Q1 2017 Enagas SA Earnings Call

ENG.MC - Enagas SA
Q1 2017 Enagas SA Earnings Call
Apr 25, 2017 / 07:00AM GMT 

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Corporate Participants
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   *  Antonio Llarden Carratala
      Enagas, S.A. - Executive Chairman

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Conference Call Participants
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   *  Harry Peter Wyburd
      BofA Merrill Lynch, Research Division - VP and Junior Analyst
   *  Javier Suarez Hernandez
      Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst
   *  Oliver Salvesen
      Jefferies LLC, Research Division - Equity Analyst
   *  Pablo Cuadrado
      HSBC, Research Division - Analyst
   *  Rui Dias
      UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst

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Presentation
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Operator   [1]
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 Good morning everyone and welcome to this earnings conference for the first quarter of 2017 for Enagas. The results have been published this morning before the bell, before the opening bell, and we are available at our website as always at enagas.es. Mr. Antonio Llarden, President and Chairman of Enagas will be leading this presentation. We expect this presentation to last around 20 minutes, and we will then open the Q&A session that we will try to answer as fully as possible. Thank you very much for your attention, and I will now give the floor to Mr. Antonio Llarden.

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 Antonio Llarden Carratala,  Enagas, S.A. - Executive Chairman   [2]
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 Good morning ladies and gentlemen and thank you very much for your attention. The results of the first 3 months of 2017 which we are presenting to you today are fully in line with the goals for the quarter, and the company is now on track to meet our goals for this year. As you know, as you all remember, in February we presented the results for 2016 and also in an update of our strategy for 2017/2020. We will now, as we usually do, we will initiate the road show where we have already visited most of the main cities in Europe such as Paris, Frankfurt, London, Geneva, and we will resume this road show after the presentation. We have been holding meetings with our main analysts and investors.

 It is also interesting to remember that 3 weeks ago on March 31st we held our Enagas general shareholders' meeting with a majority approval of all the points on the agenda. Before we touch upon the main figures, I would like to remind you as we announced in our strategic update of the main new feature in 2017's results which is the consolidation of GNL Quintero by global integration. This has an impact on this first quarter results. In order to give you a homogenous comparison with the 2016 results, you will see that we have included in all the financial statements that we are presenting here today a pro forma information which we have called standalone. We consider in it our participation in GNL Quintero at the end of March which was 60.4% applying the same equity accounting method used in previous years.

 I will now tell you about the most relevant figures of the first quarter which you can see in fuller detail in the presentation. With regard to after-tax profit, we -- it amounted to EUR 156.3 million. This is 54.4% more than what we obtained during the first quarter of last year. This increase obviously is due to an accounting effect of EUR 53.5 million which derives from the global consolidation of GNL Quintero which includes a one-off amount of EUR 52.4 million which does not have an impact on our cash flow. With regards to standalone terms pro forma, the growth in after-tax profit has been of 1.6% which was the expected increase for this first quarter and which is in line with the 5% which is expected for the end of 2017.These results have been possible thanks to two key factors. The first one is the comprehensive expenditure control, both operational and financial, that we already announced in our strategic outlook for 2017/2020. And the second is doubtlessly the positive performance of our affiliates which after the first quarter represented 21.6% of the benefits. I'm talking standalone after-tax profit obviously. With regards to the cash flow, this good evolution of our affiliates is reflected in the company's cash flow.

 During the first quarter we have received from our affiliates, if we consider our participation in GNL Quintero at the end of March, dividend for the value of EUR 29 million. This figure represents 25% of our annual goal which I'll remind you was established at EUR 120 million for the whole year. With regards to standalone funds coming from operation, which includes the dividend from our affiliates, has risen by 15.4% compared to the same period in 2016. This is a significant increase which has enabled us to reach a standalone leverage ratio. I'm talking funds from operations related to net debt of 16% which exceeds our goal of 15%.With regards to cash flow that will be presented in the second quarter, we will see those $150 million that we obtained by selling 15% of GNL Quintero which took place on April 11th. With the current participation of 45.4%, Enagas Chile remains in control and will continue to globally consolidate the participation in this asset.

 The strategic update we put in place in February already considered this reduction in our participation and therefore all of the company's goals until 2020 were set considering the current participation as of today of 45.4%. With regards to investment during the first 3 months of the year, Enagas has invested a total of EUR 264 million. The main investments were in the European pipeline, the Trans Adriatic Pipeline, EUR 42.4 million, and on the other hand the cash output for the payment of GSP's guarantees for EUR 213 million, these were executed in January, but they had already been included in the debt figure at the end of 2016. That's what we explained during our results presentation in February.

 In this amount of EUR 264 million was not included the operation that we talked about yesterday night for our participation in COGA, Amazonian gas company that goes up to 31% -- 51% for a total amount of $8.86 million. This operation is in line with our strategy to consolidate Enagas' position in regions where it is already present through the growth of its affiliates. In this specific case, as you have seen, we have decided to work in partnership with the other big shareholder in the project, our TgP subsidiary, the Canadian Pension Plan Investment Board. And we have benefited from the fact that the third partner Grana y Montero wanted to sell its shares so that this operation could take place. So not only have we consolidated the presence of the two main shareholders of TgP in the operating company for the [ gas duct ], we are convinced that we will be able to include some efficiency elements for the management that will have an impact on the result and that will allow us to have greater revenue, TgP will have a greater revenue.

 As we committed in each result presentation for each quarter, we shall inform about the evolution of the situation of the Sur Peruano pipeline project, GSP. After the notification of the termination of GSP concession in January 2017 the Peruvian state -- the Peruvian administration has declared its well to re-bid it following the foreseen procedure in the concession contract. The Peruvian government is therefore taking the necessary steps to execute the new bid and further goods from the original concession to this future awarded bidder. To do so it has already involved the public organizations in charge of the different options to be carried out.

 First it is expected that the so-called -- the supervising organization for the investment in energy and mining of [ Synergymin ] will appoint in the coming 2, 3 weeks an administrator. This administrator will administer and oversee the goods from the concession on behalf of the Peruvian State until they are transferred to the private sector. Furthermore the government has stated that the public organization that promotes private investment in Peru, Pro Inversion, or Pro Inversion as named will coordinate the process for calculating the net value of the goods from the concession, but also to estimate the new project tender.

 Therefore at Enagas we are working very closely with the Peruvian State to ensure the success of the process and we will continue taking the necessary actions to defend interest and recover the investment we made in this project. With regards to the financial position, the first-term data of the quarter, as you will see in the presentation is that the standalone net debt as of 31st March amounted to EUR 4.913 billion. Were we to include the net debt of GNL Quintero the total amount would be EUR 5.678 billion.

 Our average standalone net cost, financial cost is 2.3% which is in line with our expectations, on track to meet the average net cost forecast for the closure of 2017. If we consider the effect of the global consolidation of GNL Quintero, the net average financial cost is 2.8%.The standalone leverage ratio, funds from operations divided by net debt, is 16%. Although we have presented these leverage ratios with the global integration of Quintero, they are undervalued since we have only taken into account one quarter of EBITDA and FOFO, funds from operations, but we have consolidated 100% of GNL Quintero's debt. On the other hand we have with our funding sources a great diversification. Around 64% of the debt is in capital markets, 23% of the debt is funded with loans from the official credit institute ICO, and the European Investment Bank, and finally 13% is in commercial banking.

 Lastly, this is a figure that hasn't changed, more than 80% of our net debt is at fixed rate and we do not have any significant maturities until 2022. The evolution of gas demand for -- in Spain during Q1 grew a lot, 8.4% compared to that same period in 2016. This data is very positive for all consumer segments. For example the conventional demand remained strong and has grown by 7.2% compared to first quarter 2016 and this thanks to the increase of the industrial demand by 4.6 gigawatt hour and greater demand of domestic commercial sector due to a slightly cooler temperature in winter in this Q first quarter than in 2016. The third leg of the demand which is gas to generate electricity, it grew by 16.5%, major figure which has been influenced by to lesser water in hydraulic generation than in the first 3 months of 2016.As you know, it is difficult to foresee these kind of movements mainly due to temperature, weather, and therefore we are very happy about this result. But the most important thing for me is that we maintain quite a constant pace in the positive evolution of the industrial demand which is more than 60% of the total of demand. With all these figures, today we estimate that we can close the 2017 year with a total growth of demand of at least 2%. This is a cautious forecast because we do not contemplate any cold waves during this year. Should we have another cold wave by the end of the year, well, the growth will be even higher.

 Before finishing, I shall recall which are 6 main objectives for 2017. First to pay dividend of EUR 1.46 per share; second to achieve a growth in the standalone after-tax profit of 5%; third to carry out the pledged investments of around EUR 650 million to achieve a dividend volume for our affiliates of around EUR 120 million. Fifth to have a standalone funds from operations over net debt ratio of more than 15%; and sixth fund standalone net average fiscal cost of around 2.4%.Lastly I would like to highlight another key objective for Enagas which maybe is not in these previous objectives, but in our meetings with our investors we talk more and more about these objective because it gets more importance to maintain our leadership in sustainability. Our commitment towards sustainability which is in our strategy and included in our business operation has made it possible to renew our presence in some of the main international indexes in this matter in the first month of 2017 which you can see in the presentation.

 In order to close very quickly and to give you some conclusions of the topics dealt with this conference call, the quarterly results presented are very in line with the goals set for 2017. The results -- this is very interesting, the results of the second Q will reflect the entry of those $150 million coming from the reduction of our main participation in GNL Quintero. Then our financial position continues to be very solid. More than 80% of our net debt is at fixed rate and we do not have any significant maturities minimum 2022. Then the -- and finally the demand for natural gas has grown in the first quarter by 8.4% boosted by the industrial demand mainly, a major growth in line with evolution -- positive evolution of our economy.

 So thank you for your attention and now I shall invite you to make all the questions that you may deem suitable. All the Enagas team will try to respond with a greater detail possible. Thank you very much.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) The first question will be asked by Pablo Cuadrado.

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 Pablo Cuadrado,  HSBC, Research Division - Analyst   [2]
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 I have three quick questions to ask. First of all, it has to do with COGA's purchase that you announced yesterday. So now that I have studied the structure and the 51% debt, I wanted to know you will globally consolidate the asset after this operation considering that you will have 51%, or if there is some sort of agreement between the partners that does not allow for that global consolidation? The second question has to do with demand. We explained that there has been a higher demand in the first trimester and you think that there will be a growth of 2%, that could be conservative. I would like to know what is the growth figure you have included in your business plan considering the situation of the gas deficit because if I'm not wrong I think that we thought the demand would grow 1.5% for the system to be balanced in equilibrium, so if this higher growth could improve the figures? And the third question I want to ask has to do with personnel expenses. I've seen the standalone figures excluding Quintero and we see that there has been a growth of 15% of personnel expenses during the first quarter. So I wanted to know if there is some sort of extraordinary impact or if you could give us further detail in that sense?

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 Antonio Llarden Carratala,  Enagas, S.A. - Executive Chairman   [3]
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 First of all with regards to COGA, no, we have a joint control together with the other shareholder that does not allow for a global consolidation, but what we will do and I actually have given you some clues regarding that during my previous intervention is using all of our operational know-how and use it to work together with the other partner so that we can obtain a greater efficiency for COGA's functioning, and we think that in the mid-term if we consider that this is a concession with a long, long term ahead, we think that this could allow us to increase the revenues that we already obtained, which are quite correct. So this has more to do with efficiency than any other element. And as for the gas demand, I would say in general terms that we have foreseen for the whole period until 2020 an average increase for demand of around 3%, although during 2017 when we drafted our budget at the beginning of the year we were much more conservative and we only included 1% demand growth. Although right now everything indicates that this 1% will turn into 2%, and although this is not a big figure, it could improve our final revenue and benefit figure. And as for personal expenses, our CFO tells me that this derives from a very specific topic. I'm sure you'll remember that there was a requirement all investors needed to put in place an ILP, and I guess a long-term incentive for everyone who has a direct impact on the revenues of the company. We included that last year, but we did it with a majority of people vote during the general shareholders' meeting that had took place at the end of the first trimester. So when we compare this first quarter with last year's quarter when that factor was not included, this is the difference that explains that 15%. And I think I've answered all your questions.

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Operator   [4]
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 Next question by Javier Suarez from Mediobanca.

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 Javier Suarez Hernandez,  Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst   [5]
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 A few follow-ups after Pablo's question. The first one on the evolution of the tariff deficit, can you give us some updates on how you think that the system or the deficit can evolve in the coming years taking into account the strong growth of demand? Can you give us more visibility on the mid-term please? Secondly, with regards to the CapEx, capital expenditure, the company without the cash-out generated with the GSP crew is around EUR 40 million-EUR 50 million. How much do you think that -- if we exclude that cash-out related with GSP, how much do you think that the CapEx organic of the company can represent for 2017? And which are the most important projects? Third question related to CapEx, it's TAP and it seems that we have problems with the condition with Italian system. Can you give us your opinion on possible delays in the opening of TAP in time matters? Could this suffer any delay? And the last question I'd like for you to tell us if you would be interested in participating in the future project for Peru GSP?

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 Antonio Llarden Carratala,  Enagas, S.A. - Executive Chairman   [6]
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 So first of all, the evolution of the tariff deficit in the system, our forecast are the following. In this 2017 year, we will reach the balance between income and expenses, the system which had a certain deficit in the past, revenues slightly lower than costs. For the first time in 2017 we foresee to reach the balance, so we are convinced that by 2020/'21 we will have eliminated all the previous deficit. But I insist the major thing is to see that we have -- we think that we are going to meet the break-even between income and expenses. As for CapEx, we deduce GSP in round figures, investment will be EUR50 million for Chile GNL Quintero, Trans Adriatic Pipeline, around EUR 213 million and the rest around EUR 176 million-EUR 175 million will be for different matters in Spain (inaudible). As for TAP, the Trans Adriatic Pipeline project, we have to say that first, the project continues with no problem whatsoever in Greece and Albania. Italy, it is true that there have been some cuts of work reductions in -- for several weeks when landing into the Italian Peninsula, but Friday, last Friday, there was a judgment sentence allowing to continue to work. So by today the Trans Adriatic Pipeline management and the board of directors where we of course have a seat does not think of having major delays, neither in the works plan, or in cost increases. Lastly, you were asking about the possibility of having an interest or being present in these possible future consortium for GSP. That is something that we're analyzing. But as for milestones that I've presented, we have to take a decision much more in the future, not immediately. But I can tell you that we're analyzing the possibility. But I shall recall that our main commitment is to recover the capital we had invested there, and therefore if this helps probably we would be able to do so. But the main objective I shall recall is not so much to be or not to be, but to recover our investment.

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Operator   [7]
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 The next question will be asked by Rui Dias from UBS.

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 Rui Dias,  UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst   [8]
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 I have two quick questions. The first one is knowing how the conversations are unfolding with the Spanish regulator for the selling of tariff deficit, and I would also like to know if you have any details you could share with regards to brown field opportunities that you are finding outside of Spain.

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 Antonio Llarden Carratala,  Enagas, S.A. - Executive Chairman   [9]
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 First of all, yes, it's true that with the Spanish regulator, we always have ongoing conversations regarding the tariff deficits and it's selling -- securitization, and I'm sure that all through this exercise the regulator might make whatever decisions are relevant. But these conversations obviously are always ongoing and we have currently seen that they consider it a correct solution, this is obviously linked to this year as I already said, we have for the first time an equilibrium between a breakeven between revenues and expenses and as for brown field opportunities, obviously we study many projects that could be considered interesting. We don't usually -- due to confidentiality reasons, we don't usually give any reasons -- any details regarding what we are studying, but I can also tell you that we are not considering any new investments in brown field opportunities this year. But we do study projects. We do study them because the average time from the moment you detect the projects until you can actually make the investment is of around 2.2 years, that's the average. So it's not something that appears today and that are ready for you to invest tomorrow, but it is also true that currently the world market, does have a bit of an excess in gas, we can see that in prices. So there aren't so many projects as we might have had 2-3 years ago.

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Operator   [10]
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 Thank you. For the time being no more questions in Spanish. We shall now move on to questions in English. Ladies and gentlemen, the first question in English comes from Harry Wyburd from Merrill Lynch.

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 Harry Peter Wyburd,  BofA Merrill Lynch, Research Division - VP and Junior Analyst   [11]
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 A couple of questions from me on net income and first on just on arithmetic, so this year's net income guidance, I think when you originally set your 2017 net income guidance, you said you'd have 12% growth in net profit, of which 5% was underlying, and the difference between those two is that the expected EUR 29 million in capital gain on Quintero that if I'm not wrong, that capital gain is actually bigger than EUR 29 million you just reported, so why is the growth in net profit in this first quarter guidance still plus 12% and underlying plus 5%, surely the plus 12 would be a bit higher? And then perhaps it's a bit early for this, but for next year, if you ignore any acquisitions you might have in the next 6 months, you've got essentially a weak or lower consolidation of Quintero and essentially a low ramp in tariff for domestic business. So should we assume that net income could go down in 2018?

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 Antonio Llarden Carratala,  Enagas, S.A. - Executive Chairman   [12]
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 First, yes, of course. I think I said it in the presentation we have got a non-recurrent profit of around EUR 50 million. So it is possible that by the end the net profit the growth will be slightly higher, but these are not significant, it's not a significant figure. It's non-recurrent I insist. On the other hand, with regards to just a second, excuse me for a second please. Yes, I was consulting with the CFO, I think I said it also during the presentation, for our budget for the year-end 2017, during 2017 we have considered already our participation in Quintero of around 45%. It is true that Q1 specific figures of Q1 are slightly higher, 60% of participation, but as we knew that we were going to have that operation carried out. We have got a budget with 45%. So our final forecast, contemplate what we do have today here. It is true that there is a possibility to increase during the 12 coming months by 5% of our participation stemming from coherent agreement with the rest of partners, but we've been conservative and we have included as forecast of 45%. And I think that's the answers to your questions.

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Operator   [13]
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 The next question comes from Oliver Salvesen from Jefferies.

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 Oliver Salvesen,  Jefferies LLC, Research Division - Equity Analyst   [14]
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 And two questions please. On your medium-term strategy given the acquisition of COGA last night and obviously the cash inflow from Quintero in Q2, do you expect to reinvest this, this year? And do you expect to make any more consolidation acquisitions through the rest of this year? Secondly, on capital investment in Spain which was very low in Q1, around about EUR 7 million, what do you expect domestic investment in Spain to be for the full-year?

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 Antonio Llarden Carratala,  Enagas, S.A. - Executive Chairman   [15]
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 I think that for the first question, I have already given you all the details. Our investment in Spain for this exercise would be of around EUR 175 million and outside of Spain we would have EUR 50 million in Chile, and EUR 110 million to EUR 115 million in the TAP. And well, as we said in principle we do not foresee any new investments for this exercise, apart from these elements that we have mentioned. There are some projects that are important that are included in our 2017/2020 strategy such as the midcap that is now called Step. I think I already told you during the results presentation that we expect to get a final agreement of the European Commission during 2018. So we think that we're on time to make this investment during the strategic period, but I'm giving you a very specific example with name and surname, but that will not take place before 2019. So the figures of investment that we are sharing with you have to do with these projects that we have been mentioning.

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Operator   [16]
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 There are no further questions in today's conference call. I will now give you back the floor for your final comments.

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 Antonio Llarden Carratala,  Enagas, S.A. - Executive Chairman   [17]
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 Thank you very much everyone. This conference call is called off.




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