Half Year 2018 Naturgy Energy Group SA Earnings Call
Jul 26, 2018 AM UTC
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GAS.MC - Naturgy Energy Group SA
Half Year 2018 Naturgy Energy Group SA Earnings Call
Jul 26, 2018 / 10:00AM GMT
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Corporate Participants
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* Abel Arbat
* Carlos Javier Ãlvarez Fernández
Naturgy Energy Group, S.A. - CFO
* Jon Ganuza
Naturgy Energy Group, S.A. - Director of strategy
* Steven Fernández
Naturgy Energy Group, S.A. - Director of Capital Markets
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Presentation
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Abel Arbat, [1]
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Good morning, everyone, and welcome to Naturgy's results presentation for the first half of 2018. This is Abel Arbat speaking from the capital markets team at Naturgy.
This is the first reporting we present as the new Naturgy and under the new divisional structure. As such, and given the relatively short period of time since we presented this Strategic Plan, I will ask for your patience as we endeavor to continue improving on how we present our results in order to increase transparency and make your life easier in following the company and its performance.
For this purpose, you will find restated quarterly figures at EBITDA level according to the new divisional structure in the appendix of the first half financial report.
By way of agenda, the results will be presented by our Capital Market Director, Steven Fernández, together with our Controlling Director, Jon Ganuza, and our CFO, Carlos Ãlvarez. At the end of the presentation, we will open up for Q&A. We remind you to please submit your questions to the webcast and during the course of the presentation.
And without further addition, I will hand it over to Steven.
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Steven Fernández, Naturgy Energy Group, S.A. - Director of Capital Markets [2]
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Good afternoon, ladies and gentlemen. Following this morning's results publication, and of course, mindful of your time today, we would like to focus on a few key points before opening up the line for questions, as Abel mentioned.
Before starting, we would note that today's presentation marks the first set of results following the Strategic Plan unveiled at the end of June. And as a result, none of the expected positive impacts are reflected in the H1 numbers. As the year moves forward, we'll start seeing some of the first effects.
Now onto the key highlights of the first half. As we detailed in this morning's release, the first half of the year saw activity growth in the Gas & Power business unit, notably in Q1, and stability in the infrastructure business. Taking into account nonrecurring effects, explained later on, recurrent EBITDA for the period rose 6% to EUR 2.1 million. This EBITDA performance is not impacted by the new efficiencies program, which has started in H2 and which should start showing in the results during the second half, including around EUR 100 million of capture costs for the year, mostly recognized in Q3. One visible impact on H1 results stemming from the start of the Strategic Plan has been the EUR 4.9 billion write-down announced during the Capital Markets Day. As a reminder, this write-down is a result of a thorough asset valuation review using the exact same assumptions applied to the Strategic Plan. Its impact is a one-off for 2018 with positive implications moving forward.
In terms of net profit, it increases by 22% on a recurrent basis, which is a solid performance, in our opinion, in light of the market environment.
During the first half of the year, Naturgy has all been busy investing with a focus on value creation, with more than 70% of the CapEx dedicated to growing our existing asset base. As part of our commitment to the market, as Abel mentioned, we've also taken the first steps to revamp our reporting with a new perimeter, a more granularity of information, which we hope will be useful to you. We plan on introducing further improvements as the year moves on.
It should also been noted that the company will be distributing a EUR 0.28 per share dividend on 31 July, and this is the first of 3 dividends against 2018 results that the company will pay and which will total a minimum of EUR 1.30 per share, that's up 30% versus 2017.
Finally, we are pleased to report that after the release of the new Strategic Plan, S&P has reaffirmed the rating on the company at BBB, stable outlook, which is a positive sign on the view of the plan.
If we move on, as previously mentioned, these first half results have been affected by a number of nonrecurring effects, negative on the first half of 2018 and positive on the same period of 2017. In particular, the first half of 2018 has been affected by around EUR 100 million of nonrecurring items at the EBITDA level, of which I would highlight basically three: first, gas transfer and procurement retroactivity effects with an impact of around EUR 38 million; secondly, extraordinary expenses in Chile related to fire prevention measures, which amount to around EUR 32 million; and thirdly, restructuring costs of around EUR 24 million.
In terms of net income, the key elements to bear in mind on top of the ones already mentioned are obviously the asset write-down as well as other impairments carried out ahead of the Strategic Plan, offsetting the capital gains booked for the disposal in Italy during Q1.
Similarly, although it's inherent to our activities, performance has been negatively affected by the devaluation of the various currencies under which we operate, and this has led to an overall impact of around EUR 106 million at the EBITDA level compared to last year.
In summary, as you can see, the H1 results have been impacted by non-recurrent items and FX.
One of the key aspects of these results is the asset write-down. The thorough asset valuation review, as I mentioned previously, is consistent with the new Strategic Plan hypotheses and assumptions, the new business structure and the financial projections of such businesses going forward. This exercise, together with other impairments carried out ahead of the Strategic Plan, have ultimately led to a EUR 4.9 billion write-down in the first half of the year. And as you can see on the slide, the bulk of the write-down corresponds to the Spanish conventional power generation assets, together with their associated goodwill, which, in total, have led to a EUR 3.9 billion impairment. On top of this, another sizable write-down corresponds to our associate company, Union Fenosa Gas, the 50-50 joint venture with Eni, which has incurred an impairment of approximately EUR 500 million. I would also like to highlight that this is a one-off on our results, which has no impact whatsoever on our ability to distribute the committed dividends. And moreover, the write-down will have a positive cash impact in 2018, as you can see on the slide and will be EPS accretive from 2019.
Now moving onto our business positioning and an update there, too. First, we have finally completed the disposal of our businesses in Italy and Colombia as well as 20% minority stake in Nedgia, receiving proceeds of around EUR 2.6 billion in the period, and this is well known.
Secondly, we have reclassified Moldova, Kenya and Kangra businesses as discontinued operations, given the high likelihood of achieving an exit soon. And in fact, we have already signed an agreement to dispose of the assets in Kenya and Kangra, which are expected to translate into proceeds of approximately EUR 80 million once completed.
Finally, we are redeploying some of these proceeds into core businesses and activities, which meet our golden rules as defined in the Capital Markets Day. And examples of these could be the renewable awarded projects in Spain or the recently acquired solar projects in Brazil.
So in summary, we are making progress in positioning the group into those businesses, which have the most value-creation potential.
Finally, as you remember, one of the key pillars of our Strategic Plan is shareholder remuneration. So as anticipated, the Board of Directors has approved the first interim dividend of EUR 0.28 per share payable on 31 July, which commits -- which is consistent with the shareholder remuneration policy that we announced and which commits to a minimum EUR 1.30 dividend per share against 2018 results. Again, a reminder, this constitutes a 30% increase versus the previous year. In terms of cash, because of the timings, this means that, in 2018, the company will distribute dividends amounting to a total of EUR 1.40 per share.
At this point, I'd like to underscore the relevance and the importance of our EPS commitment. This commitment is [capped in] stone and is completely independent of operating performance, thus providing certainty and visibility of a growing EPS over the life of the Strategic Plan.
Finally, as regards to shareholder remuneration, we will start executing our share buyback during this second half of the year.
If we move on to the consolidated results. Looking at the evolution of our operating activities and consolidated EBITDA in the first half of the year, you can see in Slide 10 that we have excluded the nonrecurrent items explained earlier on to reflect the evolution of our operations on a recurrent basis. So as a result, recurrent EBITDA is up 6% in the period, mainly supported by the improvement in the Gas & Power business unit. As we will review in the following pages, our infrastructure businesses have also been affected by the negative evolution of exchange rates, with a negative impact of around EUR 106 million compared to the first half of the previous year, which is presented here, again, as an inherent part of our recurrent operations.
Finally, it's worth noting that the implementation of the new efficiency plan is underway and expected to start yielding visible recurring savings from the second half of the year. In fact, the company has launched a new OpEx committee to oversee and approve all expenses above EUR 30,000, scrutinizing every cost and its real need on a case-by-case basis and supervising the OpEx performance of each business unit to ensure the delivery of the new efficiency plan.
Now let's turn to analyze the evolution of the net income in the first half. Figures here also excludes nonrecurring items explained earlier on, and of course, notably, the write-down carried out in the period. So as a result, recurrent net income in the first half of the year reached EUR 532 million, which represents a 22% increase versus H1 2017 and has been supported by recurrent activity growth on lower financial expenses with the average cost of debt reduced to 3% from 3.4% in the same period last year. Our equity affiliates have also improved their contribution in the quarter, notably Union Fenosa Gas.
So in summary, H1 results show a solid recurrent net income supported by activity and lower financial expenses.
Finally, before going to the business units, a quick word on cash flow and net debt. We have generated operating cash flow in the period of EUR 1.4 billion, that's 19% more than in the first half of 2017. Cash investments amounted to around EUR 770 million, that's 4% more than the previous year, mainly as a consequence of the growth CapEx deployed in the development of the new renewable projects awarded in Spain and abroad.
In addition, we would like to highlight that the company has put in place a new CapEx committee to approve all investments above EUR 200,000 to guarantee that all growth CapEx meets our golden rules.
In terms of net debt, you can see that there's been a decrease to EUR 12.4 billion in the first half of 2018, which is equivalently -- equivalent to approximately 3.2x net debt to the last 12 months EBITDA. This deleveraging is mainly the consequence of the EUR 2.6 billion proceeds received in the completion of disposals. However, it should be noted that this decrease obviously does not take into account the EUR 950 million paid in dividends over this month of July.
We have also continued to be active in debt optimization and liability management, which has allowed the group to reduce the average cost of debt by around 40 basis points to that 3% that we mentioned previously. And again, just to re-emphasize, following the review of our Strategic Plan, S&P something has confirmed its rating of BBB with a stable outlook.
And at this point, I'd like to hand over to Jon Ganuza, who will go over the business units.
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Jon Ganuza, Naturgy Energy Group, S.A. - Director of strategy [3]
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Thank you, Steven. Good morning, everyone. Let's spend some time reviewing the operating performance of each of the 4 business units.
And starting with Gas & Power, the increase in recurrent EBITDA has been of 27%, and that has been mainly due to the increase that we've seen in Gas & Power service sales and international LNG business. In the Gas & Power supply business, we have to differentiate between 2 different patterns. The first one, what we've seen in the gas and services where we see a solid behavior, but as far as electricity sales is concerned, we have to differentiate between what has happened in the first quarter and what we have seen in the second quarter. At the beginning of the quarter, we've seen pool prices in the order of EUR 48 megawatt hour. By the end of the second quarter, those prices have risen to almost EUR 60 megawatt hour. That's impacting negatively on the margins that we have on the fixed-price electricity sales that were done before the second quarter 2018, and this is something that probably is going to move forward looking at the forward prices that we have for the second half of 2018. We are actively managing our client portfolio, trying to mitigate the current scenario that we could see from the forward prices.
Regarding international LNG, we have to say that the first quarter has been extraordinary. First of all, in the first quarter, it has been a tight winter as we have seen in previous years, but the truth is that the prices have been higher than, for example, previous winter. But most unexpected has been the behavior that we've seen in the second quarter where, despite being a summer month, the prices -- spring months, the prices that we have seen were higher than were expected. So I think that's something that we -- to say is that the current results that we have seen in the first half of 2018 for the LNG business are extraordinary and therefore should not be used in order to extrapolate the results of the LNG. Though I want to emphasize one thing: the increase that we've seen, EUR 70 million, is not only due to the prices. It's also due to the fact that we have an increase in the order of 50, 20 terawatt hour because we have new supply contracts.
Regarding generation. The performance that we have has been mainly condition due to 2 factors. First of all, on average, in the first half, the pool prices have remained more or less the same between -- in 2017, it was EUR 51 megawatt hour. In 2018, it's EUR 50 megawatt hour. But the pool -- the CO2 prices have increased a lot. So first half of 2017, we had EUR 5-ton CO2 prices, and by the end of the second quarter, we were looking at CO2 prices of EUR [16] megawatt hour. That has impacted negatively on our thermal generation base.
On our CCGTs, our production has kept more or less constant. Our spread has decreased, and on our carbon generation, coal generation, it has affected both our production and the spreads that we were getting. It's true that in the same period, it has increased the generation that we had from the hydro, but that has not been able to offset the negative results that we have had due to the -- increasing the CO2 prices.
In international power generation, we have had an increase of the installed capacity, mainly due to the 68 megawatt hour photovoltaic project that came online in Brazil last year and also due to the increase of the installed capacity that we obtained on existing CCGT assets due to high fogging procedures that allowed us to generate greater excess volumes. This increasing results have been offset by an FX effect of around EUR 17 million.
Finally, let me underscore that these results do not reflect the positive impact of the new Algerian contract, which will be reflected retroactively from the beginning of 2018 once completed. We expect completion of this contract will occur during the third quarter of this year.
Moving now to our infrastructure business in EMEA. The current -- recurrent EBITDA has increased by 1%, and we have to differentiate between gas networks in Spain, where we have seen an increase on the demand of around 3%, but this has been offset by the lower metering revenues due to the regulatory review that we had last year. That has had a negative impact in this quarter -- in this half of around EUR 20 million. I want to stress that this effect has been already taken into account in the Strategic Plan that we presented in London. So this is not a new effect. It has been already taken into account. We are also seeing an increase in the -- in our growth activity that has led to an increase in the CapEx that we have in the gas distribution activity in Spain.
In electricity -- in the Spain electricity networks, there is one -- a slight increase on the demand, but let's be clear that, that's not the main driver of the revenues that we have in electricity Spain. The main driver is the increase that we have in our regulatory asset base, and there, we have had a slight increase. And on the quality side, on the first quarter of 2017, we had a bad performance due to the storms that we had there, and now we see that there's a significant increase.
In EMPL, there has been a slight increase in the results on one side due to the fact that the EMPL business is -- the revenues are indexed on a yearly basis, and also, we have had extra volumes that had allowed us to have extra revenues, but due to the fact that these revenues are dollar based, this has led to a negative impact of EUR 70 million.
In summary, resilient performance despite the negative effects from the gas meter remuneration in Spain and evolution in the exchange rates.
Moving on to our infrastructure business in South LatAm. I think that here we have to distinguish between what has happened on a recurrent basis, what has happened on the nonrecurring items, where basically, the main impact has been the one that Steven has already mentioned due to Chile extraordinary expenses, and also, we have had an important FX impact that amounts in the total of Infrastructure South LatAm to EUR 58 million.
Why has this happened? Basically because as we have said in the presentation in London, on the long term, depreciation should be netted out by inflation. But what has happened in this first half? If we look, for example, at Brazil, the real has devaluated 20% in this first half of the year whilst the inflation that has been taken into account into the indexation of our tariff is 3%. In Argentina, the devaluation that we've seen in this period is 54% while the inflation in the period has been 28%. And the same has happened in Chile. This is something that means that, on the short term, all the results that we're seeing in this first half of 2018 has led to a negative FX impact, but we expect that, over the long run, there should be a convergence, and we should see this turn into a positive effect in the following quarters and following years.
Going into the specifics of each of the businesses. In Chile electricity, there has been an increase of demand of 3%, but this increase has not been enough in order to offset the adjustment, tariff adjustment, that we have related to a scale that meet -- that the demand growth must be in the order of 4.5%. In Chile gas, we have grown our customer acquisition by 26% if we compare it with the first half of 2017. Demand in distribution has been flat, but there has been a slight decrease on the demand for the sales that we have with generation. All that, in conjunction with an increase of the OpEx due to the fact that we are acquiring more clients, that has led us to a decrease in our results in Chile gas.
In Brazil gas, I have to -- one of the main effects, of course, is the FX that has led us to minus EUR 23 million due only to FX. As far as the volumes is concerned, in the low-margin segments, we have seen a decrease in generation and in industrial. But in high-margin segments like, for example, residential and domestic, the demand remains flat.
In Argentina, what we are seeing already in the results is the tariff increase that we already said in the past presentation so in the Strategic Plan. So we are moving in line with the main hypothesis of the Strategic Plan, though, as we said at the beginning, the devaluation that we've seen in the short term has not been able to be offset by the inflation, and therefore, this has led to a negative impact of EUR 60 million. I must stress that in the case of Brazil and in the case of Argentina, moving forward, this effect of the devaluation, if we take into account the forward curves, we might see that -- a worsening in the next 2 quarters.
In summary, the performance of the infrastructures of South LatAm has been affected by FX and its inflation effect as well as by some nonrecurrent items, mainly in the case of Chile.
Finally, moving to North LatAm. Results have been impacted by temporary factors and negative evolution of FX, the same as has been explained before in the case of Infrastructure South LatAm. In the case of Mexico, what we've seen is a decrease in the sales on the segments with lower margins but higher volumes, mainly industrials and clients that only pay the TPA. But we've seen an increase in the sales in the high-margin segments, residential and commercial. We have also seen a slight increase in the OpEx due to the normalization on the -- some of the prices that we were paying to our suppliers. And in Panama, the demand has increased 8.7%, basically due to the fact that the weather has been colder. But as far as customers is concerned, the increase that we had is higher, and I think that points to the fact that the fundamentals of growth in Panama are strong on the mid-, long term.
Let me now hand it over back to Steven for conclusions.
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Steven Fernández, Naturgy Energy Group, S.A. - Director of Capital Markets [4]
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Thank you, Jon.
So to summarize the first half results before moving into the outlook for the second half. As you have seen, we have experienced activity growth, which has been offset by nonrecurrent FX.
In Gas & Power, we have benefited from a strong Q1 and a good performance in LNG.
In our infrastructure businesses, performance has been stable despite the negative evolution of FX versus last year.
Furthermore, we have registered the EUR 4.9 billion write-down as part of our strategic review, which has led to one-off negative impact on net income of around EUR 3.8 billion.
And finally, note that this is the first time that the company reports under its new divisional structure, and it is our firm intention to continue improving how we present our results in order to increase transparency and granularity.
In conclusion, the new Strategic Plan has had a very limited impact on the first half results of 2018, but we are very confident that the pillars of our plan, and the various initiatives underway will start being more visible on the second half of 2018 and beyond.
In terms of outlook for the second half of the year, we expect improving results on the back of a number of tangible levers, which provide visibility into the second half: first, the gradual contribution of the efficiency plan, which should start yielding positive and visible results from the second half of the year; second, an improved outlook in Europe power generation on the back of higher pool prices and our growing renewal exposure in Spain and abroad; third, the positive impact of the new Algerian gas contracts expected in Q3, as Jon mentioned and retroactive from the start of 2018; fourth, the lower financial results benefiting from a lower cost of debt; and finally, the write-down's positive impact on earnings from the second half of 2018.
Against the improving backdrop that I've just mentioned, we will face one-off capture costs as part of the new efficiency plan. As a reminder, this should be around EUR 100 million. Two, pressure on power supply margins, as Jon has mentioned. And three, a continued FX negative impact.
Finally, let me remind you as well that we will start executing our share buyback in the second half of this year.
To conclude, let us summarize on the progress that we've made so far on the Strategic Plan that we introduced at the end of June. In terms of simplicity and accountability, we've done the write-down with a positive impact on cash and earnings from 2019, which demonstrates a clear transparency and cash flow-driven decisions. We've also done progress in simplifying the group by disposing of non-core businesses, which bring frankly little value added and unnecessary complexity to the company. And we've also introduced a new reporting structure with greater transparency.
In terms of optimization, the new efficiency plan has been launched as well as the new OpEx and CapEx committees, which, by the way, will be critical in delivering the results of the efficiency program.
In terms of capital discipline. We would highlight that there is no M&A in the horizon, and no M&A is concentrated in this Strategic Plan. We are focused on growth, but the growth that we're focused on right now is organic. As an example, more than 70% of the CapEx that we have dedicated in this first half of the year has been devoted to growing our asset base in projects that meet the golden rules.
Finally, in terms of shareholder remuneration, we want to continue to emphasize our EPS commitment regardless of operating performance. And on top of that, to emphasize that we will be buying back shares starting on the second half.
So to conclude, I would simply like to underscore that this is a company that is focused on value over size.
And with that, I thank you for your attention, and I think we're ready to take any questions you may have.
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Questions and Answers
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Abel Arbat, [1]
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Thank you. Thank you, Steven. So very good, so we move on now to Q&A and the questions, which have been
(technical difficulty)
answered through the various explanations throughout the presentation. And some others are of quantitative in nature, and as a result, will be addressed by the capital markets team afterwards. But let's go ahead and start with the Q&A.
We're going to start with the most generic questions. The first question made by various analysts is in relation to guidance with regards to EBITDA 2018 and net income 2018, if we are comfortable versus the consensus.
So I'll address this one first. As we have explained in the presentation, we clearly see a better outlook for the second half of the year based on a number of visible drivers.
(technical difficulty)
completed. We are not in a position to provide more guidance in addition to what has already been explained. But we clearly see a more positive second half of the year.
Moving on to other generic questions. Let's now go into nonrecurrent and one-off items. One of the questions is if we can explain the detailed reasons and explain the EUR 38 million one-off related to gas transport and procurement.
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Carlos Javier Ãlvarez Fernández, Naturgy Energy Group, S.A. - CFO [2]
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Carlos Alvarez speaking. Thank you very much. As you know, we have several discussions, disputes with several suppliers, the transportation supply. In this case, the most part of this nonrecurrent item refers to a dispute with a European transport company, that there is a one-off payment related to discussions with precedent years' amounts, and this is one-off for precedent years. It has no, going forward, more impact for this discussion.
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Abel Arbat, [3]
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Thank you, Carlos. And this -- so there are some analysts as well that question -- the query around whether all these nonrecurring items, besides the one we think will be recorded or not, and the same answer applies. I mean, these are nonrecurring items that we don't expect to see going forward besides what can come obviously from the non-restructuring cost or capturing cost for further efficiencies.
(technical difficulty)
down with regards to Union Fenosa Gas. Some of the questions relate to whether this has any relation to the ongoing arbitration procedures. What's our perspective on Union Fenosa Gas in terms of profitability? Can this asset be an asset for disposal?
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Carlos Javier Ãlvarez Fernández, Naturgy Energy Group, S.A. - CFO [4]
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(technical difficulty)
Related to the write-down that we have provided to the stake, Union Fenosa Gas is a consequence of the new factors that we have in front of us according to the evolution during this period, the six months of this year plus our hypotheses, our ideas into the Strategic Plan. Various terms are relevant in terms of the volumes of that we have projected. Remember, that we have a contract that no molecular gas has received from 2012. That means that this hypothesis has been changed due to the delay of the arbitration process or the results of the arbitration process we have began -- begun against the decision of the company, EGAS. But also because we have no news, no good news but not also bad news, that this is not agreement with this company, in terms to see the short and medium term, some quantities that we're saving for this contract. This is probably the most important issue that we have in front of us in order to consider to revaluate the value that we have in our asset base.
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Abel Arbat, [5]
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Thank you, Carlos. Now moving on to further nonrecurring or specific items. There are some questions relating to the recent news on Electricaribe and the claim, which has increased to $1.6 million. The reality is that the previous estimate of $1 million was not in the claim as such but a preliminary estimate. And after the review that has been done thoroughly, the demand -- the claim put in place is $1.6 million. And Carlos, feel free to add here if...
Okay, now continuing to -- continuing with generic questions. There is one question in relation to the recent M&A rumors and press news that we've read in Spanish press in relation to Naturgy potentially being interested in participating in the expected consolidation in Europe.
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Steven Fernández, Naturgy Energy Group, S.A. - Director of Capital Markets [6]
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So thank you, Abel. This is Steven. The answer is our Strategic Plan, which we introduced less than a month ago or about a month ago, does not contemplate any M&A. There is no M&A on the table right now. We are not obsessed with wealth at all. As I've mentioned previously, we privileged value over size. And as a result of that, you should not expect Naturgy to be an active player right now in the M&A arena. Having said the above, what we've always said is that it's our job also to analyze any opportunities that may be put on the table, and if we were going to be opportunistic about this, if something comes up that meets our very strict golden criteria, then we'll look at it. But if it doesn't meet our very strict golden criteria, we do not need to do M&A to meet our objectives for 2022.
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Abel Arbat, [7]
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Thank you, Steven. There are a number of questions as well related to efficiencies. Few analysts are asking whether we have more visibility on the restructuring costs of EUR 400 million that we envisioned as part of the efficiency plan. And when can we expect to start seeing visible results in terms of efficiencies?
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Jon Ganuza, Naturgy Energy Group, S.A. - Director of strategy [8]
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Here, Jon. I mean, as far as visibility, we already said in London, when we presented the Strategic Plan, that 80% of the savings were already identified. So I think that already when we presented the Strategic Plan, there was a high level of visibility at least internally. Another thing is where the kind of guidance that we -- the disclosure that we're going to make afterwards. Regarding that when we should be starting to see an impact, I think that by the end of the year, we should be already seeing some impact in the OpEx and the OpEx margin that we have in the company.
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Abel Arbat, [9]
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Thank you, Jon. Additional questions in relation to the write-down. The write-down has triggered EUR 200 million, a one-off positive impact in free cash flow in 2018. The question is, will it have any impact going forward from 2019 onwards?
Let me get this one. So the EUR 200 million impact in 2018 relates purely to a part of the assets, which has actually been written off. The rest of the assets, which have not entirely been written off but written down have triggered a deferred tax asset that will be gradually amortized throughout the following years. So as we have explained in the presentation, what you have going forward in terms of D&A is obviously lower D&A as a result of the written-down assets, and you will have as well these deferred tax assets in relation to the written-down assets that we'll be gradually phasing away throughout the following years. And in relation to this, the best estimate we can have with regards to D&A going forward is the figure explained in the presentation where we said that it will have a net income accretion or a net income impact above EUR 100 million per year on average.
With that, I will move on to other questions relating to the buyback. The key questions relating to the buyback relate to when do we start to execute the buyback. Some question around if we have any kind of price level or -- upon which we will not be comfortable carrying out the buyback and so on.
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Steven Fernández, Naturgy Energy Group, S.A. - Director of Capital Markets [10]
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So thank you, Abel. We were basically restricted up until this morning for buying back our shares, first because of the presentation of the Strategic Plan, then for our results. And as I've mentioned in the presentation, our intention is to start the buyback in this second half of the year. So technically, we could even be potentially buying today for all we know. As far as the price level, this is obviously something that we are sensitive to because we want to make sure that the buyback adheres to our golden rules, and this is something that will be discussed in greater detail in the board in September. As far as the amount of the buyback, as you remember, it's up to EUR 400 million. So that's an up to, it could be less, it cannot be more, okay? And I think that covers the question.
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Abel Arbat, [11]
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Thank you, Steven. So let's now move on to the various questions on the specific business units, most of them relate to Gas & Power. I'm going to start addressing the first one. Lots of analysts have queried around the quantitative impact of the contract renegotiation with Algeria.
As we already said, I mean, given that the final agreement still needs to be confirmed by the council of ministers in Algeria, we are not in a position to disclose any quantitative details at this stage. Nevertheless, we expect to complete this contract this quarter and be in a position to do so. But nevertheless, I mean, we can say that we are very happy with the terms obtained, and in particular, I would like to highlight a few elements: first of all, we are indeed improving the economic terms in the sourcing of cash versus the former conditions; second, we have obtained more flexibility to navigate the seasonality during the year while also lowering potential risk of take-or-pay. And third, we believe that we are now better positioned to negotiate the potential renewal of the EMPL concession with the Moroccans.
Now continuing with the rest of the questions regarding Gas & Power, there are lots of questions as well, in particular on the evolution of Gas & Power supply or commercialization in Spain. Some of the analysts recognize that Q2 seems to have been a more challenging or harsher quarter compared to Q1, and as a result, a query about that. And also, what's the outlook in respect of this particular business line for Q3 and Q4?
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Jon Ganuza, Naturgy Energy Group, S.A. - Director of strategy [12]
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Here, thank you. Abel, Jon here. I mean, issue that Q2 is starting to be a challenging quarter. That is also true that most of the nonrecurrent items that we've seen in Gas & Power are also in that business and in that quarter, so I think that's something that must be taken into account. So when you see 2 quarter vis-Ã -vis 2017, you should also think that a sizeable part of the nonrecurrent items are there, and that's something that maybe improves the performance of the business when you're looking at it. It's true, and I tried to emphasize that when I did this presentation, there has been a deterioration on the results that we're getting in the electricity part of the Gas & Power service sales, mainly due to the fact that there has been an unexpected increase in the pool price that was not taken into account, and no one foresaw it a few months ago in the forward curves. And that means that the prices -- the sales that you make on a fixed-price basis, they are going to be impact negatively if the price increases [some after] forward that it did. Looking at -- today, we look at the forward curves for third Q and fourth Q, the prices now are going to be over EUR 60 megawatt hour. That means that we will see an erosion on the margins and also in the results that we will have from the electricity sales side. Having said that, and I want to stress this, it's not something that we are just looking at the forward curves and hoping that they improve. We are actively managing our contract base, and I think that, that's something -- that it should allow us to mitigate the situation that currently we see with the forward curves.
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Abel Arbat, [13]
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Thank you, Jon. Still within the Gas & Power business unit, there are some questions relating to international LNG and its performance, in particular, an analyst point out that LNG's spot prices have a rise and closed to EUR 10 per BTU in recent weeks. Do we expect this to lead to a strong performance in international LNG going forward, in particular, in Q3 and Q4? What's the outlook that we foresee in international LNG?
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Jon Ganuza, Naturgy Energy Group, S.A. - Director of strategy [14]
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We don't give any guidance, and I think that -- it's true that prices people are looking at are fewer spot prices. A part of our sales have been already been closed, that means that we cannot benefit from the increase-on-the-spot prices that we've seen in the past few weeks -- in the past few months. I think that, as I said during the presentation, we have to think of the first half results as something extraordinary, as something that was unexpected. And I think that the most unexpected part were the results that we've seen in the end of the second quarter and we've seen at the beginning of the third quarter. Having said that, I think that what we want to stress is that these results, what we affirm as, is in the outlook and the guidance that we gave for 2022 in our Strategic Plan, but we don't think that is something that should be used to extrapolate the results in the short or in the medium term.
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Abel Arbat, [15]
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Thank you, Jon. There's another question in relation to gas and the question relates to which contracts -- which gas procurement contracts are attached to gas, electricity and services supply? And which procurement contracts are attached to the LNG international activity?
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Jon Ganuza, Naturgy Energy Group, S.A. - Director of strategy [16]
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Well, as we said several times in the past, the way we use the procurement contracts is to optimize the global position that we have. Therefore, there is not an explicit assignation to each of the business. It depends on the global conditions, and that's part of the way we are able to create value out of our gas contracts, is to optimize, seeing which are conditions in each of the moment. So I would not say, and I think that there is no way to say that some contracts are associated to any one of the businesses.
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Abel Arbat, [17]
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Thank you, Steven. There's -- thank you, Jon. So continuing with Gas & Power. Some of the analysts recognize that gas commercialization in Chile is now back into the Chilean business unit as opposed to where it was the previous quarter, which were -- it was reported as part of gas supply. And the question relates to can we extrapolate the dynamic that we see in international LNG to Chile and its gas commercialization activity? Or what are the dynamics that we are seeing in gas commercialization in Chile?
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Jon Ganuza, Naturgy Energy Group, S.A. - Director of strategy [18]
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Thank you, Abel. We cannot extrapolate it. The dynamics of the gas supply business that we have in Chile, basically there are 2 drivers. First one has to do with the gas sales that are done through our gas distribution businesses, and those are basically related to the pass-through price that we have and it's fixed in some gas -- the gas flow. And there's also an important part that has to do with the electricity generation in Chile, and electricity generation in Chile is mainly conditioned due to the fact that it has been a dry (inaudible) year.
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Abel Arbat, [19]
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Thank you, Jon. So 2 more questions in terms of LNG. One question is around whether we can give more visibility on the contracts that were to be renegotiated during 2018. And the other question is more of a high-level question in terms of what's our long-term ambition for the LNG business.
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Jon Ganuza, Naturgy Energy Group, S.A. - Director of strategy [20]
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Regarding the first question, I think that -- I would say again, and I would say something that we said already in London, is that as far as the compromise that we -- the commitment that we make for the Strategic Plan, we did not envisage any further renegotiations of gas contracts and take that as an upside, and I would keep -- I would stay in that position. So we are not going to say anything about that. But there's an upside that we saw on the table. Regarding the long-term outlook of the LNG business, I think that there is a lot of speculation regarding to that business, but I'm going to stick to what we say in London regarding at the LNG international business because we have to commit for the time being to the Strategic Plan that we have.
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Abel Arbat, [21]
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Thank you, Jon. So moving on to the last set of questions. These relate to Europe power generation and renewables, in particular. The question relates to the recent excitement that we are seeing in solar in Iberia, given by the new power purchase agreements scheme and the falling costs. So the question is, can we see Naturgy playing a key role in solar in Iberia? Could we see perhaps inorganic growth? How -- and related to this, how do we see renewables affecting pool prices going forward?
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Jon Ganuza, Naturgy Energy Group, S.A. - Director of strategy [22]
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I think that they should ask the people who are saying that they are excited. I mean, since they are the ones who are excited, those are the ones who should be asked, not us. And regarding the pool prices, again, I think we reaffirm on the outlook that we gave on the Strategic Plan, though we are always aware that, that's an average, and that's how we see that, in the long term, is going to evolve. When we look it day by day and year by year, there's always a level of volatility, and I think that, that's something completely different, and the productivity regarding that is relatively low.
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Abel Arbat, [23]
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Thank you, Jon. So there are no more questions relating to Gas & Power and to the other remaining business units, there's only one question related to Infra LatAm South, which is regarding the tariff regulatory view in Argentina, and we will just confirm, as we said during the presentation, that new regulatory tariff is already active and effective and implemented since April 2018. And as a result, we don't see any delay or nothing. I mean, it's already in place.
So with that, this was last question. There are a few questions of a more quantitative nature that the capital markets team will address and will follow up on in due course.
And with that, I would thank you, everyone, for your assistance and your questions. And nothing else to say. Thank you, and goodbye.
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Steven Fernández, Naturgy Energy Group, S.A. - Director of Capital Markets [24]
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Thank you. And for those fortunate enough, enjoy your holidays, and we'll catch back in September. Thanks.
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