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Edited Transcript of ENG.MC earnings conference call or presentation 16-Oct-18 7:00am GMT

Q3 2018 Enagas SA Earnings Call

Madrid Oct 16, 2018 (Thomson StreetEvents) -- Edited Transcript of Enagas SA earnings conference call or presentation Tuesday, October 16, 2018 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Antonio Llarden Carratalá

Enagás, S.A. - Executive Chairman

* Antonio Velázquez-Gaztelu

Enagás, S.A. - Director of IR

* Marcelino Oreja Arburúa

Enagás, S.A. - CEO & Executive Director

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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

* Jorge Guimarães

Haitong Bank S.A., Research Division - Equity Research Analyst

* José Javier Ruiz Fernandez

Macquarie Research - Analyst

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Presentation

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Antonio Velázquez-Gaztelu, Enagás, S.A. - Director of IR [1]

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Good morning, everybody, and welcome to this conference of result of Enagás corresponding to the 9 first months of 2018. The results have been published this morning before the opening of the market, and they are -- they were made available on our website, enagas.com.es (sic) [www.enagas.es]. The conference will be 20 minutes approximately. And after that, we will have a Q&A session, and we will try to respond to the questions as accurate as possible.

Without further ado, let me give the floor to Mr. Antonio Llardén, our President.

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Antonio Llarden Carratalá, Enagás, S.A. - Executive Chairman [2]

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Good morning, ladies and gentlemen, and thank you for attending. If you have had the presentation with all the information and figures, first thing this morning, I will focus -- we will focus on the 7 topics that we believe are most relevant. Excuse me, but my voice is not very well today.

To begin, I would like to look at the executive summary of the results of these first 9 months, which are fully in line with the target we set for the year, both in terms of growth and cash flow generation.

The net profit is 1% up on the first 9 months of 2017 without including, obviously, the accounting effect derived from the revaluation of GNL Quintero in 2017. This growth has been possible mainly thanks to the control of operating and finance costs, on the one hand; and on the other hand, which is good news, the strong progress made by our affiliates, which now contribute 20% of the net profit after taxes.

The ratio of funds from operations on net debt is very good, 16.8%. And finally, as you can see, our net debt continues to fall. More than 80% of our net debt is fixed rate. And you can see on the chart that we don't have any significant maturities until 2022.

Second item, our investment, I'm going to talk about TAP, Swedegas and South Peru Gas Pipeline. The TAP pipeline has reached 79% completion, according to the data provided by TAP's executive management. As everybody knows, the current situation in Italy is quite delicate. In this regard, the management team of TAP is undertaking very efficiently the necessary measures with the Italian government. The permits required, and this is very important, to work in the region have now been obtained. And as you remember on the conference call of July, we didn't have this at the moment, so we trust that all is progressing satisfactorily.

In Albania and Greece, all permits have been obtained and work is being completed in the expected time frame. And lastly, which is very important as well, TANAP, the Trans Anatolian Pipeline, the pipeline that precedes TAP, is now operational and supplying natural gas to the Turkish market.

In terms of Swedegas, on September 3, Enagás and Fluxys announced that the agreement for the joint sale of our shareholding in the transmission system operator from Sweden, owner of a gas distribution network in Sweden. The transaction, we believe, may be completed by the end of this year, 2018, or at the beginning of 2019, depending on when the competent authorities in Sweden approve it, the Konkurrensverket. The sale will represent a return for Enagás in terms of net IRR of more than 10%. And this fits very well with the strategy already announced to turn over of assets outside Spain to enter into potential new investments.

In terms of GSP, on July 2, as published in the relevant fact, Enagás filed for the start of arbitration proceedings before the ICSID with the Peruvian state under the terms of Agreement for the Promotion and Reciprocal Protection of Investments, APPRI, entered into between the Republic of Peru and the Kingdom of Spain. The ICSID has accepted the request for arbitration, and the time frames and proceedings established are progressing as expected. We are at the disposal of the Peruvian state to negotiate an amicable solution.

Third point. Third item, in terms of the demand of natural gas in Spain. During the first 9 months of the year, it's been growing by 1.7%. And we expect that July -- that 2018 will end with a total volume of demand as seen last year. We have an increase last year of 1.9%. Since 2014, demand for gas -- natural gas has grown in Spain at an average rate of 5% a year. And in line with the estimate, it looks that it could continue growing at a much rate and steady pace 2018-2030.

Now in terms of regulation, we are going to see, for the novelties for this period, the most significant thing is that in September, the CNMC has published 2 nonbinding reports. The first one is a public consultation document on the proposal for new regulation of the services rendered by regas GNL plants. This report promotes -- suggests flexible cost for higher yield of regas plants, something that we've been discussing in Enagás for a while.

The second document, which is economic and financial analysis of the main companies that -- carriers of the gas sector. This document refers to the new regulatory period that will start January 2021. For the demand date, I was referring to in the previous item, our estimates is that for 2018, the Spanish gas system will start creating excess and this trend on surplus -- I'm sorry, and this trend will continue in the next year. The strength and the financial equilibrium of the system allows us to think that this framework will be stable until 2021, and the return will be appropriate for Enagás.

Fifth item. We are set to meet the targets set for 2018, which are as follows, 3: solid cash flow generation and strong deleveraging; the second item -- important item is net profits stood at EUR 443 million, reflecting a 1% growth without including the accounting effect from reappraising, in line -- which is in line with the target announced for the 2016-2020 period at an annual growth rate of 3%; and lastly, increase dividends by 5%.

Sixth item, which is very positive for us, we can say that we remain leaders in sustainability, and this has been demonstrated in the last -- in the most recent review of Dow Jones Sustainability Index World, which is the global benchmark for sustainability.

In addition, we have to say that after 10 years -- and this index is for numerous classes for companies, as one new company comes in, another one has to go out. So after 10 years, we have been world leader in the oil and gas storage industry.

Last week, just to finish with this topic, we received also good news because Enagás, as we know, is the first Spanish company to be included in the Equileap ranking on gender equality.

Lastly, seventh item, we are staunchly committed to the energy transition and the decarbonization of the gas network in Europe. The Gas for Climate Consortium, which includes Enagás, presented an action in Brussels to boost the use of renewable gas in European gas infrastructures.

And also, and you have seen that on the news that we collaborate with other companies in developing production technologies from solar energy, oil promotion, biogas projects.

Also we participate -- we actively participate in core LNG gas type initiatives to promote the use of natural gas for transport, in particular maritime transport ships. Furthermore, the European Commission has recently selected the second phase of this project called LNGHIVE2, which promotes LNG as sustainable fuel.

In this regard, in the first few months of 2019, we will present you with an update of our projections for this 2019-2023 period, which will include for the first time some investment figures and projects related to decarbonization process: biomethane, hydrogen and projects related with the promotion of use of natural gas for transport.

Let me conclude by saying that our results for the first 9 months are in line with the targets set for 2018. Any small variations that may occur will be attributable to the completion of transactions at the end of this year or at the beginning of 2019.

We remain leaders in sustainability. We are of the role of natural gas in the energy transition, and we are aware of the opportunities we have in the decarbonization process. We continue to strengthen our financial position. This will allow us to continue considering international investments and new projects in Spain related mainly to biogas and hydrogen.

And lastly, I would like to reiterate that in February 2019, with the final results of 2018, we will present you with an update of our forecast for 2019-2023.

I would like to thank you for your attention and now invite you to ask as many questions as you wish. As usual, we will endeavor to answer as fully as possible.

The moderator for the Q&A session is the Director -- the CEO, I'm sorry.

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Marcelino Oreja Arburúa, Enagás, S.A. - CEO & Executive Director [3]

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Good morning, everybody, and let's start this traditional Q&A session.

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Questions and Answers

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Operator [1]

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Good morning, ladies and gentlemen. The Q&A session will start now. (Operator Instructions) The first question will be done by Javier Suarez of Mediobanca.

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Javier Suarez Hernandez, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [2]

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These are my 3 questions, actually. The first question is concerning nonbinding documents provided by the regulator, you mentioned them. Could you please give us some details about your reading, your take on this document, returns, ratios? And I would like to know if you can provide us with further detail on your opinion on -- of this document and the profits that might entail for Enagás. First question. Second question is the political scenario in Spain. An agreement has been reached to support general budgets in Spain with the socialist administration and many details on the energy sector, especially power supply, but also gas supply. I would like to know what's your take on the Enagás situation facing the potential new measures that we'll be taking during the first quarter of 2019 and if this is going to affect your company. And also, the TAP project, there was a meeting between the administration of Puglia and the Italian government to talk about the TAP project. Could you please give us some details about this and how this will be implemented?

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Marcelino Oreja Arburúa, Enagás, S.A. - CEO & Executive Director [3]

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Thank you, Javier. My name is Marcelino Oreja, and I'm going to answer to your questions. First of all, In terms of the CNMC report, they are not binding. And the goal is -- the goal we want to set, new services in the gas Spanish system, and we want to use plants for things that are not used today, transshipment, bunkering in plants, so many things could be done. But we believe that this is important for our gas system. In terms -- to answer to your second question on the document signed between the government and Podemos political party, this will not affect the gas system. The gas system is balanced. We believe, 2018, we -- in 2018, we got a surplus. We paid our debt, especially this will be completed in 2022, '23. This is important for this energy transition period, so we will not be affected by big changes in the gas system. And thirdly, and as far as TAP is concerned, to our knowledge, the project is going well. 90% of the project has been completed in Greece, 80% has been completed in Albania and 50% in Italy. So it will be completed in time in 2020. This is what we believe. But it is difficult to foresee what is going to happen within the next month. So the landing part of the project will be difficult, but we believe this is going to be completed in 2020. Thank you very much.

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Operator [4]

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Next question, Jorge Guimarães from Haitong.

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Jorge Guimarães, Haitong Bank S.A., Research Division - Equity Research Analyst [5]

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Would it be possible to clarify further in terms of regulation over remuneration and activity over the last years and how can this impact the regulatory decisions for the years to come?

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Antonio Llarden Carratalá, Enagás, S.A. - Executive Chairman [6]

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Mr. Guimarães, it is difficult for us to give you further details because the new regulation has been -- will be implemented in 2021, so we will be analyzing the new regulation. At that time, we have '18 -- 2018, 2019, 2020 to analyze. So the gas system aims at avoiding deficit and effectively use our infrastructures. So retribution is okay for this category, including the technological effort it requires. So providing you with further detail of the new regulation to, as years before, is difficult. The model will be changed, of course, and that it could be that the new model will be implemented soon. But it's a little early to talk about the new regulation and -- because we still have 2.5 years for the implementation of the new regulation.

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Operator [7]

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Next question, José Ruiz from Macquarie.

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José Javier Ruiz Fernandez, Macquarie Research - Analyst [8]

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I only have one question, which is a little difficult maybe. I would like to know if you are participating or not in the discussion on energy transition. Could you please share with us what the government thinks about it? The government obviously talks about 2 scenarios: closing coal companies or plants and nuclear plants and come up with a combined plants. Facing this scenario, the demand for gas will increase. So could you please share with us any idea facing this scenario?

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Antonio Llarden Carratalá, Enagás, S.A. - Executive Chairman [9]

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Yes, thank you, José Ruiz. I cannot tell you what the government thinks about this in details. But let me tell you, however, that in terms of transition and climate change and decarbonization of economy, gas will always be an ally facing any scenario. The appearance of reduction of coal for energy generation or the reduction of nuclear energy, the gas will be a replacement for electricity creation. But the gas demand in Spain, only 1/3 is used for power supply generation. The other 2/3 are for households use and then industries. So there are no alternative yet. So gas is a necessary energy for many industrial processes still to produce good gas as needed. So we'll be there for quite a high number of years. And we are betting for renewable gas. We need to introduce renewable gas in our network for the electrification of industrial sectors.

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Operator [10]

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Ladies and gentlemen, there are no further questions in the English channel. Now we're going to hear a question

(technical difficulty)

The first question comes from Harry Wyburd from Bank of America.

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Harry Peter Wyburd, BofA Merrill Lynch, Research Division - VP and Junior Analyst [11]

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Three from me, please. So firstly, just on the CNMC documents, I just wanted to ask a very narrow question on the RCS allowance. I think some of the documents mentioned a review of that. So could you give an idea of whether you think that RCS allowance will continue or they will be scrapped and what it might be replaced with? And then secondly, you got -- 20% of your net income is now coming from affiliates. Can you give us an idea of the FX exposure there? So do you -- is the FX a big deal now? I think [Terra's] in dollars, but you've also got some LatAm currencies in there. So can you give us an idea of your FX exposure this year? And then just on Swedegas, can you just give an idea why you sold out of Swedegas? Obviously, you've got some upheaval in LatAm. So what led you to sort of concentrate your bets in LatAm and withdraw from a Northern European asset?

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Antonio Llarden Carratalá, Enagás, S.A. - Executive Chairman [12]

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Thank you very much, Harry. Let me answer your questions. First and foremost, about the document from the CNMC and the review of the RCS, indeed, the CNMC proceeds to do a global review of that system, of the retribution system for gas companies. And that will include, if relevant, the scrapping or replacement of the RSCs with a different retribution system. We thought that it was very positive that the RCS linked us to the demand, and it made us co-participate in the demand of gas in Spain. And we hope that in the new reformed deals, they include a new mechanism that includes gas demand amongst our goals and objectives through perhaps a level of retribution, RDS or RCS or linked to the walk. We will be willing to look into whatever is foreseen, and we will try to deal with the government so that we can help them establish a fair and incentivizing gas policy. So the currency exposure and the FX, as you know, the debt of our investments is done with the same currency of the investments of those companies, therefore the effect is quite limited. Only EUR 3 million to date, this year, is what is affected by the exchange rate this year. And we got to improve that and the results of our affiliates, which is 20% of our net profit. And as for Swedegas and why we've decided to take action, that action with Swedegas, we thought that it made a lot of sense to make that investment. Initially, we did that initially with Fluxys, its partner, which is a good reference for us. Secondly, we're doing that in a market where investments for renewable gas and new types of gas were emerging. And the first bank in GNL biogas operation has taken place in Sweden, and we've learned from that, but we think that there's no growth in the area. We think that we need to be present wherever there is growth in our activity or a neighboring activity that could lead to growth. And in Europe, we think that we can add more value in the Southeast of Europe, which is where we're present in TAP and so on in those areas and in the areas where we are already present in North America and South America. Therefore, with divestment, seeks to reinvest those profits in the countries where we are already developing our activities. Thank you.

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Operator [13]

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Ladies and gentlemen, there are no further questions in the conference call. I now give back the word to the company. Thank you.

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Antonio Velázquez-Gaztelu, Enagás, S.A. - Director of IR [14]

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If there are no further questions, we are going to close the conference. We dearly thank you all for the kind attention that you paid this morning to our presentation of results. Thank you.