Q1 2015 Enagas SA Earnings Call

ENG.MC - Enagas SA
Q1 2015 Enagas SA Earnings Call
Apr 21, 2015 / 07:00AM GMT 

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Corporate Participants
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   *  Antonio Velaquez-Gaztelu
      Enagas SA - Director of IR
   *  Antonio Llarden
      Enagas SA - President
   *  Borja Garcia-Alarcon
      Enagas SA - CFO

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Conference Call Participants
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   *  Javier Suarez
      Mediobanca - Analyst
   *  Carolina Dores
      Morgan Stanley - Analyst
   *  Olivier Van Doosselaere
      Exane - Analyst
   *  Antonella Bianchessi
      Citigroup - Analyst

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Presentation
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 Antonio Velaquez-Gaztelu,  Enagas SA - Director of IR   [1]
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 (Interpreted). Hello. Good morning, everyone. Firstly, welcome to the first results communication of Enagas, the first trimester.

 The results were published this morning, before the market opened, and they're available on our website, enagas.cm (sic). Mr. Antonio Llarden, President of Enagas, is going to be leading this conference. So this conference will last around 20 minutes and then we will have some time for Q&A.

 Thank you very much. I will now give the floor to Mr. Antonio Llarden.

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 Antonio Llarden,  Enagas SA - President   [2]
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 (Interpreted). Good morning. Thank you very much, Antonio. Good morning, ladies and gentlemen, and thank you for being here.

 The results that we are going to present to you that correspond to the first three months of 2015 are completely in line with the objectives that have been foreseen for this trimester's results, and we are on the right way to be able to fulfill the engagements that we had made for the whole year. I'm going to talk to you about the most relevant figures that you will be able to see in greater detail in the presentation.

 The net benefit was around EUR107m (sic - see slide 2 "EUR100.7m"), which is 1% more than we had last year. For this growth, a number of factors have had some impact. For instance, there is a slight positive effect of exchange rate differences; there is a contribution of international assets, mainly coming from TgP and from Coga, which made no contribution in the first quarter of 2014, and obviously the positive impact of the change of the tax rate in the Company's tax.

 And with regard to operating expenses, it is important to say that in homogenous terms they are maintained. Nevertheless, as you can see on the presentation, the expenses in absolute figures grow. This is due to the fact that we have new activities that are generating expenses, but obviously we also have more revenue.

 On the other hand, during the first three months of the year, Enagas has invested a total of EUR50m, and in that sense the most important news are the following. On March 5, one month ago, we finalized the purchase of 10% of Bahia de Bizkaia Gas, BBG, for EUR11.6m. This purchase was done through the fund managed by Deutsche Asset and Wealth Management, and this allows Enagas to control 50% of the share capital of this regasification plant belonging to BBG.

 The acquisition, the purchase of 30% of Saggas, is now pending the official approval of the regulatory authorities. On the other hand, at the end of March Enagas signed an agreement, as you very well know, with the Belgian operator Fluxys to buy jointly Swedegas, which is the owner of the high-pressure gas pipeline network in Sweden which is also the operator of the Swedish gas system.

 This investment makes up to EUR100m which was paid last week, on the 15th, and that are not included in the first-trimester figures. It will be included in the financial statements at the end of April. This operation is completely in line with our five international investment criteria, and it enables us for the first time to operate as well in another country in the EU as a transmission system operator.

 With regard to the financial position, we have to say that this is one of our main strengths, as you very well know. The main figures are the following.

 First of all, there is a net financial debt as of March 31 of EUR4.023b and a liquidity of EUR2.715b. This allows us to maintain high solvency levels and to continue pursuing our investment plan without having to reduce financial flexibility.

 Ever since the beginning of the exercise, we have had two bond submissions for a total of EUR1m (sic - see slide 8 "EUR1b"), with 8 and 10 years maturity periods, with a record low financing cost for a debt corporate issue in Spain, and this clearly shows how very well received the Company is in capital markets.

 And as a summary and as a conclusion of our financial evolution, I have to say that we have a very low borrowing cost. We have enough liquidity to enable us to move forward and achieve our strategic objectives, and we have no major debt maturities for the next two and a half years.

 And I want to briefly tell you about the evolution of natural gas demand in our country during this first trimester. The national demand has gone up by 6.5% when compared to 2014, which is surpassing Enagas' estimates for the entire year which forecasted an increase of 4% to 6%.

 This growth was largely due to three factors. First of all, there is an increase in conventional demand. Secondly, there is a greater demand for gas to generate electricity, due to the fact that there is less hydroelectric and wind generation. And finally, there is an increase in the demand for electricity.

 With regard to the next trimesters, we have to say that there is another factor that might have an influence in the demand growth, which is the fact that co-generation had an important role during the first months of 2014 but it stopped being important during the last trimester of last year due to reasons that you already know. So, in comparative terms, from the second trimester onwards, maybe the comparison that we will do for 2015 with 2014 will have this positive upside as well.

 With regard to the results of the first three months, Enagas finds itself on the right path to achieve the goals set for 2015. We have to remember that those goals are first of all a dividend of EUR1.32 per share, an increase in net profit of 0.5%, a total investment of EUR430m, and all of this while maintaining the Company's current ratings.

 These objectives, these targets, obviously could be surpassed as we have seen during this first trimester due to the factors such as the cost of borrowing and the exchange rates themselves. But a lot of these factors obviously are variable. There is much year to go by still and we have to see if their influence is consolidated or not.

 So, as a conclusion, I have to say that the results of the first trimester that have just been presented to you confirm that the targets are being achieved for this year, what we wanted to do during this year. So Enagas' burgeoning international footprint is allowing us to keep on growing, keep having results that grow, and we are getting dividends from the acquisitions that we made up till now. So in that sense, we are fulfilling those objectives that we have set for us with regards to investment volume as well as profitability of those investments.

 On the other hand, the last bond issues and the liability management operations that have taken place have allowed us to lengthen the average maturity of our debt, to diminish their estimated cost for 2015 and to optimize their maturity profile. As we have seen, during the next two and a half years we won't have any maturities, and that allows us to fight against the volatility of the market.

 So thank you for your attention and you are most welcome, if there are questions that you want to ask, together with all of the exec team of Enagas, we will try to give you in detail answers to your questions. 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, everyone, and thank you for listening to my questions. I have three questions. The first one has to do with the line of equivalents. Obviously, you have seen an important growth due to your international activities. Our question is could you please detail those EUR8.9m of equity line? If you could tell us what the different projects that are included there are.

 The second question has to do with the regulation or the regulators. We read during the first quarter that there is a possibility for the regulators to review the OpEx and CapEx standards, and I wanted to know what are the latest news with regard to the timing of this review of OpEx and CapEx standards and when this could be applied, and if they are modified when the new ones would be applied.

 And thirdly, I wanted to know your opinion with regard to creating a new regasification plant in the Canary Islands. I think that your business plan includes just one regasification plant for 2017, and I wanted to know what your expectations are. So, apart from the one that should be opened, would you need a second plant in the Canary Islands and what would be coming for that regasification plant?

 And the fourth question has to do with the last purchase that you have done with Swedegas. I wanted to know what are your synergies, what could be the operations of Fluxys and Enagas in that situation, and could you tell us how much you have paid for this purchase? Thank you.

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 Antonio Llarden,  Enagas SA - President   [3]
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 (Interpreted). Thank you very much, Mr. Suarez. First of all, the EUR9m are the three brownfields that we have in Mexico. You know the regasification plant in Mexico and Chile, the regasification plant as well, and then TgP in Peru, the gas asset that is already working, and you know that is the one that was not present last year.

 With regard to your second question that has to do with standards, there are two clarifications to be made. First of all, this -- well, first of all, there has just been a demand. They have asked for a report done by the CNMC for the OpEx standards. There has been a request. And the legislation establishes quite clearly. I actually had a meeting with the Secretary of State a few weeks ago, talking about other issues but we talked about this as well, and he ratified that that is just a request for a report. When the CNMC will end its work, then the ministry will have it.

 But in any case, the new legislation will establish that if in 2018, that is three years after the beginning of the new regulation, we were to detect these alterations in the OpEx and CapEx system and this report led us to take some measures then we would. But if not, and that is what we are expecting, that there won't be any reason to do so, then no modifications would be made.

 As for the second regasification plant in the Canaries, it is true that the government has foreseen a second regasification plant in the Isle of Grand Canaria. You know that this is the island where Las Palmas is the capital. And a series of decisions has to be made, so it is still pending a series of decisions by the government of the Canaries and the ancillary authorities to define what the specific location will be for the regas plant to be built. And that is why we haven't included it as an OpEx or revenue point for our 2015/2016 plan.

 Our best quantification is that if this plant were to be built during the next year or two next years, then it would be an investment that we would make during the [2015/]2020 period. In any case, this plant and the Tenerife plant as well have no impact whatsoever on the revenue and income figures that we have presented on our strategic plan.

 And finally, Swedegas, we have to clearly say that this investment follows -- strictly follows those five criteria for international investment that we apply to all of our investments with regards to profitability, with regards to core business, with regards to Company's control, partners and so on. So from that point of view, there is nothing else to be said because it really fits our standards.

 And as for synergies, the most important thing for us and for Fluxys, the other partner, is that the development plan for this company will now mainly be focused on building a regas plant in the Baltic Sea and the use of natural -- liquid natural gas for a small-scale operation. So in that field, we are much experienced and our partner Fluxys is experienced as well. So that is one of the factors that leads us to thinking that Swedegas, which is a solid company, could have a future development in this field, where they have done nothing insofar.

 And as for the multiples that have to be used here, I think that is quite simple. We have to use the PER. And if we compare the cost of the Company to the benefits that it will provide us with, then this company has a PER that is even more reduced than Enagas' one, so we thought it was a very good investment.

 So thank you very much and other questions are welcome.

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Operator   [4]
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 (Interpreted). Carolina Dores, Morgan Stanley.

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 Carolina Dores,  Morgan Stanley - Analyst   [5]
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 (Interpreted). Good morning. Thank you very much for listening to my questions. I have two questions to ask. The first one has to do with your expenses, your operational expenses. I think that the EBIT and EBITDA are a bit higher than what -- a bit lower, sorry, than what was expected for this year, but the net revenues are in line, so the equity income might have a stronger performance and the OpEx might have a weaker performance. Is that what we expect, or could the EBITDA improve in the next trimesters?

 And I also wanted to ask about the assets in Swedegas. Will there be a contribution to the net benefit of EUR2m, in line with what you expect for the dividend?

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 Antonio Llarden,  Enagas SA - President   [6]
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 (Interpreted). Thank you very much, Carolina. I'm going to give the floor to our Chief Financial Officer, Borja Garcia-Alarcon, so that he may answer both questions. Borja, please?

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 Borja Garcia-Alarcon,  Enagas SA - CFO   [7]
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 (Interpreted). Good morning, Carolina. As the President said, the EBITDA as well as the EBIT and the benefit after taxes is in line with what we expected. It is true that the EBITDA has shown that there are more expenses than last year, so we will see an improvement through the year, but the main message is the figures are the ones that we expected for the year.

 And as for Swedegas' contribution to the P&L, we have only told you what the dividend contribution will be. But the contribution to the P&L is -- will have to be calculated when we do the final classification. That is when we will communicate the info. But right now, what we have is the information that we have shared with you.

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 Antonio Llarden,  Enagas SA - President   [8]
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 (Interpreted). Thank you very much. More questions, please?

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Operator   [9]
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 Olivier Van Doosselaere, Exane.

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 Olivier Van Doosselaere,  Exane - Analyst   [10]
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 Yes, thank you. Good morning. Thank you very much for taking my questions. I also have two. Just wanted to come back on the operating expenses line. As you mentioned, they are staying flat if we look at let's say constant scope level, but you also mentioned that actually there's less capitalization because of a lower activity. And then I guess the question would be given that the investment needs are so much coming down domestically in Spain relative to where they were in the last years, is there actually not a scope to actually reduce operating expenses on an absolute level?

 And the second question for us is actually on the international part again. How much more new projects do you expect to be having to make in order to reach your full-year EUR430m of investment guidance? And in which regions and in which countries do you at the moment see most of the project pipeline of what you are looking at today? Thank you.

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 Antonio Llarden,  Enagas SA - President   [11]
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 (Interpreted). Thank you very much, [Rick]. So, first of all, I have to set clear that our objective has been to try and maintain the OpEx without cost increases. Let us think that in Spain, though, in the future we might invest less or very little. It's clear the OpEx is mainly the management of the grid. In the grid right now, in Spain, we might have about EUR7b or EUR8b that we have to maintain for the coming 25 years.

 So the objective is not to reduce it because we are investing less, but it is already a positive objective to be able to have it flat -- have the OpEx flat. We must not forget that the global figure of OpEx that you see is not only as a consequence of our activity in Spain, but also because of our international activity. And that is why we are proud to say that we are having the OpEx flat despite the fact that our global activity is growing, and growing at a major pace.

 On the other side, regarding the new projects that we are studying, I have to clearly get back to the five criteria and the three investment assets. Five criteria, it explains that we have set to make sure that the investment is profitable, adequate, pertinent. And the three assets that you might remember that I won't repeat in order not to bore you, we've got three investment assets in our strategic plan. All our projects that we study have to fit in one of these three [adjectives]. If they do fit, of course we can go -- if they don't fit, it will be left out.

 More specifically, what are the kind of projects that we have got under a more thorough or more immediate study, well, for confidentiality matters that we are obliged to follow, we cannot tell you anything. But I can tell you that if in any moment in time we do have a new investment, it will be done following the strict five criteria regarding the kind of investment; it will fit within one of the three adjectives that we have in the strategic plan.

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Operator   [12]
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 Antonella Bianchessi, Citigroup.

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 Antonella Bianchessi,  Citigroup - Analyst   [13]
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 Yes. Just a very quick question on your debt. Can you just elaborate if you plan to refinance additional and to issue additional bonds over the next few months? Thank you.

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 Antonio Llarden,  Enagas SA - President   [14]
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 (Interpreted). Antonella, thank you very much for your question. The CFO will answer to you. Borja, you have the floor.

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 Borja Garcia-Alarcon,  Enagas SA - CFO   [15]
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 (Interpreted). As the President said, we have no maturity coming in two and a half years. The debt situation during -- for our securities and the midlife -- average life and cost are optimum, so we don't intend to make any additional operational liability management. Thank you very much.

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Operator   [16]
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 There are no further questions. Thank you.

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 Antonio Llarden,  Enagas SA - President   [17]
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 (Interpreted). If there are no more questions, we shall finish this Q1 conference call. Thank you to everybody.

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Editor   [18]
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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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