Full Year 2015 Enagas SA Earnings and 2016-2020 Outlook Call

ENG.MC - Enagas SA
Full Year 2015 Enagas SA Earnings and 2016-2020 Outlook Call
Feb 16, 2016 / 08:00AM GMT 

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

==============================
Conference Call Participants
==============================
   *  Pablo Cuadrado
      HSBC - Analyst
   *  Javier Suarez
      Mediobanca - Analyst
   *  Javier Garrido
      JPMorgan - Analyst
   *  Carolina Dores
      Morgan Stanley - Analyst
   *  Rui Dias
      UBS - Analyst
   *  Virginia Sanz de Madrid
      Deutsche Bank - Analyst
   *  Olivier van Doosselaere
      Exane BNP Paribas - Analyst
   *  Maurice Choy
      RBC - Analyst
   *  Jose Ruiz
      Macquarie - Analyst

==============================
Presentation
------------------------------
 Antonio Velazquez-Gaztelu,  Enagas SA - Director of IR   [1]
------------------------------
 (Interpreted). Good morning, ladies and gentlemen. Welcome to this conference for the presentation of Enagas' results for the 2015 financial year and our five-year outlook until 2020.

 The results have been released this morning, before the opening bell, and they are available on our website, as usual. That's www.enagas.es.

 Mr. Antonio Llarden, the President of Enagas, will host this presentation. We expect this conference to last around 15, 20 minutes, and afterwards there will be, as usual, a Q&A session that we will try to answer with as much detail as possible.

 Thank you for your attention and I will now give the floor to Mr. Llarden.

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

 You have both on Enagas' as well as CNMV's websites a very complete presentation with 50 pages of detailed information. In order not to take much of your time and so that my intervention doesn't last more than 8 minutes, I will only highlight the most relevant messages and we are going to show you through the webcast a summarized version of the presentation. I insist that the one that has been uploaded at the CNMV is the complete one that you of course may download. During the Q&A session, we can take a deeper look at all the matters that are of interest to you.

 And today, after this presentation of results, I am going to begin a road show where I will be having meetings with our main investors. Considering that our free float has increased up to 95% in the Company, we have -- well, I personally and the Company have increased our contact with investors, with analysts and rating agencies. As you very well know, in 2015 we have doubled the number of meetings -- of such meetings.

 I think this is very positive, especially in volatile contexts such as the ones that we face nowadays, because we can that way have a clearer and more direct perspective of what interests our investors, what worries them, and how we can respond to their concerns.

 During this conference call, we are going to introduce to you, as we usually do, our 2015 results, but I'm also going to give you a sneak peek for the 2016/2020 period which extends the horizon of our targets for greater visibility. I consider, following the line of what I said previously, that during uncertainty times in global markets, this sort of exercise is very useful.

 As you can see on the presentation, our results for 2015, we fulfilled what was expected and we surpassed the commitment that we took at the beginning of the year. The net profit has grown 1.5%, compared with 0.5% that we had set ourselves for the year, at the beginning of the exercise.

 Standard & Poor's has improved our rating twice. We have gone from BBB to BBB+ and from BBB+ to A-. Fitch, on its -- sorry, Fitch has reaffirmed our credit rating for the fourth consecutive year, and it's also A-.

 We have invested EUR530m, and I would like to remind you in a quick way our most relevant investments; the acquisition of 50% of Swedish gas -- the Swedish gas operator, Swedegas. We have also bought 4.34% of the TGP, which is -- which represents 24.34% of the Company. We have also acquired 30% of the regasification plant in Sagunto and we have purchased 10% additional stock for the BBG plant in Bilbao so we now own 50%. And we are also investing on two greenfield projects, the Trans Adriatic Pipeline, TAP, in Europe, and the Gasoducto Sur Peruano, GSP, in Peru.

 We have a very solid financial structure, very solid financial structure, with diverse sources of financing, with over 80% of our debt at a fixed rate and with an average cost of debt of 2.7%.

 These results, on the other hand, already include the effect of the new sector regulation for the whole year. This is an aspect that reinforces our productivity up to 2020.

 In 2015, the cost of the Spanish gas system has been decreased on the one hand and we have on the other hand seen revenues increase. As a consequence, both have been practically balanced out this year, and it's the first time that this has happened in the last years.

 We know that gas demand has had an impact on this because it grew 4.5%. It is good news. And it is the first year with positive growth of the demand forecast, the national demand forecast, since 2008.

 Since 2007, when we launched our strategic plan, we have year on year met our commitments and, like this year, we have even surpassed them. This has been recognized by the market.

 For the 2007/2015 period, the IBEX has dropped 32%, while Enagas has increased its value in almost 50%. If we consider dividends distributed during that period, the total profitability for our shareholders amounts to 98%. So far, in 2016, and in this general context of falling markets worldwide, Enagas has been one of the values that has shown greater resistance and actually right now we are, I believe, third in the IBEX 35.

 I'm going to summarize now the main axes of our strategy, and you already have detailed information on the presentation I referred to previously. The strategic plan that we presented in 2007 and that we updated last year for the 2015/2017 period is working very well.

 And that is why we maintain our growth model, based on the three drivers you already know. First, the European markets; secondly, the development of gas infrastructures in growth markets; and thirdly, the consolidation of our position as a global specialist in the liquid natural gas market. Likewise, we are maintaining our strategic drivers and, above all, our rigorous selection criteria for investment opportunities.

 In the current context, we might see opportunities arise in projects with less profitability and a greater risk than those we have set out for ourselves. Very often, during meetings with investors in the last few months, they have asked me what we will be doing facing those opportunities. Well, my response, my answer is quite clear. Enagas is not going to invest and is not going to take risks in these types of projects, because they do not comply with our investment criteria. This is a very firm commitment that we have undertaken with our investors and shareholders.

 Before I explain to you the actions that will give body to our axes of growth, I wanted to summarize to you the most important trends in the world gas market nowadays.

 Natural gas and LNG have experienced, just like oil, a sharp drop in prices in 2015. This is mainly caused by an excess of supply due to the massive arrival of new non-conventional sources and the drop in demand in emerging countries. This drop, this is a deceleration in the demand. There is a growth in the demand, but not at the pace that we expected a few years ago.

 This structural increase in the global supply at a very competitive price we think establishes a solid basis for the growth of the gas sector in the medium and long term. There is going to be a better relative competitiveness of gas in the context of growing competition with other fossil fuels and with other energy sources.

 There is going to be an easier implementation of environmental regulations and policies, and this will favor for gas to replace other more polluting fossil fuels and it will occupy part of the space that will be freed by these fossil fuels. We will also have more options for consumers and more liquidity, this is important in the market, which in turn will promote greater competition.

 On the other hand, the decrease in margin for upstream activities derived from the low prices of crude oil and natural gas may lead to disinvestment by vertically integrated companies, and at least in the first approach will cause opportunity for Enagas to invest in midstream gas infrastructures that are already in operation.

 In this context, what are the possibilities we have for each of our growth axes? Well, first of all, in the European gas market, we believe that they may contribute decisively to the security of European supplies. In Europe, the demand for gas has increased in 2015. It's gone up about 7%, while domestic production decreases every year. So it will become more and more dependent on imported gas.

 The diversification of that external supply and market integration are two of the main targets of the energy union that is being promoted by the European Commission. In this regard, today, just by chance, the Commission has just published the package on gas security, which includes the European strategy for LNG and storage as well as measures in order to increase the security of gas supply.

 I have to say that during all of this process and in our way of life or the way this strategy should be designed, we have been consulted by the Commission and we have actively participated in the work groups that the Commission has recognized in order to design this energy security package.

 With the increase of imports and full integration, traditional incoming gas routes are going to be modified, and this requires new gas infrastructures both for import and for interconnection. At Enagas, we're already working on this. We are working on two key products in order to meet European targets.

 First of all, the TAP pipeline, the Trans Adriatic Pipeline, one of the main European infrastructures, priority European infrastructures, is part of the Southern Gas Corridor that will allow us to supply gas to Europe from new alternative origins such as Azerbaijan. This is a project that has the complete support of the EU and the European Bank for Investment, as well as the European Bank for Reconstruction and Development has decided to participate in.

 The second project is very well known by all of you. It is the interconnection that we have called MIDCAT, that will allow to double the export capacity from Spain to the rest of Europe through France. As you know, our Spanish gas system, which was developed basically by Enagas, has the greatest supply capacity in Europe. The development of a capacity for interconnection both with Portugal as well as with France, in which Enagas is working in an active way, will allow for the Iberian Peninsula to contribute decisively to the security and diversification of the gas supply in Europe.

 The European Commission itself has recognized the importance of the development of these interconnections. They have included them on its list of Projects of Common Interest, PCI, and they have recently granted, two weeks ago, up to EUR5.6m to finance studies for the development of the MICAT project within the mechanism that they have called Connecting Europe Facility, CEF, mechanism.

 The second axis is gas infrastructures in growth markets, and here the first comment I can make is that we are in the most stable markets. We're present in Peru, Mexico, Chile. And as you can see in the chart of the presentation, these are countries that do have good expectations for growth, macro-economically, way beyond the average of the region. We can also expect in these countries a significant increase in the use of natural gas, and therefore we can expect the development of new gas infrastructures to meet the growing demand.

 In Peru, we have positioned as the reference gas operator in the country through the two main gas transport infrastructures, Transportadora de Gas del Peru, TgP, which transports gas and liquids from the production fields to the country's main consumer centers and exporting centers, and Gasoducto Sur Peruano, GSP, which is under construction and continues on schedule.

 In Mexico, we estimate an investment of infrastructure for gas transport of around $10b until 2019. We are already present through its shares in -- as you know, in the regas plant of Altamira, TLA, the Morelos pipeline, and the Soto La Marina compression station which started operation last November.

 As far as Chile is concerned, the agenda, the energy agenda set by the government, sets as a priority line to promote LNG for electricity generation together with its industrial and residential users. Among the actions to be promoted foreseen in this energy agenda, we find the enlargement of capacity of the GNL Quintero plant, which is Enagas holds shares.

 These three countries offer major opportunities to consolidate our presence as a relevant midstream agent in the region.

 Lastly, the global LNG market, which in the coming years will undergo a new expansion in capacity and availability and competitive prices only with the start of operation of the new projects currently under construction, mainly in United States and Australia, global capacity for liquefaction will increase by 45%. This in the short term will put even more pressure on prices to come down, and in the medium and long term will mean greater liquidity and options for the LNG market.

 This context, and this is something -- it's the first time we deal about it, will favor more flexible focuses for business models, with model solutions with a more reduced scale and less intensive on capital. Just for example, floating technologies or what we call the small-scale terminals, and more extensive and competitive supply will allow LNG to have an increasing role in new sectors, mainly in the transport sector, an example. And due to the growing demand of the environment, in its shipping transport the LNG will allow important reductions of pollutants and the reduction of CO2 emissions.

 The role of midstreaming for such operators and developers is therefore key. Enagas, with over 40 years of experience, is one of the world leaders in LNG infrastructures and is very well positioned to take advantage of growth opportunities that we'll be having in this market.

 So, we've seen the evolution of gas markets and the opportunities offered by these markets, so let's go now and see the 2016/2020 outlook for Enagas.

 First of all, we think that the Spanish gas system will be fully balanced by 2020, even a year before that, and this without contemplating any increase in the toll for the system. In the second place, for this period 2016/2020, our outlook is -- our best outlook is today that the demand for natural gas will increase an average of between 3% and 4%, thanks to a greater penetration of gas in the energy grid.

 On the other side, and talking specifically about Enagas, we foresee an annual average growth rate of growth of net profit of about 2% for the period. We expect to meet its international investment as of today will provide, by 2017, 13% of our net profit and for 2020 a minimum of 25%.

 Likewise, our target is for the dividend contribution of all affiliates to amount for 2017, next year, up to EUR100m, and for 2020 EUR140m. All our affiliates in Latin America use the dollar currency. The investment is, on dollars, revenues and dividends are all American dollars. Therefore, there is no exposure to potential depreciation of the local currency.

 Nevertheless, you will find detailed information in the presentation about each of our affiliates and you will allow me, for time matters, not to explain the detail of this idea.

 Up to 2020, we plan to invest an average of EUR400m annually, more or less. In Spain, the two main projects are the construction of the MIDCAT interconnection with France and the regasification plant in Tenerife. And outside our country we are contemplating, besides the committed investment in the GSP Peru and TAP Peru, other potential investments that are alternatives and that will fit in our strategic criteria.

 It is interesting to note the cash flow -- the operating cash flow that we will generate over the period. We think that we're going to generate annually an average of EUR750m a year. This will allow us to maintain, first, a solid financial structure, that is to continue with our ratings, to pay of course the dividend that we have committed, and maintain this volume of EUR400m per year of investment with an estimated debt for 2020 similar to the debt that we -- the debt we have at the end of 2015.

 The growth of dividend in a sustainable way will continue to be one of our main priorities. That is why, and this is something which is new, we are extending our new dividend policy until 2020. We undertake to make this dividend grow 5% annually. So, as you can see in the presentation, we will go from a dividend per share for 2016 of EUR1.39 per share to EUR1.68 per share at the end of the year 2020.

 I'd like to highlight that the rate of growth of the free cash flow exceeds the rate of dividends growth. In addition, another data which is important is that the volume of committed invest -- of non-committed investments amounting to EUR900m in the period are included in our projection as an investment, but without contributing to the P&L account or to the operating cash flow.

 This 2016/2020 perspective is accompanied by a well-established financial policy. We estimate an average net financial cost for the period below 3%, and we're setting a basic target of maintaining our current standalone credit ratings, that is the leverage ratio of the funds from operations divided by the net debt, to always be above a minimum of 15% (sic - see slide 32 "1.5 times).

 With regard to the global financial panorama, and I will enter into something which is not Enagas specific, we have to bear in mind that 2016 is already a very complicated year for the world in Europe, but also in Spain. It all seems that financial markets are going to get more difficult and there is a certain feeling that there is a continuing financial crisis, and that does not help business credit and individuals.

 In this context, we think that at Enagas we are a solid business, we've got a solid business model, and we've got prudent and realistic outlook up to 2020. That means that we are ready to withstand, if necessary, this global situation, which we expect won't last too long, but that is -- for the time being, it's what there is.

 And strictly financially speaking, we have no relevant maturities until 2022. We've got 80% of our debt at a fixed rate, and as you know, at reasonably low cost. That isolates us from the high volatility of markets today, and the evolution of the stock exchange in January and February markets have acknowledged this.

 Specific objectives for 2016 now: to share a dividend of EUR1.39 per share; to achieve a net profit growth after tax of around -- of at least 0.5%; to invest around EUR465m; to reach a volume of dividends from our affiliates that is an impact on cash flow of around EUR65m. And all this with an average net financial cost of around 2.7%.

 Before finishing, I would like to emphasize Enagas' strong performance in sustainability and adherence to the best international corporate governance practices. Sustainability is one of our four strategic drivers. We are committed to the fight against climate change, and especially with the evolution towards more sustainable and carbon reduced business models.

 Therefore, we work to offer a competitive supply of clean and efficient energy such as natural gas, with the highest efficiency in the transformation processes, and furthermore allowing new users linked to transport.

 I'd like to highlight that by the end of 2015 the European Commission selected the project called LNGas HIVE coordinated by Enagas, participated by 42 partners, to promote the use of LNG as a ship fuel and therefore to reduce CO2 emissions and particles, as well as reducing pollution of sulfur and nitrogen oxides in our seas, especially in the ports that have greater traffic.

 On the other side, we're working in Sweden with Swedegas, with our Fluxys partner, in a project for gradually incorporating biogas into the natural gas network. So by 2030, this will represent 30% of the transported fuel. This is a project related to sustainability. It is a pioneer of its kind in Europe, and Sweden will become the first country to reach this level of use.

 This commitment towards sustainability, and we're proud of it, has been acknowledged in the last Global 100 rate, an index presented at the last World Davos Forum, two weeks ago, and that has distinguished us as the most sustainable company in the world in the gas utilities sector and places us at number six on its global ranking. This is the highest position that we have obtained, a Spanish company, since the creation of Global 100 in 2005. Likewise, we continue to have a presence on other main sustainability rates or indices, such as the Dow Jones Sustainability Index.

 Well, in order to sum up and to conclude, we have presented today once more results that are consistent with our targets. Furthermore, in the context of -- in a world context that has China and the price of oil as the main uncertainties, we are offering realistic and attractive outlook until 2020. And that will allow us to continue growing, maintaining our rating and a very favorable dividend policy.

 Thank you for your attention. If you have any questions, please feel free to ask them. As always, we will endeavor to answer them as fully as we can. Thank you very much.

==============================
Questions and Answers
------------------------------
Operator   [1]
------------------------------
 (Interpreted). (Operator Instructions). Pablo Cuadrado, HSBC.

------------------------------
 Pablo Cuadrado,  HSBC - Analyst   [2]
------------------------------
 (Interpreted). Good morning, everybody. Four questions, quick ones, three on details of the results and another one more for strategy.

 Regarding results, the first thing I'd like to know is from the net debt reported on 2015, could you tell us what part of that debt is related to new regulators of the gas deficit and regulation? And when do you expect to recover the cash flow that has been lost on that side?

 Taking a look at the results of 2015, I think that there's a write-down for the D&A. Could you give us more details on that same figure and could you give us a figure for 2016?

 Taking a look at the guidance of 2016, the net income growth is 0.5%. Could you give us information for EBITDA for 2016 related to OpEx evolution?

 And from the strategic stance, the presentation is very clear, yes, it's true, but I'd like to ask you about the non-committed investment in that sense. I guess that many of us ask ourselves what's plan B. What's plan B if by any chance in the coming years you don't manage to -- or you don't think that investments are not attractive because they are not profitable? What would you do with that cash flow? Would you think about increasing dividends? Would you think of a share buyback? What could be your plan B? Thank you.

------------------------------
 Antonio Llarden,  Enagas SA - President   [3]
------------------------------
 (Interpreted). Thank you, Mr. Pablo Cuadrado. Maybe the first questions on details, CFO Borja will give an answer, and then I will answer the fourth question. We'll try to be quick. Borja?

------------------------------
 Borja Garcia-Alarcon,  Enagas SA - CFO   [4]
------------------------------
 Thank you, Mr. President. The net debt figure for 2015, 40% of deficit of the gas system, which is EUR320m for us.

 What could happen during these years, the main factor for which the net debt will grow between 2015 and 2016 is the gas system deficit for 2015. We expect the liquidation of the deficit generated until 2014, EUR506m, EUR400m of Enagas, around EUR209m of additional deficit. Enagas has foreseen to get the payment of other businesses, Yela for example. So the free float is EUR67m, added to another debt, generates working capital of around EUR100m. And this variation of negative working capital explains the increase of debt between 2015 and 2016.

 From 2016 till 2020, as we expect to absorb the deficit of the gas system, we will generate through the working capital the amount of cash of around 2016 -- during these three years of around EUR350m or EUR340m of working capital.

 Your question on extraordinary amortization of 2015 corresponds to the deterioration of warehouses, and the amortization for 2016 is EUR280m.

 For EBITDA for 2016, the figure is around EUR890m. This is around EUR890m because it depends on pending recognitions such as the ones we had in 2015. The main variation of revenues comes due to GPS -- GTS, EUR13m, GSP EUR18m, and the drop of the remuneration of the Company of a lower RDA of EUR22m. Operating expenses will grow because of staff and outsourcing services, and maintenance costs will remain in 2016 at EUR6m and the EBITDA will be around EUR890m.

------------------------------
 Antonio Llarden,  Enagas SA - President   [5]
------------------------------
 (Interpreted). So let's answer the fourth question now. First, with regard to what we have committed and the projects that are under study, we've got a major portfolio of possibilities that we're working on them on a regular basis. And as even said in my presentation, that it is possible that in the coming two, three years we might face midstream projects in the hands of vertically integrated companies deciding to sell for their own reasons, and logically that is something that we will look with interest.

 But answering indirectly to the question, as I said in my explanation, that we study thoroughly all the projects and we undergo to these projects and we think that respect our rigorous criteria of profitability, risk, etc., etc. If by world economic standards we were not to find a project to undertake, as clearly said, that we won't invest just for investing's sake.

 And I have to set clear here that this year, for legal obligations, we will continue with our long-term incentive for the management team that had been claimed by investors and profits. And in this long-term incentive, it is clear that we're not incentivating investing for investment's sake. But we're in fact incentivating the return for the investor, the real value of the dividend, of the opportunity, the maintenance of our rating criteria, but not investing by investing or for investment's sake.

 But if in the coming years we were not to find projects satisfying these rigorous criteria, we would have cash flow availability that could be going to net -- to debt reduction, or maybe today that would not be intelligent to do so because we've got very good costs and it's possible that in the future this cost, even this year, will increase, so we won't go into that path. So it could be possible to have an extraordinary dividend not on a recurrent basis but via a buyback.

 But today, we still have not thought about that possibility. That could be a solution if in this period of time we were not to find a project satisfying these rigorous criteria. Thank you very much.

 More questions, please?

------------------------------
Operator   [6]
------------------------------
 (Interpreted). Javier Suarez, Mediobanca.

------------------------------
 Javier Suarez,  Mediobanca - Analyst   [7]
------------------------------
 (Interpreted). Good morning, everyone. Thank you very much for listening to my question. The first question is insisting on the investment opportunities and their profitability. Could you be so kind to explain more specifically what's the profitability threshold that you're referring to and what would be the adequate tier where we would invest in a Latin America project that is denominated in US dollars and what would be the profitability threshold in Europe with a (inaudible) currency? So what would be the specific criteria for the investment in projects by the Company in the next few years? That's the first question.

 And the second question, looking at slide 25 and the contribution by dividend by your consolidated companies, could you please give us some details with regard to those EUR40m by company -- EUR140m by company? I know the list is a bit long, but I would like to understand if those EUR140m only comes from existing companies or if there are new projects included there.

 And the last question has to do with a different slide, slide 27, where you talk about your investment. Is there an investment component in those EUR400m that has not been identified, especially on the international side? Because when you talk about 2% growth in the IPS, are you talking about what CapEx? Are you thinking of those EUR400m and some non-identified projects, or is it a CapEx under EUR400m? Thank you very much.

------------------------------
 Antonio Llarden,  Enagas SA - President   [8]
------------------------------
 (Interpreted). Thank you very much, Mr. Javier Suarez. With regard to investment opportunities, I'm going to give you a figure. But I wanted to highlight that that is not the only criteria, because obviously the other main criteria besides this year is precisely the sort of risk we would be getting into, because we are not looking for a high tier just as a standalone if we think that the risk is higher than the risk companies such as ours admits the new company could face.

 So we usually think of this year, and we also think of whether it is of an adequate risk level, something that we consider logic for our business. But in general terms, the investments we're looking for have to have a minimum of 10% return. But I insist, for an investment to go through that test does not mean that it is adequate for us. We obviously have to take a look at the risk and have to think of the sustainability of the dividend. It needs to be true, reasonably true, that in the next 10, 15, 20 years that will last, that can actually happen. So that's my answer to your first question.

 Your second question, EUR140m dividend for 2020 do not consider new companies that are not the ones that we have currently. So in that -- if in that period we were to invest and the investment period ends and provides us with results, that is not something slated in the EUR140m.

 And the same is to be applied to your question regarding the 2% growth in the 2016/2020 period, whether it includes or it doesn't include other cash flows or benefits coming from new investments, because we have considered this in a cautious way. We have been very conservative. We thought that none of them would have matured at that time in order to produce the benefits or dividends, or we think that it hasn't happened.

 So the figures we give you with regard to growth of dividend are very conservative, or a little conservative, rather, sorry, because we do think that in normal conditions we will be able to do new investments, but we haven't considered any cash flow coming from them. Thank you very much.

------------------------------
Operator   [9]
------------------------------
 (Interpreted). Mr. Garrido, JPMorgan.

------------------------------
 Javier Garrido,  JPMorgan - Analyst   [10]
------------------------------
 (Interpreted). Thank you. Good morning. I have three questions. The first one has to do with international business. I wanted to know if you could give us a figure regarding operating expenses that are linked to international businesses for 2015, and if those OpEx are recurring or if you think there is a certain amount that will be recurring in the future.

 And the second question has to do with PSC -- TgP, sorry. There was an accident in TgP, but it seems it has already been solved, that there has been some loss of fluids. I wanted to know what the cost of that accident was, if you consider that to be a relevant cost and if those sorts of accidents that have happened in TgP will have some sort of impact, maintenance cost, or if they will be considered as a normal incident in those infrastructures.

 And the next question has to do with the interconnection project, the underwater interconnection between Mexico and the US that is going to be done, where you seem to be one of the main parties interested in collaborating in the project. Would you participate in a consortium if you are granted this project? Will you be doing this on your own, or would you be majority partners with over 50% of the joint venture?

------------------------------
 Antonio Llarden,  Enagas SA - President   [11]
------------------------------
 (Interpreted). Thank you very much, Mr. Javier Garrido. I have had to ask for some of the specific figures you asked for. With regard to international business, the OpEx we have is basically -- well, the OpEx of the separate division that we have separated from the divisional business in Spain, what we call activities of new businesses international activity, which is mainly staff expenses, it's around EUR5m every year.

 And we could consider that recurrent, yes, but this is that part that you know we have included in the sort of investment we do. We don't have to highlight or we don't have to send many people to those projects, so we haven't a big staff expense. This is the OpEx that we have with our international activity.

 With regard to TgP, it's true. That gas was spilled due to special characteristics of a certain part of the project. When there are big rains, when heavy rainfall happens there are [negatives], there are landslides, and some of the gas ducts might be broken, and we consider that. And on the other hand there is insurance. We have insurance, which is what we use to face this sort of circumstances. So we think we are covered. We, as partners in the gas (inaudible) operating company in COGA, we think that this will not have an important impact.

 Then the project that you were referring to in Mexico, yes, we're studying it. I've already said, not today but during other conference calls, that we study almost every project that we detect in the midstream area. There aren't many in the world, so we're studying this one. Whether we decide to participate in it or not, we would never have more than 50%. We maintain this criteria especially in important projects.

 So if we were to participate, and as you very well said, if we were to be granted this project, then obviously we would have to have an equivalent set for this. But we are always the investing partner and the partner that brings its expertize to the company, but we don't want in projects -- big projects such as this one a participation that would go over 50%. Thank you very much.

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

------------------------------
 Carolina Dores,  Morgan Stanley - Analyst   [13]
------------------------------
 (Interpreted). Good morning. Thank you for taking my questions. Just one question. From the annual CapEx for international investments, out of EUR250m per year, how much of that is committed? Is it half? Just to have an estimate. Thank you.

------------------------------
 Antonio Llarden,  Enagas SA - President   [14]
------------------------------
 (Interpreted). Carolina, thank you very much. Of EUR250m, more or less, we've foreseen for investment committed, an average is EUR50m a year. So the rest, EUR200m, will be for the ones open for this period for the kind of projects that we were talking about before. Thank you for your question.

------------------------------
Operator   [15]
------------------------------
 (Interpreted). Rui Dias, UBS.

------------------------------
 Rui Dias,  UBS - Analyst   [16]
------------------------------
 (Interpreted). Good morning. Rui from UBS. Three quick questions. On dividend, in the outlook until 2020, do you take into account the possible negative impact of a change in the government and regulation, because the socialist party said that they could review the cost of the grid? And that would be important to know what you think about that, because we are in a moment in time in which political uncertainty is big, and maybe this could be a move out, a bold move.

 And the MIDCAT, for the MIDCAT, could you give us an update of this project? It's clear that for Europe and for Spain this is a major project, but for France that's not so clear. And there's a MIDCAT. So is this project still ongoing? Do you have to increase capacity in the Spanish grid to help to export, or does the current grid is enough capable? Will you be able to transport gas from the south of Spain to the border with France without major problem?

 And the third and last question, could you give us the status on the [cut up] in Spain?

------------------------------
 Antonio Llarden,  Enagas SA - President   [17]
------------------------------
 (Interpreted). Thank you, Mr. Rui. To estimate dividends for 2020, we have not included any possible change in the regulation, first of all because it would be very difficult to say what changes, and because we don't think that we are going to -- there is going to be a change in the regulation.

 You might think that it's going to be complicated to have a government in Spain. When this government will be formed, changing the regulation would demand for a law in the parliament with an absolute majority. It doesn't seem that with the government to be created, of whatever nature it might be, this will be possible if there is no agreement amongst four or three or four parties.

 So we do not think -- independent to the comments that can be done in electoral programs, we don't think that there will be a reform in the gas sector with an absolute majority in the parliament, because we think that it's not the focus of the political problems that our country has now. So we have not included that, and we have not included it because we think that its probability is very, very minute or even impossible.

 For the MIDCAT, it is true that this is a major connection for Europe. Maybe France isolatedly, isolated from Europe, does not require or does not need it, but I would say that Spain doesn't really need it to -- if this interconnection is needed, Spain is self-supplied and with a greater security of supply than the rest of Europe.

 So this project is a European one. It's not to favor a country or another one but to have a safe European grid, north/south, south/north, that will allow us to be less dependent on a single supplier. So we understand that the EU has taken this approach and is very firmly committed towards this project. The EU is so interested that they have given first subsidies for surveys. And when the EU does subsidize or help, it's because the project is more feasible.

 But if we take an isolated approach, neither Spain, Portugal or France need this interconnection, because the three countries isolatedly are reasonably well supplied. Spain maybe is a country that has a greater difference of supply origin. The problem is not Spain or France, but the EU. And the Juncker Commission policy presents a package today related to this issue to try and have a comprehensive approach for Europe.

 In one of the pages of the full presentation, you have a map with different colors explaining the supply dependencies in the EU. If you take a look at this map, that is how you have to understand this interconnection. For France and Spain, slide 17, this is not necessary. Maybe France has got an energy mix with less gas, and that explains why historically it has not been a priority. But I have to say from my knowledge of the dossier that the French government in this sense has taken positive stances towards the project in the last months.

 And we think that during 2016 the European Commission, not countries individually but the Commission, will take a final decision on this project. And we had a meeting with Commissioner a few days ago where we overviewed this issue.

 And then the hub has started working for the time being, as we thought, with low gas volumes, but it's working well, in a reasonable manner. And it has already produced opportunities to improve the price for small amounts that have been hired or purchased, and that shows that to improve in general in Spain competitiveness these two matters are necessarily greater, interconnections and secondary market mechanisms. So this is working well. Thank you.

------------------------------
Operator   [18]
------------------------------
 (Interpreted). Virginia Sanz de Madrid, Deutsche Bank.

------------------------------
 Virginia Sanz de Madrid,  Deutsche Bank - Analyst   [19]
------------------------------
 (Interpreted). Yes. Good morning. I have two questions to ask. The first one has to do with your statements regarding 2020. I wanted to know what was the tax rate that you had considered, because some political parties are establishing certain rates and they say they want to increase them.

 And the second question has to do with the regulated income that you have referred to in your presentation that is going downwards. I wanted to know if you're also considering that the OpEx regarding this regulated income might also decrease in time. Thank you very much.

------------------------------
 Antonio Llarden,  Enagas SA - President   [20]
------------------------------
 (Interpreted). Thank you very much, Virginia. Let me give you an answer. With regard to tax matters or currency exchange, as you very well know, we always work with the data available at the moment. We're doing our calculations right now. We have tax rates that are set in Spain that are in force right now. And obviously majority is required in order to change those rates by the parliament, so we haven't changed the situation. It's not improved, not harsher. Maybe we might have a government that will establish lower rates, so we haven't modified it. If there are changes, we will modify it.

 And the same is to be said to exchange rates between euro and dollars. We always work with last year's average. Some people might think that the situation will be improved or not, but we never do those changes. We work with what we have at hand.

 And now, my personal opinion, I really have my doubts. I think that if we have a new government in the next two or three months, I don't think that they will be touching this sort of taxes because we have to think that our economy, and I think that they know it, and I know the people who deal with the economic side of the different political parties' programs, so they know that we are at the EU. And we don't think that our competitivity conditions will be harsher for us if we get a new government.

 As for the regulated income, we have a slight decrease every year due to amortization, but this is diminished because there is an amortization process -- but there is an amortization process in the OpEx. There are simply some maintenance expenses that have to be calculated considering a series of parameters, and these expenses are not increased and are not decreased.

 I think that I have answered your questions. Thank you very much.

------------------------------
Operator   [21]
------------------------------
 Olivier van Doosselaere, Exane.

------------------------------
 Olivier van Doosselaere,  Exane BNP Paribas - Analyst   [22]
------------------------------
 Yes. Good morning, everyone, and thank you for taking my questions. I have three left on my side. The first one is that you've mentioned that in your P&L you have not taken into account any potential impact of those EUR900m potential investment in new international operations that are not committed today. I was wondering if you could confirm if those EUR900m, however, would be included in the EUR4.3b debt figure that you provide by 2020. That's the first question.

 The second one, on those international projects, you said that you think that the national infrastructure plans of the different countries where you operate in Latin America suggest that there could be opportunities for new infrastructures in the years ahead. I was just wondering if you could give us a feel of what you perceive to be the level of competition that you are facing there today and how likely, therefore, it is that you could actually gain some of those projects given, for instance, infrastructure funds, which I suspect could be targeting lower returns than the 10% that you are speaking of.

 And then the third question, just on the cost of debt, I was just wondering if you could confirm that the 2016 guidance assumes cost of debt remains stable at 2.7% and whether or not you believe that you are conservative in that assumption. Thank you.

------------------------------
 Antonio Llarden,  Enagas SA - President   [23]
------------------------------
 (Interpreted). I shall answer quickly. For 2020, in the end we have a total cost of debt which is similar to the one we have and this includes what we have foreseen to do. And if we do less things, we will have less international debt, but we have thought about that debt when -- after doing this investment plan. A part is committed and then another one is pending.

 With regard to the competition we've got, we always insist that we don't solely act as a financial investor, but we are in those projects where we think we can contribute with technology so that we make -- that makes our partners to be the ones that are first interested to be our partners, because we're contributing the management and in the control of assets where we think it's positive.

 I was putting example of the places where we are that are -- where assets are running. The Quintero plant in Chile, the Altamira plant in Mexico, the TgP gas duct in Peru, we are active members of those consortia. In their Board of Directors, we are present with certain veto rights. And we currently contribute with our technological expertise, which affects, though maybe not visibly, with a greater efficiency where we are present. And that is because we're not only a silent partner that is just sitting there, waiting to get dividends, but we are active partners.

 So if in a project we decide not to be present, despite the fact that their economic conditions might seem good, it's because we don't see the possibility of, in that consortia, having a major weight or opinion. And in that case, we decide not to participate.

 In all the projects where we're present, we've got excellent relations with our partners. And each one contributes with expertise, and we normally contribute with the management of an asset, with our experience, which is measured in thousands of kilometers of gas ducts or tons of storage, which is useful for the use or the life of that asset.

 And lastly, for the financial cost for 2016, we've estimated 2.7%. We think that is appropriate. For 2020, for the average of the period, that increases slightly. It could reach 3% because that will depend, as you may think, from the percentage of the debt we might have dollarized. Today it's around 11%, 12%. The financial cost in dollars is slightly higher than the financial cost in euros or in Swedish crowns. And that's why we have done this calculation.

 And for the period, we allowed us to say that maybe that figure will be higher. But for 2016 specifically, that is the figure we've got in front of us. The CFO thinks that, and today he's to my left and the CEO is to my right, they think that we can keep that figure of 2.7%. Thank you.

------------------------------
Operator   [24]
------------------------------
 Maurice Choy, RBC.

------------------------------
 Maurice Choy,  RBC - Analyst   [25]
------------------------------
 Hi. Good morning and thank you for taking my call. Two questions from me. The first question is about EBITDA margin. Obviously, we've had slightly higher than expected OpEx for this most recent year, for 2015. I wonder whether -- if you could help us guide where the EBITDA margin, which has fallen to around [34%], how that is going to move throughout your outlook period.

 And secondly, it's more about your international options. Obviously, one of your slides here speaks highly about your LatAm growth markets. I wanted to ask whether or not there were other markets that you're considering outside of LatAm, and obviously if you're free to go wherever you need to go on a map. Thank you very much.

------------------------------
 Antonio Llarden,  Enagas SA - President   [26]
------------------------------
 (Interpreted). Thank you very much for your questions. First of all, I'd like to insist on the fact that really, ever since the international activities started, our EBITDA are not a good way to measure the whole Company, because the EBITDA only measures our regulated income, the regulated income here in Spain. And we know that our regulated income in the next few years is going to decrease, slowly decrease. It's not going to be an important figure, but it's going to decrease due to the amortization of lots of infrastructures that amount to thousands of millions.

 So, in order to talk about margins, you would have to add all the dividends, the net dividends that we receive from our international activities that have their own equivalent but they're not consolidated. That is why we don't give an EBITDA margin figure. We could have given that five years ago, but it doesn't really respond to the reality of a separate vision.

 If we were to consolidate it all, we could do it, but we can't do that due to accounting rules. So that is why we provide you with more information, not just the regulated income in Spain and not just the net dividends that we receive from our subsidiaries, wherever they may be.

 And as for the countries, well, I insist on the fact that we have three main drivers or axes. First of all, Latin America were the countries that we have identified which have growth characteristics, strong growth characteristics in the energy industry, especially gas, and which have a legislative and governmental environment that we consider reasonable, where we can invest.

 Second axis, which is Europe itself, where we are present. We are present in different projects, Sweden, the Trans Adriatic Pipeline and the interconnection with France.

 And finally, there is a more general axis, which is that of LNG, natural liquid gas, regasification natural gas, and we have different projects all over the world. Not many, it's true, but it's just a few projects. There are different projects all over the world that we're studying. We don't usually advertise what we're studying, because 99% of our cases we have signed non-disclosure agreements, so I can't tell you about those. But I'm sure that you follow closely the different projects that might be found all over the world.

 So we always have in detail information of all those projects. We study them. And then, as though it were a train station, we can either follow that road or follow a different one. After studying a certain project, we might not follow up to it. And those that are interesting, well, we keep on studying them and we go through different stages. And in the end, we decide which projects will be introduced to the Board members, and after an in-depth study, we decide if we are still interested or not.

 So, all through the year, during the different conference calls, we provide you with information if the projects are mature enough, and I'm sure you know how that works. So thank you very much.

------------------------------
Operator   [27]
------------------------------
 There are no more questions in English. We have more questions in Spanish. Thank you.

------------------------------
 Javier Suarez,  Mediobanca - Analyst   [28]
------------------------------
 (Interpreted). EUR100m to EUR140m from 2017 to 2020. I think that part of the explanation should be GSP. And my question is what are you considering with regard to contribution in the TAP projects, because I think that in that figure we could be including some TAP dividends, if I'm right.

 And the second question I wanted to ask you has to do with the accounting for TAP. What would be your contribution to the Company's P&L in 2017, 2018 and 2019, until it starts issuing dividends, not from the dividend point of view but rather from the equity consolidation contribution?

 And the third question has to do with the debt. On slide 32, you talk about the debt that is fixed at EUR4.3b. And I wanted to ask you, considering the CapEx that you have -- the committed CapEx that you have right now, would it be correct to say that the debt shouldn't be EUR4.3b but rather EUR4.3b less the EUR925m of cash flow that we were referring to for this, the EUR3.4b, rather? Thank you.

------------------------------
 Antonio Llarden,  Enagas SA - President   [29]
------------------------------
 (Interpreted). Thank you so much, Mr. Suarez. First of all, from EUR100m to EUR140m, it is, you are right, due to GSP, only not just. And during this period, we do not think we will be getting TAP dividends.

 Now, I'll answer to your second question. During this period, the equity, yes, does consider TAP.

 And as for the debt, your calculations are correct. Those EUR4.3b are considering all the investments committed, as well as uncommitted. And you know the criteria that we have considered. And if the investment were not to take place, then EUR4.3b would have to be reduced in the cash flow proportion that was not invested, EUR900m or EUR400m or EUR500m or EUR600m. So EUR4.3b, yes, is thinking that we are going to invest this committed investment. And the non-committed part of the investment, that does not produce during that period any sort of dividend or profit.

 So, as I said, if we can do an investment but we don't consider it interesting, we will not do it, which is what you were asking about. I have to say this and I said it during my presentation. Maybe we will have some opportunities, especially in the brownfield cases, and if we think that they meet all the profitability and risk criteria, we would go ahead and do it. And in that case, we would have an increase on our profit, on our income, on our risk, on our benefits. That would improve the (inaudible) that we're always very conservative.

 And we haven't done a calculation saying, well, part of the new investment, I don't know, X percent will be brownfield and that will provide us with benefits and we will include these benefits in our expectations. No, we haven't done that. We haven't included it. But in the next few years, the odds of us finding within the field of our investment requirements avenue another brownfield opportunity, that could be very real. And that would improve our results not just from 2020 and onwards, but even earlier than that.

 But as I said on many other occasions, we will cross that bridge when we come to it. As of today, we don't know if we will have to cross that bridge. We might, but we don't know so we haven't included it in our figures. And I insist that EUR4.3b would have to be fine-tuned. You would have to take off the part of investment we think we could make but we might not go through with. Thank you very much.

------------------------------
Operator   [30]
------------------------------
 (Interpreted). Jose Ruiz, Macquarie.

------------------------------
 Jose Ruiz,  Macquarie - Analyst   [31]
------------------------------
 (Interpreted). Good morning. Just one question. Could you give me the figure of the debt which is out of balance, debt related to participations put into equivalent by the end of 2015? Thank you.

------------------------------
 Antonio Llarden,  Enagas SA - President   [32]
------------------------------
 (Interpreted). I shall give the floor to the Chief Financial Officer.

------------------------------
 Borja Garcia-Alarcon,  Enagas SA - CFO   [33]
------------------------------
 (Interpreted). The debt we've got out of balance sheet within the financial statement corresponds mainly to the bridge loan granted to GSP by banks. Now we have a collateral of 25%. So, it's EUR500m, so 25% is the out-of-balance debt. And that debt, that bridge loan has been refinanced with the financial control of the transaction. So the warranty provided by Enagas will be effective in due time.

------------------------------
 Antonio Llarden,  Enagas SA - President   [34]
------------------------------
 (Interpreted). Okay. If there are no more questions, thank you to everybody. Thank you for listening. And of course, during the roadshow that will start today and our investor relations department is fully available for any question, any details or any issue you may want to comment. Thank you.

------------------------------
Editor   [35]
------------------------------
 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.
------------------------------