Q3 2015 Enagas SA Earnings Call

ENG.MC - Enagas SA
Q3 2015 Enagas SA Earnings Call
Oct 20, 2015 / 07:00AM GMT 

==============================
Corporate Participants
==============================
   *  Antonio Llarden
      Enagas SA - Chairman
   *  Borja Garcia-Alarcon
      Enagas SA - CFO

==============================
Conference Call Participants
==============================
   *  Javier Suarez
      Mediobanca - Analyst
   *  Fernando Lafuente
      N+1 Equities - Analyst
   *  Carolina Dores
      Morgan Stanley - Analyst
   *  Mehul Mahatma
      Berenberg - Analyst

==============================
Presentation
------------------------------
Unidentified Company Representative   [1]
------------------------------
 (Interpreted). Good morning, ladies and gentlemen, and please be welcomed to the results presentation of Enagas corresponding to the third quarter 2015. The results are published this morning before the markets opened and they're available on our website.

 Mr. Antonio Llarden, President of Enagas, will chair this meeting. And we expect a duration of about 20 minutes for this conference. And next we'll open a Q&A session which we will try to answer as fully as possible.

 Thank you for your attention. And I will now hand the floor to Mr. Llarden.

------------------------------
 Antonio Llarden,  Enagas SA - Chairman   [2]
------------------------------
 (Interpreted). Good morning, ladies and gentlemen, and thank you for your attention. The whole management team of Enagas is here to answer this conference call.

 And first of all I'd like to say that the results that we present today correspond to the first nine months of 2015 that allow us to confirm that we will once again meet our commitments for the entire year.

 Furthermore, from this quarter onwards, the results we present are fully comparable with those for the same period of the previous year seeing as both sets now reflect the impact of the regulatory reform enacted in July 2014. Therefore now for the first time we're comparing periods in which we have the regulatory reform enacted in both cases. And all the relevant figures, as you will see in the presentation accompanying this conference call, are the following.

 Net profit grew by 1.5% year on year regarding the first nine months of year 2014, reaching up to EUR313m. This increase was mainly due to three factors.

 First, the greater contribution of the Company's international assets, both the Peru gas transport company, TGP, not just due to its contribution for another quarter but also because we have increased our stake in the company by 4.34%. Also we have the positive contribution of the COGA, the Amazonian gas operating company, and finally the positive contribution of the Morelos gas pipeline in Mexico.

 Second, profit was boosted by two aspects. First, the impact of the change in the tax rate; and second, by the dollar's rise against the euro.

 And thirdly, due to an improvement in the financial result mainly caused by a reduction in the cost of debt, which also helps us to improve profit.

 Regarding operating expenses, the like-for-like growth was due, as we have explained in previous results presentations this year, to the Company's organic growth linked to its international activity. These rates of activity also generate more revenues so our efficiency ratios remain unchanged.

 Another interesting aspect is that in these first nine months Enagas has invested a total of EUR410m, which means we have virtually hit our annual investment target already. As a Company we have very clear objectives, such as paying the promised dividend and maintaining our ratings. However, achieving a certain investment figure is not an objective in itself. Let me explain.

 We only invest if projects fulfil the five criteria established in our strategic plan regarding risks, returns, corporate governance, selection of partners with complementary skills and also that the assets are core business assets. The investments that are in line with these five criteria that we have made this year so far are the following. Let's remember them.

 The acquisition of an additional 10% of Bahia de Bizkaia Gas, BBG, the regasification plant, bringing our total stake to 50%.

 Second, the acquisition of 30% of Saggas which is a regasification plant of Sagunto.

 Thirdly, the purchase of 50% of Swedegas, a transmission system operator and the operator of the Swedish gas transmission network.

 Fourth, the international investment underway in the European -- in the two big greenfield projects we have, the European Trans-Adriatic Pipeline, TAP and in the South Peru gas pipeline, GSP.

 And the fifth element, actually this quarter, is the acquisition of an additional 4.34% of the Peruvian company TGP, which brings our total stake to 24.34% in this company.

 Regarding the financial situation, this remains one of our main strengths. The net financial debt as of September 30 amounted to EUR4b, in fact EUR4.052b. The average cost of debt at the end of the third quarter of 2015 was 2.8% compared with 3.1% at the end of September 2014.

 Enagas's liquidity at the end of third quarter stood at EUR2.212b. And this has enabled us to maintain high solvency levels whilst continuing to rollout our investment plan.

 And last, Enagas has diversified funding sources. 58% of debt is in the capital markets, 38% is financed with loans in very good conditions from the European Investment Bank and the Spanish Official Credit Institute. And finally with the commercial banks we just have 4%.

 On the other hand and from a different perspective, over 80% of Enagas's debt is fixed rate, with an average maturity of 6.8 years, which means that if we add to that, that we have eased the estimated cost for 2015 and optimized the maturity profiles, the conclusion, as I mentioned at the beginning, is that we have a solid financial position which is one of the pillars of the Company.

 In this regard, our investors, with whom we are in regular contact, have expressed their appreciation of the fact that Enagas has no major maturities until virtually the year 2022. And this allows us to shield ourselves from the current market volatility.

 So far this year Enagas has made further inroads in the international area that enables us to increase both earnings and dividends. In the last conference call, with the conclusion of the latest transactions, I mentioned that we estimate that in 2017 the contribution of all affiliates and acquisitions to dividends will amount to EUR85m, which is a much higher figure than we had estimated initially. That was around EUR60m.

 We should highlight in this regard that there is no exposure to potential local currency depreciations because all our affiliates in Latin America are dollarized, so all investment revenues and dividends are done in American dollars.

 The expected dividend from our affiliates is highly visible, on the other hand, since these are assets that are either regulated or protected by long-term ship-or-pay contracts in the long term.

 Last, we had a recent financial transaction this quarter. There is an increase in the initial return on one of our international assets. I'm talking about Swedegas in Sweden. On July 24 this year we refinanced with -- a debt without recourse to shareholders, the bridge loan secured for the acquisition of the Swedish operator. This new SEK3.8b loan has a seven-year maturity and its external financial cost is far lower than that borne by Swedegas before it was acquired by Enagas and Fluxys.

 Regarding our dividend, as you may know, we have undertaken to pay EUR1.32 per share against 2015 net profit and maintain a 5% growth over the two coming years at least, in line with the best-in-class of European peers, of peers who are similar to our Company.

 Last, regarding our ratings, I am delighted to draw your attention to the excellent news that we received and announced last week. For the second time this year the agency Standard & Poor's upgraded Enagas's ratings, which rose from BBB to A-minus with a stable outlook. That means that we currently boast two of the best credit ratings amongst our peers, A-minus from Fitch and A-minus with Standard & Poor's. The strength of Enagas's rating is one of the cornerstones of our strategy. And with this A-minus rating from Standard & Poor's, Enagas has surpassed the target set in our 2015/2017 strategic update.

 Let's remember that for the rest of the year or the whole year, the other objectives set, I mentioned earlier, are as follows. To give out a dividend of EUR1.32 per share, to achieve a growth in net profit of 0.5% with investment of around EUR430m.

 Let's briefly mention the situation with gas demand because in the first nine months of the year, natural gas demand has grown by 5% compared with the same period in 2014. This increase was largely due to an increase in conventional demand as a result of colder temperatures on last years and also to the good behavior of the industry that consumes natural gas.

 On the other hand, the increase in demand for gas for electricity generation was 21% higher than last year, mainly due to declining hydroelectric generation. We actually had a drier year than last year. And this is very welcome news and this is the largest growth in demand for natural gas since the onset of the financial crisis in 2008.

 And since we transport natural gas, that's our main business, it's the first time that in these long seven years of crisis, recession and financial complexity in the whole world, we see the total national Spanish demand is higher for the first time, I insist, than the one in 2008. And [just the one] in 2008, it's the first time we have a positive growth. Our total demand kept decreasing, and this is the first year that demand bounces back and becomes more positive than last year.

 This 5% growth is in line with our year-end estimates, which envisage, depending on winter temperatures, an increase in demand of between 4% and 6%. It also means that we can state that 2015 will be the first year with positive growth in domestic demand since 2008, since the beginning of the crisis.

 The gas act or regulatory framework approved in 2014 and expected to remain stable until 2020 is helping to eliminate very clearly the mismatches between costs and income in the system. We estimate that the gas system will be completely balanced in 2020 at the latest. This great improvement will start to show in 2015 when we expect the system to post a surplus for the first time in the last few years.

 And in short, as a conclusion, our results for the first nine months confirm Enagas's good progress and repeat that we remain on the right track to attain and in some cases exceed our goals for 2015. And furthermore, they underline the Company's flexibility, solidity and ability to adapt in times of high financial volatility, political and economic turmoil in the whole world, and we think that it gives us credibility and strength to keep our growth commitment, to grow and create value for our investors and shareholders.

 Thank you for your attention. If you have any questions, please feel free to ask them now and, as ever, we will endeavor to answer them altogether as fully as we can. Thank you very much indeed.

==============================
Questions and Answers
------------------------------
Operator   [1]
------------------------------
 (Interpreted). (Operator Instructions). Javier Suarez, Mediobanca.

------------------------------
 Javier Suarez,  Mediobanca - Analyst   [2]
------------------------------
 (Interpreted). Good morning, everybody. Javier Suarez from Mediobanca. Three questions. First, in your presentation, page 10, you mentioned that dividend you expect of the participated for 2017, EUR85m. And this is bigger than the indicators you gave or you expected EUR60m. Why? If there's a higher dividend for 2017, could you explain why the contribution of dividends or of these companies will be higher?

 Second question related to the growth strategy internationally. We have seen of course after the summer the strong deterioration in the perception of risk in the emerging market in general and your activities are dollarized. But has this had any impact in your perception of risk or capital cost when you take a look at new projects in emerging markets? How has your thinking line changed due to the general situation of the high -- of the increase of capital cost?

 And thirdly, slide number 11, you speak about the funding of Swedegas. Could you give us the exact details of how has the Swedegas debt reduced and how is this going to impact in the figures of the Company? Thank you.

------------------------------
 Antonio Llarden,  Enagas SA - Chairman   [3]
------------------------------
 (Interpreted). Good morning. Thank you very much, Mr. Javier Suarez. The first question, yes, passing from EUR60m to EUR85m, it's mainly due to these new acquisitions we have done during this year, the increase of our stake at BBG, Saggas, the increase of our stake at TGP and the purchase of Swedegas. Without entering into details that I don't have before me, but this is what explains that we do have a forecast of dividends that is higher.

 The second question regarding the possible deceleration of emerging countries, how has that influenced? Have we felt anything? First of all, the projects that we do already have running or that we are studying are fully out of the short-term economic cycle. They are long-term projects, always with some collaterals or payouts or off-takers that normally work very far away the day-to-day line of the economy. So from this standpoint we haven't seen any major problem, neither in the financing. These are always, as I was saying, long-term projects.

 But I would tell you that we have thought two things. An external element, some projects of those projects that are long-term, for example, new regas plants in some places in the world are projects that have slowed down and we will not carry them out immediately. And then also we have, let's say, activated our risk radar, our radar is on and we will not enter into any project that, though it might be interesting, we could think that it has a higher risk than the one we have studied.

 So the summary, in general our international activity is, and as we expect, it's far away from the short economic cycle, the short-term and the short-term financing. So of course our technicians that study these projects of course do take this in mind and really give a lot of thought to all the possible risks that may exist in any new project. Should we have risk, they wouldn't even study these projects.

 Lastly, and using your question I shall stress what I said before. Contrary to the dividend payout with a specific amount and with a rating remains and we're at very conservative debt levels, we do not have any commitment of having to reach at the end of a certain year, of a certain period to reach an investment figure. We do not have that commitment. We do study projects if they meet the five conditions we enter. If they don't meet these conditions of course we won't enter into those projects.

 Lastly, just a small detail on the Swedegas loan. I will give the floor to the CFO Borja Garcia-Alarcon, who will give more details.

------------------------------
 Borja Garcia-Alarcon,  Enagas SA - CFO   [4]
------------------------------
 (Interpreted). Good morning. This operation was closed as a Group deal with three banks. The leverage ratio is at 70%. This allows us -- it's [on] shareholders and that confirms that our profitability objectives of the operation that were set as such at the beginning. Funding cost of this loan is 2.7% and it's below the funding cost the Company had, the financing cost we entered at Enagas and Fluxys, which was around 5%. Thank you very much.

------------------------------
Operator   [5]
------------------------------
 (Interpreted). Fernando Lafuente, N+1 Equities.

------------------------------
 Fernando Lafuente,  N+1 Equities - Analyst   [6]
------------------------------
 (Interpreted). Good morning. I have two questions, one regarding the dividends for 2017. Could you give us a breakdown of those EUR85m between what comes in euros and how much comes in dollars to be able to [root] out those estimates of the 1.35 that you've got here?

 And the second question is with regards to OpEx. Could you give us more details on the OpEx evolution and the EBITDA you expect for the end of the year? Thank you very much.

------------------------------
 Antonio Llarden,  Enagas SA - Chairman   [7]
------------------------------
 (Interpreted). Mr. Fernando Lafuente, good morning. With regard to the dividends, we have seen the figures. 83% of these dividends more or less come in dollars, 11% in Swedish crowns, 6% euros.

 As far as the OpEx question, I will give the floor to the CFO, who will give you more details.

------------------------------
 Borja Garcia-Alarcon,  Enagas SA - CFO   [8]
------------------------------
 (Interpreted). Good morning, Fernando. EBITDA Q3 has two impacts, as you all know. It does not include the additional [retribution] of the technical monetary systems in revenues and EUR7m of other operating expenses corresponding to different stratifications.

------------------------------
 Fernando Lafuente,  N+1 Equities - Analyst   [9]
------------------------------
 (Interpreted). What will happen in the Q4?

------------------------------
 Borja Garcia-Alarcon,  Enagas SA - CFO   [10]
------------------------------
 (Interpreted). We expect to confirm that the GTS revenues will get to the Company. And with regards to OpEx, the figures we've got in mind is, starting from EUR284m we had in 2014, we should add to that amount the accrued expenses EUR17m for Castor, EUR17m Al Andalus and EUR7m of [staff], as the President has said, and the last other increases we've talked. So OpEx will be around EUR321m, in line with the expected figure.

 So the EBITDA figure will be the EUR920m/EUR940m range depending on the closure of the financing of the [Aguerto do Sul], so we must have that [tax feed], but we are authorized at the level of profit after tax.

------------------------------
 Antonio Llarden,  Enagas SA - Chairman   [11]
------------------------------
 (Interpreted). Thank you. More questions?

------------------------------
Operator   [12]
------------------------------
 (Interpreted). Carolina Dores, Morgan Stanley.

------------------------------
 Carolina Dores,  Morgan Stanley - Analyst   [13]
------------------------------
 (Interpreted). Good morning. Thank you for your -- taking my questions. First, some time ago you were expecting for the regulator to approve higher revenues for the TSO's follow-up. Could you update on that please?

------------------------------
 Antonio Llarden,  Enagas SA - Chairman   [14]
------------------------------
 (Interpreted). Good morning. Yes, we are just waiting for the regulator. As indicated, by the end of the year we'll review the revenues of the GTS or the system technical manager. Three weeks ago Marcelino Oreja and myself had a working meeting with the Secretary of State for Energy overviewing different elements. And according to the subject, they told us that they thought there was no major problem after having received the report of the CNMC, etc., etc. So we do believe that by the end of the year, and one of the Ministerial Decrees that shall be issued by the Ministry will include this. That might be a higher revenue to the one we have, around EUR10m, EUR12m, EUR13m. We do understand that within the economic exercise 2015 we can count on it.

 Thank you very much. More questions?

------------------------------
Operator   [15]
------------------------------
 (Interpreted). No more questions in Spanish. We will now pass on to the questions in English. Thank you. Mehul Mahatma, Berenberg.

------------------------------
 Mehul Mahatma,  Berenberg - Analyst   [16]
------------------------------
 Hi. Good morning. It's Mehul Mahatma from Berenberg. I have two questions. Your profits from your equity investments are now nearly about 9% of net income. Do you expect this to be the case at year end or do you see this being more or less?

 My second question is on the cost of debt. This is now at 2.8%. Do you expect this cost of debt percentage to be the same during the entirety of the strategy plan or do you expect it to be lower? Thanks.

------------------------------
 Antonio Llarden,  Enagas SA - Chairman   [17]
------------------------------
 (Interpreted). Thank you. Good morning, Mr. Mehul Mahatma. The second question, 2.8% is an improvement of our initial objective and we are going to try for the coming years to keep that cost. A great part of our debt is on a fixed cost so that allows us to have a clear idea of cost. And of course we have proven in the past on several occasions that we are really taking good care about how the market changes to improve that. So in principle our answer would be positive.

 On the first point, the CFO Borja is telling me that he's got the answer for you.

------------------------------
 Borja Garcia-Alarcon,  Enagas SA - CFO   [18]
------------------------------
 (Interpreted). Good morning. Page 5 of the presentation and you can see that the contribution of the brownfield is EUR38.4m. The impact of the PPA amortization EUR14.9n, and the greenfield EUR3.9m. For the whole of the year the brownfield contribution can be extrapolated to the last quarter and we will repeat the contribution of the previous three quarters and the same for PPA. But at the level of greenfield, the contribution will be more negative. That has to do with the projects advancing in the greenfield sites.

 Thinking about the coming years, the contribution -- the extrapolation of brownfields we've got until now will be exactly the same ones except for, in the case of TGP, as you all know, in 2016 we expect the put into operation of that greenfield including this asset. The purchase price allocation would be around EUR20m related to this investment until now. And we're going to see how the greenfield contribution will be more negative as the activity in the [start-up really] develops and adapts too.

------------------------------
 Antonio Llarden,  Enagas SA - Chairman   [19]
------------------------------
 (Interpreted). Thank you very much. More questions?

------------------------------
Operator   [20]
------------------------------
 There are no more questions. Thank you.

------------------------------
 Antonio Llarden,  Enagas SA - Chairman   [21]
------------------------------
 (Interpreted). Thank you very much. If there are no more questions we shall finish this conference call. Thank you, everybody.

------------------------------
Editor   [22]
------------------------------
 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.




------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the 
Transcript has been published in near real-time by an experienced 
professional transcriber.  While the Preliminary Transcript is highly 
accurate, it has not been edited to ensure the entire transcription 
represents a verbatim report of the call.

EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional 
editors have listened to the event a second time to confirm that the 
content of the call has been transcribed accurately and in full.

------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other 
information on this web site without obligation to notify any person of 
such changes.

In the conference calls upon which Event Transcripts are based, companies 
may make projections or other forward-looking statements regarding a variety 
of items. Such forward-looking statements are based upon current 
expectations and involve risks and uncertainties. Actual results may differ 
materially from those stated in any forward-looking statement based on a 
number of important factors and risks, which are more specifically 
identified in the companies' most recent SEC filings. Although the companies 
may indicate and believe that the assumptions underlying the forward-looking 
statements are reasonable, any of the assumptions could prove inaccurate or 
incorrect and, therefore, there can be no assurance that the results 
contemplated in the forward-looking statements will be realized.

THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------