------------------
 (Interpreted) Thank you very much, Mr. Pablo Cuadrado. I can confirm that, yes, for 2014 there was an OpEx non-recurrent figure of about EUR18m that will not be present in 2015.

 With regard to investment, for 2015-2017 we have included with several values every year the investment on the Tenerife plant, some of it in 2015 and then increasingly for 2016 and 2017. And I seem to remember there will be a small bit of investment that will be included as an item in 2018. However, we have not included the Gran Canaria plant in 2015 or in 2016 or in 2017. We have not included it. If afterwards (technical difficulty) go better than expected and we can initiate work earlier then we'll work on it. But we have not put into account the investment on the Gran Canaria plant for either the 2015, 2016 or 2017 accounts.

 And regarding the MidCat investment, we have note forecasted for 2015 but we believe that in 2016 and 2017 it should be carried out. So, for this period we have not put the other leg of international connection which is the (inaudible) that will be linked to it and we believe will be more for the future but we have not included in the investment figure a total. We have not included it in the 2015-2017 period at all. Thank you very much.

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Unidentified Company Representative   [29]
------------------------------
 (Interpreted) There are no more questions in Spanish. Let's now move onto the questions in English.

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Operator   [30]
------------------------------
 Olivier Van Doosselaere.

------------------------------
 Olivier Van Doosselaere,  Exane BNP Paribas - Analyst   [31]
------------------------------
 Yes, thank you very much. I have two questions remaining. Just coming back on the OpEx, and obviously there have already been quite a few questions asked about that one, but just to be sure I've got the right base for OpEx going forward, you spoke about EUR18m of non-recurring costs in the fourth quarter. I was wondering if that's only the provision part and that there were maybe also some non-recurring maintenance costs in the third quarter -- in the fourth quarter because we saw that other operating expenses were actually up by EUR28m in total while other operating costs have been down in the first nine months of the year. So I was wondering if there was anything else other than recurring we should be taking into account when making our projection on OpEx going forward.

 And then another one is just on -- well, you said that the dividend policy wouldn't be at risk if gas demand would not grow. I guess from a purely P&L perspective that that would be right but I was wondering if you think that there would be a risk of a new tariff deficit emerging if gas demand does not grow in the coming years and as a result of which we may have in a few years' time another need for adjustment of the regulation. Is that any risk that you could identify? Thank you.

------------------------------
 Antonio Llarden,  Enagas SA - President   [32]
------------------------------
 (Interpreted) Thank you very much, Olivier. I'm going to answer in Spanish (inaudible). Regarding the first question, I'm going to once again give the floor to the Financial Officer.

------------------------------
 Borja Garcia-Alarcon,  Enagas SA - CFO   [33]
------------------------------
 (Interpreted) Thank you very much, Olivier. As we've said, within the EUR70m we have EUR6.7m for provisions, EUR5.6m for regulatory reform and EUR5m of non-recurrent. Those three items, as I have said, will not be on the P&L account for 2015.

 And regarding the demand, I can say that on one hand our estimate for annual average demand is 4% annually but that if we fine-tune it, the deficit will stabilize or disappear and even if demand proves below that percentage, even if we go well below that 4%. So if the demand grew only for instance by half, 2%, or even by less than 2%, the deficit will be eliminated. And so the figures that we have according to the regulatory reform and a minimum growth of demand in six years of, I don't know, 1% or so, the deficit still disappears. And so I must say that this confirms that the figures with which we have worked when we did the regulation, if demand grows at expected rate, not only will deficit disappear but also by 2020 there will be a surplus, a considerable surplus in the accounts. But let's not start (inaudible) and as you say we continue to participate in the discussions.

 And the figures that have been taken into account in order to eliminate this deficit, this deficit will be eliminated slowly or faster but if it goes at 4% as expected then it will be eliminated very quickly and in a more negative case the deficit will also be eliminated, even if demand doesn't grow as expected. And so we don't think this is going to affect our dividend policy.

 The economic risks may come from other aspects but not from demand, bearing in mind the figures that we have. Thank you.

------------------------------
Operator   [34]
------------------------------
 There are no more questions. Thank you.

------------------------------
 Antonio Llarden,  Enagas SA - President   [35]
------------------------------
 (Interpreted) Well, if there are no more questions we'll put an end to this conference call. Thank you all very much.

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Editor   [36]
------------------------------
 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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