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Edited Transcript of REE.MC earnings conference call or presentation 31-Jul-19 8:00am GMT

Half Year 2019 Red Electrica Corporacion SA Earnings Presentation

Madrid Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Red Electrica Corporacion SA earnings conference call or presentation Wednesday, July 31, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* María Teresa Quirós Álvarez

Red Eléctrica Corporación, S.A. - CFO

* Roberto García Merino

Red Eléctrica Corporación, S.A. - CEO & 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 Fernandez Garrido

JP Morgan Chase & Co, Research Division - Head of Utilities and Senior Analyst

* Javier Suarez Hernandez

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, we are about to start with our presentation. We would like to welcome all of those who are following us on the webcast.

We are joined by Roberto García Merino, the company's CEO; and Teresa Quirós, our Corporate Director of Economic and Finance.

First of all, our CEO will explain the role that Red Eléctrica is playing in the energy transition as well as the regulatory developments that have been placed in order to support this transition, including the recent publications of draft circulars by Spain's National Commission on Markets and Competition.

After that, our Corporate Director will provide details on the financial results of the first half of the year. Finally, we will be talking about our commitments that are related to the 2018-2022 Strategic Plan. After the presentation has concluded, we will have time for questions and answers.

Now I would like to turn the presentation over to Roberto García Merino, the company's Chief Executive Officer.

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Roberto García Merino, Red Eléctrica Corporación, S.A. - CEO & Director [2]

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Thank you very much, [Ivania], and good morning to everyone. I'm very pleased to have this opportunity to address all of you following my recent appointment by the Board of Directors as the new CEO of the Red Eléctrica.

And I'd like to take advantage of this occasion to share first half company results with you and to analyze the progress that has been made during the first 6 months of this year all in relation to the energy transition.

Red Eléctrica has been called upon to play a key role in that transition and we are fully committed to that role. We intend to contribute the resources and investments that are necessary in order to help make it possible. And this is something we've already clearly stated in the 2018 to 2022 Strategic Plan that was announced by the company last February.

I'll also explain the scope of the new regulatory changes that have recently taken place. And at the end of the presentation I will, of course, be available to answer any questions you may have.

The fight against climate change is now presenting Red Eléctrica with an unprecedented challenge. Now as a company which is responsible for operation and transmission in Spain's electrical system, our obligation is to bring about the integration of new renewable energies, new forms of electricity generation and consumption, while at the same time, making a contribution to lowering energy costs and fostering an increase in energy efficiency.

Now this must be done essentially for 2 reasons. First, because the harm being caused to our planet requires a collective effort from society as a whole, together with a commitment from all Spanish companies to ensure that the energy transition will take place successfully.

And second, because as a company that provides an essential service, it is also our obligation to make a dedicated contribution to turning the energy policy measures adopted by Spain's parliament and the national government into reality.

At the international level, there is the Paris Agreement. While the European Union which is the - of course, the institution that harnesses the political will of all of the continent's citizens, has set out its own roadmap for decarbonization in Europe. And here in Spain, Red Eléctrica is working to ensure that the ambitious goals of our country's Clean Energy Package and the comprehensive National Energy and Climate Plan can be achieved within the time period that's already been established.

Implementation of that plan will represent a significant transformation of the electricity systems' mix of generation sources with the number of stored gigawatts represented by wind power increasing from 22.8 gigawatts to levels of 31 gigawatts to 47.5 gigawatts, with photovoltaic solar technology increasing from 4.4 gigawatts to levels between 40 gigawatts to 77 gigawatts. That will be the range.

Turning to storage. The expansion of pumped storage and battery technologies can definitely be highlighted because they are already providing an additional power level of 6 gigawatts, along with improved ability to manage the energy generated. However, the measures contained in that plan will not only have a positive impact on the environment, they will go even further and that.

They will promote the creation of jobs for more highly skilled workers and they will provide incentives for the development of innovative processes, helping to modernize Spain's economy by mobilizing EUR 236 million between 2021 and 2030. Approximately 18% of that figure, that's more than EUR 40 billion will be earmarked for investments in electricity grids and electrification of the economy.

At Red Eléctrica, we have an obligation to contribute to building a more sustainable economic model. But we also have to participate in the design of a more efficient energy model that is less costly for our consumers. Remember here that electricity transmission activities represent only 4% of the total cost of the Spain's electricity system.

We are working intensively to ensure that electricity is supplied to all of our citizens in this country, while maintaining high quality standards and with a 98.24% availability rate for the transmission grid in -- on Mainland Spain, 97.4% in the Balearic Islands and 98.8% in the Canary Islands.

The availability rates recorded by Spain's electrical system are some of the highest in the world. This is the result of effective and responsible management of operations and transmission, adequate maintenance of the facilities and the development of a grid that allows for coverage of the day-to-day contingencies in the system.

We've also contributed to the increased witness in generation using renewables sources, now accounted for 38.4% with CO2 free generation at over 61%. And our work to integrate clean energy into the grid continues with facilitating and improving access, connection and entry into service for renewable energies.

At the end of May, for instance, there were 28.5 gigawatts of renewable energy already in service and 56.1 gigawatts more with access permission already granted.

Next, I'll explain the regulatory changes that have taken place during the first half of this year. Now, those changes are allowing sound progress to be made towards the energy transition, and also like to discuss with you the draft circulars that have been published by the CNMC in July.

During the first half of this year, 3 key milestones were achieved, representing solid progress to the energy transition in Spain. First, the roadmap required in order to carry out that energy transition and achieve the targets that have been set for 2013 has been drawn up.

And I'm referring here, of course, to Spain's comprehensive National Energy and Climate Plan. In February of this year, the Spanish cabinet, the Council of Ministers approved the submission of a draft version of the 2021 to 2030 comprehensive National Energy and Climate Plan to the European Commission.

Now, that's the document that defines the country's targets for reduction of greenhouse gas emissions and the incorporation of renewable energies and energy efficiency measures, among other things. The submission of that plan has initiated a public consultation period and whole process will culminate with final approval of the plan at the end of this year.

Second, the 2021 to 2026 planning process has been launched. Now this process will allow us to identify the investments in the transmission grid that are needed in order to manage the significant changes that will be taking place in the electricity industry.

This public planning process is structured in different phases -- proposals, preliminary studies, public comments, consolidation and approval -- 6 phases. The proposals phase just ended on the 2nd of June, and the preliminary studies phase has now begun. The expectations are for the new planning to be approved by the end of 2020.

Third, I'd like to point out to you this morning that in the current context of the energy transition taking place both in Spain and in Europe, our country needs to adopt a clear, stable, and predictable regulatory framework. A framework that will provide legal certainty for all of the individuals and entities linked to the energy sector, while taking into consideration, at the same time, the needs of vulnerable groups as well as those of Spanish international investors.

In regard to this, after the passing and the approval of Spain's Royal Decree-Law 1/2019, which sets out a procedure that guarantees independence of the country's regulatory body with regard to the approval of its regulatory circulars, the Ministry for the Energy Transition approved Order 406/2019. Now that order establishes energy policy guidelines for the CNMC, which is the competition markets commission.

Now the guidelines have been designed to ensure the security of electricity supply and the economic and financial sustainability of electrical system, as well as contributing to the fight against climate change.

Now I would like to make a few comments about the draft circulars that were published at the start of this month on the 5th of July by the CNMC.

Now those circulars establish the methodology for calculating the compensation paid for electrical transmission activities and for the systems operator. There's also a circular establishing the calculation methodology for the financial compensation rate.

On the 25th of July too, the CNMC published a draft circular on the model facilities and the unit benchmark values for operations and maintenance.

With the publication of those circulars, the public consultation process that has commenced with deadlines for submission of any relevant public comments set as 9th of August, and 16th of September this year.

In accordance with Spanish Act 1/2019, the Ministry for the Ecological Transition in Spain may issue reports on whether or not the draft circulars comply with the energy policy positions that have already been set out in Ministerial Order 406/2019 and on whether the powers corresponding to the regulator are consistent with those that correspond to the state, the national government.

Now, that legislation includes conciliation mechanisms and intended to allow mutually agreeable solutions to be reached if there are any disagreements, if they do arise between the Ministry of Ecological Transition and CNMC. And now if there are any disagreements, any discrepancies there between those parties, a meeting with a cooperation committee can be called in order to find an amicable solution.

Once the public consultation process is being completed, the CNMC will analyze comments, all the comments received and then produce the final regulatory circulars, including a statement indicating that they are being adopted, "In accordance with the energy policy position of the Ministry of Ecological Transition", or else with the statement specifying that they have been adopted, "With the Ministry for the Ecological Transition having been consulted". According to the calendar published by the CNMC, those circulars will be improved in October 2019.

I'd like to summarize the most notable aspects of the proposal on compensation for electricity transmission activities now. I do think it's important to emphasize that the proposed methodology is one that, in the main, continues to provide continuity, although, there are some significant aspects that do not favor compliance with the strategic priorities established by the government with regard to energy. And this could make it difficult to carry out the energy transition process and to deliver on the comprehensive National Energy and Climate Plan.

As I've already said this morning, just now, the methodology does provide continuity and establish the 6-year regulatory periods, covering the period from 2020 to 2025. The compensation provided to support investment is based on the net value of assets and the model makes use of unit benchmark values for investment and for operations and maintenance.

In order to establish the financial compensation rate, the methodology proposed is a methodology aligned with the EU's regulatory best practices, specifically it makes use of the weighted average cost of capital, WACC. This is one of the novel features -- the new features of the compensations being proposed, and we believe that's a positive feature because it will guarantee transparency and provide predictability for future rates.

The financial compensation rate proposed is -- as a pretext number rate is 5.58%. Now as established in regulations, adjustments to the financial compensation rate may not exceed 50 basis points annually. Now, that means that the rate to be applied during the first year will be 6% and then 5.58% during the rest of the period.

And with regard to the extension of useful life, no modifications have been included. The approach that already existed in the previous methodology is going to be maintained. There will be a 15% increase therefore to the annual amount paid for maintenance for assets that are coming to the end of their useful life.

However, that compensation cannot be considered as an incentive for the extension of the operation of facilities that have already exceeded their useful life in terms of compensation, but they're still providing services to the system.

On the other hand, there is the inclusion of the possibility of renovating facilities that have exceeded their useful life or that are close to exceeding it based upon their date of entry into service. However, the circular also incorporates a certain degree of discretion for the CNMC when approving vestments of that type, and that introduces a certain amount of uncertainty regarding those future renovation activities.

Turning to the compensation for operations and maintenance. The draft circular proposes an adjustment, which will have more visibility once the benchmark values to be applied during the next regular period have been analyzed.

The proposals published by the CMC introduce a series of significant modifications with regard to the current regulations and they do not favor compliance with the strategic priorities established by Spain's government on the subject of energy.

Because of this, we are confident, during the process of dialogue with the CNMC and with the ministry, and were not involved in that dialogue. It will be possible for certain measures to be reconsidered and adopted in order to bring the compensation framework proposed by the CNMC into line with energy policy guidelines.

With regard to the proposed circular on compensation of the electrical systems operator, I think the point to be highlighted here is that it's the very first time a methodology is being established for compensating that activity. And we believe that that represents progress towards creating a content -- context of certainty -- legal certainty in our job as an operation and transmission operator in general.

The principle being applied to set up establishing compensation appropriate for low risk activity, taking into consideration the costs required when that activity is performed by an efficient well managed company, plus an additional module. And that additional module being proposed by CNMC is 5%.

A standard financial compensation element is incorporated and that applies to compensation rate of 5.58% to the net value of the fixed assets used for the system operation activities, together with standard amortization element.

The proposal also includes a compensation element for incentives for the systems operator which can range from minus 5% to plus 5%. However, since the CNMC believes it's most appropriate to implement those incentives gradually during this first review period that range will be minus 2% to plus 2%. The regulatory parameters have been defined for a 3 year period. The first regulatory period will be 2020 to 2022.

As I already mentioned, publication of these draft circulars has initiated the public consultation process and that process will allow submission of comments and identification of alternatives. And the point of the process being to improve on the proposal being made by the CNMC, taking into account the energy policy guidelines produced by the MINISTRY for the Ecological Transition.

Our company's key comments will be focused on the following major aspects; One, incentives for extending useful life of the transmission grids. The compensation element that appears in the proposal for the extension of useful life is the same one contained in Spain's Royal Decree 1047, that's 1047/2013. It consists of an initial increase in the compensation for O&M by 15% during the first 5 years and then subsequent increases of an additional 1%. However, this element does not really cover the additional costs that are incurred for keeping those facilities in service, and therefore it does not provide a real incentive to extend their useful life.

Second, graduality. The circular needs to provide mechanisms to allow gradual absorption of the changes proposed. In this regard, the impact related to the treatment of the assets that are coming to the end of their useful life should provide real incentives to -- first to the extension of their useful life, and then there should also be mechanisms to allow that impact to take place gradually as a way of responding to the National Energy Policy guidelines.

Third, compensation for O&M of the transmission grid. In the proposed circular, the income from compensation for operation and maintenance of the grid are established based upon the cost incurred during the most recent years for which information is available without taking into account the cyclical component, those activities can have.

Furthermore, this proposed circular does not include any tools to incorporate efficient management mechanisms to share efficiencies in a more balanced manner with consumers, nor does it introduce any elements that can be incentives for the incorporation of new technologies and innovation.

We will also be submitting comments in relation to other aspects that we think could be improved on, such as the financial compensation rate, the treatment of subsidies, and the availability incentives.

We believe that our comments will allow for progress in terms of identifying key aspects for improvement. And we believe they're relevant because they will help us to move towards the energy transition process completion without any risk to security of -- electricity supply or security of the system.

Let me turn the presentation over to Teresa Quirós, the company's Corporate Director of Economics and Finance. She'll tell you the results from the first half of the year. Thank you.

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María Teresa Quirós Álvarez, Red Eléctrica Corporación, S.A. - CFO [3]

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Thank you very much, Roberto. Good morning. And once again, welcome to you all, and thank you for being with us again in the presentations of the results from the first half of the year.

Next, I would like to give a brief summary of the results of the first 6 months of 2019, and would also like to talk about some of the significant milestones that are achieved during this same period.

During the first half of this year, Red Eléctrica has maintained a conservative financial policy that has adapted to the characteristics of our business and to its compensation model, while prioritizing efficiency and containment of cost.

The company's key results. In the last 6 months, we have seen the important matters are the following. During the first half of the year, the net profit was EUR 362 million, which represents 1.5% increase from the figure recorded the same period last year. On the 1st of July, a complementary dividend corresponding to financial year 2018 was paid in a gross amount of EUR 0.71 per share. The total dividends paid with -- that has -- that we paid at the beginning of the year also says that we should have EUR 0.9831 per share, which is 7% higher than that of last year. Therefore, it complies with our commitment on providing returns to our shareholders.

Furthermore, during the period under discussion, an investment has been of EUR 166 million and of this EUR 133 million was invested in transmission activities in Spain. Also, at an international level, I would like to highlight on 18th of July, we acquired 100% of the Carhuaquero - Moyobamba line in Peru, which we already commented at the beginning of this year when we shared with you the Strategic Plan. The total value of this acquisition was $205 million.

And other important matter was that on the 14th of February, we signed a Memorandum of Understanding between Spain and Morocco where we agree to establish a third interconnection between the 2 countries, a third one, which obviously implies that we already have the other 2 that are up and running. This is similar to the one that we already have up in service. This is 400 kilovolts of AC electricity and a technical capacity of 700 megawatts.

The planned investment will be an amount of EUR 150 million and this is -- this Spanish -- the Spain will have to pay EUR 75 million of that amount. That interconnection could provide additional revenues for Spain's electrical system of approximately EUR 140 million, which comes from the telecommunication business from usage fees and other matters.

With respect to the telecommunication business, and as you know, on the 12th of February, we -- our company reached an agreement to acquire the satellite infrastructure from operator called Hispasat. This transaction has already been authorized by Spain's Council of Ministers and by the CNMC and all that remains is to get the authorization from competent authorities in other countries such as Brazil.

As we already talked about in the Strategic Plan, the group is really committed to transformation and innovation. And this is why we have created a technical company to promote this innovation, so that innovation and technology really be present in the core of Red Eléctrica group. This is within the new framework of the Strategic Plan and we have great expectations with regards to these capacities.

In the area of corporate governance, I'm sure you will remember that we mentioned that there has been a change in our company because now we have a new CEO. And as you know, sustainability is something very important within the strategic plan of Red Eléctrica group. Therefore, I'd like to highlight that the group of Red Eléctrica is right now at the top of the IBEX ranking of companies with regards to transparency and fiscal responsibility.

Also, we are within the 1% of companies that have the best qualification or the best qualification for human rights and great place to work. Now the -- within 120 -- within Europe120, Eurozone120 and World120 indexes, we are scoring very well.

Next, I would like to talk to you about the communication that you saw that is available in the markets before the stock market opened. In any case, there are several things I would like to highlight. We have reached EUR 993 million, which represents an increase in revenues of 0.3% compared to last year. This figuring has to do with an increase of EUR 33 million in the system and also incorporates the external telecommunications activities with EUR 48 million. And in addition, international activities generated EUR 22 million, which also includes the entry into operation of the Azángaro-Juliaca-Puno line.

Gross operating profit, EBITDA has increased to EUR 779 million which is 0.3% above the previous year. The evolution of this EBITDA is primarily due to the containment of procurement costs and other operating costs, which reflects consolidation of the efficiency measures that Red Eléctrica has implemented.

I would also like to point out that the EBITDA includes the earnings that have come out from our Chilean company TEN, which were in the amount of EUR 3.6 million during the first quarter. Financial loss was minus EUR 64 million compared to minus EUR 65.3 million from last year. Consequently, this is basically due to a 2.3% versus 2.4% recorded during the same period of financial year 2018.

Finally, net profit increases to EUR 362 million, which is 1.5% higher than the amount recorded for the previous -- prior year. The effective tax rate was 24.7%, which is in line with the rate recorded for the same period last year.

Speaking about debt, I would like to say that the net financial debt was EUR 4,485.9 million with high solvency rates as seen that -- in the financial year. In this, we have seen that it has improved up to 22.7% and the ratio is 2.9x.

Speaking a little bit more about the financial structure, I would like to comment that the structure on the long term debt of Red Eléctrica is facing in the next few years that the debt has an average life of 5 years and what is really important is that what is going to be amortized in next 6 years, as you can see on this slide, are covered by the liquidity available, which right now is EUR 3.1 billion. We can see that the debt structure by type of instrument can -- shows us that it's well diversified. 84% is at a fixed rate until maturity and the euro is predominant compared to all other currencies.

And if we mentioned Standard & Poor's as well as Fitch, we've been given a rating -- rating agencies have given Red Eléctrica Corporation an A minus, which is a long term rating and a stable outlook. We'd also like to say that the cost has gone down as far as sustainability is concerned and the evolution of this spread that has paid for this credit is quite sustainable. We have complied with the objectives and therefore this is reflected in our spreads.

Therefore, also, in the first semester, Red Eléctrica Corporation has formalized a line of credit for EUR 500 million, which is at a very competitive price to be financed its acquisition of Hispasat, which is going to be between 5 years to pay back this debt and maybe up to 7. This is very important for Red Eléctrica.

Therefore, I wanted to say that we continue to move forward significantly in our activities that have been regulated internationally. We have important -- we are present in Peru and Chile, but as I commented before, this has been reinforced on the 18th of July with the acquisition of 100% of the Carhuaquero - Moyobamba line.

Similarly, a transmission grid of electricity is a key element that will allow us to move towards a decarbonized economy and in the same way advanced telecommunications infrastructure is an essential condition for developing a hyper-connected knowledge-based society.

During the first 6 months of this year, we have made progress towards the consolidation of our company as a leading telecommunications infrastructure operator. With agreements that we already mentioned before, this satellite infrastructure will be added to our 33,000 kilometers of existing fiber optics. Now we are just waiting for the final authorization to begin our integration of that company as we mentioned before.

At this point, I'd like to turn the presentation over to our new CEO, Roberto García Merino, who will conclude with a summary of our future commitments. I'm sure it should be very interesting for all of you.

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Roberto García Merino, Red Eléctrica Corporación, S.A. - CEO & Director [4]

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Thank you so much Teresa. I'd like to remind you of the company's commitment taken on last February in our Strategic Plan -- our Strategic Plan 2018 to 2022. We're still maintaining those commitments. The aim is to create value for all of our stakeholders to deliver on those commitments.

The company will be relying upon 5 core principles, strong investment of approximate EUR 6 million as a way of driving energy transition with more than half being dedicated to investments in the transmission grid and storage in Spain, fostering the energy transition. A strong commitment by the committee -- the company rather, to efficiency, maintaining margins that are in agreement with this same management philosophy.

Financial discipline with solvency ratios that will allow us to maintain a solid credit rating, sustainability in terms of net profit and a stable dividend policy. We will maintain our payout to shareholders of EUR 1.05 per share in 2019 and at least EUR 1 per share during the period 2020 to 2022.

Lastly, I'd like to remind you that Red Eléctrica will continue to work intensively together with the CNMC and the ministry in order to achieve those objectives that have been set out in energy policy in Spain as well as in the 2018-2022 Strategic Plan in the company.

So that concludes today's presentation. Thank you very much for your attention. And we are ready to respond to any questions that you may have.

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Questions and Answers

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Operator [1]

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Now the presentation has finished. We're going to start with questions and answers. Let's start with the ones we're going to receive via telephone. And once we have answered these, we will move on to questions-and-answers that we've receive through the webcast.

(Operator Instructions) First of all, first question is from Javier Suarez from 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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The first question has to do with regulation and incentives for the possible extension of the useful life of the equipment. It seems to me that you're saying very clearly that there are no such incentives for this -- to extend the life that is. And when you were mentioning that renewing this installation introduced elements that are quite of incertitude, could you talk a little bit more about that incertitude because that would be very useful if you could please continue to talk about that?

CNMC, it seems to me that they were opening up the door to be able to extend the useful life, not of all of the assets before the '98 -- for 1998. But I wonder if you could please explain this a bit more, if I actually read this properly or not with regards to the door that was opening for these assets pre-1998?

My second question has to do with sustainability. In the presentation, on the last page, you talk about the commitment of the company with sustainable dividend payout and -- up to 2022. And I was wondering about the sustainability of document within a context where the regulatory proposal were not to be changed. What I mean is that the proposal that regulator has made would remain the way it is. How would the company then, with the dividend payout that they're going to be paying out, can be sustainable throughout the next following years?

And the next question has to do with cooperation committee that you mentioned, which is a possibility. I would like to understand exactly in the case that the discrepancy were to continue between division of the ministry and that of the regulator, what opinion, what -- which legal opinion would prevalent?

And then the next question has to do with the assets that are up in running before 1998 and the ramp of these assets. And do you know if this is going to finish before the end of the year or will the treatment of those assets could it be left outside the regulatory decision that is to be taken at the end of the year.

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Roberto García Merino, Red Eléctrica Corporación, S.A. - CEO & Director [3]

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Thank you, Javier. Let me take your first question first. You were asking about the incentives for the extension of the useful life of assets. Yes, it's true that there is a new instrument. We didn't have that instrument before and that is the option to make investments in replacement of remunerated assets. It seems positive to us. It's a mechanism, as I said, that didn't exist before, so we have a positive view on it. However, in the implementation of that measure, we think there is room for improvement.

As far as we've detected, in the draft circular, it seems that it's a process that will have to be incorporated into the grid planning and it's the CNMC after analysis that will have to decide whether or not there will be remuneration for the asset or not. And that is where we feel that we need to have a little more clarity in that mechanism to have more visibility on those possible investments in the assets.

Then, you're asking whether the incentive for the extension of useful life affects all of the pre-1998 assets or not. Well, the way it is drafted in the circular, it does seem to affect all of those assets that are considered in that category -- pre-1998 assets. So, yes, the mechanism would be -- the measure would be applicable to all of them.

The question about the sustainability of a dividend payout -- that other question -- second, I think question it was. Yes, as I've already said, we are still committed to the goals set out in our 2018-2022 Strategic Plan. And as we've told you in the presentation this morning, the process is still ongoing. It's open. We have no certainty of what the conclusion will be. So the -- to talk about anything beyond the Strategic Plan seems -- perhaps would just be speculation.

Your question about the committee -- the cooperation committee, the mechanism is as follows. If there are any discrepancies, the committee will be called on to meet. You'll have the Chair of the CNMC sitting on that committee with the Secretary of State from the ministry too for the other party. But it's a CNNC, if there are any discrepancies, that is responsible for deciding on what measures will be put forward and will be adopted in the circular and saying that after listening to the ministry for the ecological transition.

Then your question about the ramp for the pre-1998 assets. These are references that are also covered by the CNMC in the documents they've published. But, as you know, work in progress is not included, the entry into service of assets over recent years are not concluded there either. So the reference is not entirely accurate. That it's not very precise and it's -- and we can't give you any specific comment there on the ramp for the pre-1998 assets.

The next question will be asked from Fernandez from JPMorgan.

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Javier Fernandez Garrido, JP Morgan Chase & Co, Research Division - Head of Utilities and Senior Analyst [4]

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The first question I have is I would like some more details about -- you've just said within the questions of Javier Suarez and that is. He said -- he talked about a possibility of including within the remuneration scheme, and he was talking about the investments that are going to be taking place from now on. If we continue with a proposal from the CNMC circular proposal that is to say the investments that have been made so far could not be considered as within the regulated assets. I wanted to make sure, if I understood this properly, if I interpreted this correctly or if the investments that were made in the past with the proposal of the circular could actually be considered within this group?

Now the next question, I'd like to understand where is the procedure -- well, how we're doing in the courts? The proposal of the CNMC and in the end when we get the final version supposedly, we assume there is going to close this circle with regards to remuneration of the assets. So to what extent would that close the door to the courts acting on the supposed non-compliance of the regulation that has existed so far, they close the door with the incompliance of the decree and would open up a new door to the courts to go through a new procedure or if -- we would have to -- if the court is going to cite that it's going to follow its course.

Now the last question has to do with energy planning -- well 2 questions actually if I may. The first one, how many years do you think that planning should cover -- that energy planning should cover? Do you wanted to cover several years and how many would they be?

And then secondly what would the implication be with regards to the investments that you would be including in that energy planning. And especially, the fact that we might not have included -- or you might not have included enough assets for the extension of the useful life of the other assets. So perhaps more investments could assume energy -- would change the energy planning for next few years?

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Roberto García Merino, Red Eléctrica Corporación, S.A. - CEO & Director [5]

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Thank you very much, Javier. Your first question, they are not question about investment in renovation -- the remuneration for it. The way it's written in the circular, it would affect future investments moving forward, although according to Royal Decree 1036 the company has been investing during 2018 on asset renovation which should affect the useful life of the pre-1998 assets. So we do expect over the next few months to perhaps see developments there because that information has been given to the Ministry for the Ecological Transition.

And then visibility, this is an open process. And as we've said many times before, we do not agree with the decision of the CNMC here and we will, of course, try and see what options are open as to defending the interest of the company and the interest of our shareholders. So there is this, of course, process ongoing at the moment and we will take it to the very last possibility with this litigation that is ongoing.

Planning. Planning is 2021 to 2026 at the moment. That is the period covered. And as we've said to you in the presentation this morning, the technical analysis phase is the one ongoing at the moment and we think that the period is long enough to be able to respond to energy policy needs 2021 to 2026.

And lastly, the volume of investment -- the circular incorporates a sealing with different parameters that -- to the ones that we had before. We were talking 0.075% of GDP before. That maximum -- that cap could be -- go -- exceeded with investments in international interconnects. We think that those limits will be brought into line with the requirements of the energy transition process. In an event there is always the possibility of those limits being exceeded, if there is some need, such as in the case the energy transition for more investment.

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Operator [6]

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Ladies and gentlemen, there are no more questions in Spanish. So now we will have some questions in English.

The next 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 [7]

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3 questions for me please. So firstly, I wondered if you could clarify. So you've talked a bit about this repex expenditure or refurbishment of the assets. The revenue profiles that are in the CNMC circular, do they include the potential repex or do they not? So the EUR 300 million revenue cut in 2023, would that be better if you included repex? That's first question.

Second one, what do you expect to happen to your IFRS depreciation, so if the regulatory documents enacted in full, would you expect your IFRS depreciation to reduce and what benefit should we include in our numbers for that in 2023?

And then could you just update us on Hispasat, so what's the projected close date? And please could you give us some EBIT guidance for Hispasat for this year and in 2020?

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Roberto García Merino, Red Eléctrica Corporación, S.A. - CEO & Director [8]

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Thank you very much for the questions. The references that we have from the circulars that are being published by the CNMC so far, the potential impact on asset refurbishment is not actually contained in those numerical references, it's not there. So we think there is a chance for improvement to be made rather than following the path that is mentioned in the circulars by the CNMC. And Teresa you take the next question, the impact on IFRS -- of IFRS depreciation for the pre-1998 asset

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María Teresa Quirós Álvarez, Red Eléctrica Corporación, S.A. - CFO [9]

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The depreciation impact should no more than EUR 100 million, because those assets will be depreciated following that period and they have revenues linked to them from operations and maintenance which is we have that 1.15% additional there.

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Operator [10]

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Now the questions -- once the questions have finished the ones that are coming through the telephone, we are going to extend a little bit more our answers to these question. Some of them were already been asked here in this room that we are in and we will be going through questions as well. So from BBVA Mr. Ortea is asking the following.

Within the investments for the repex there could be a possible recognition of the investments that are made throughout the period of 2016-2019. Could you please tell us what situation -- how is this process doing and what can we expect from that process?

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Roberto García Merino, Red Eléctrica Corporación, S.A. - CEO & Director [11]

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Thank you very Daniel for that question. Yes, the refurbishment investment, repex, that the company has been making between 2015 and 2018 in the framework of Royal Decree 1073, the company has already reported to the ministry the volume of investment that has been booked for repex -- for refurbishment of assets. And we expect over the next months the ministry to be analyzing the information we've given it and to acknowledge an increased extension of the life of the pre-1998 assets, something which will be 1 year that is the -- what our investment base has worked on.

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Operator [12]

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We have a few questions that will be by JB Capital, Jorge Guimarães; as well as Morgan Stanley, Anna Maria Scaglia, with regards to Hispasat. So how was the process for the authorizations for Hispasat doing? And when do you expect this to be ready to be finished? Do you think we can consolidate this in our accounts in this year 2019 or do you think this will take place next year 2020?

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Roberto García Merino, Red Eléctrica Corporación, S.A. - CEO & Director [13]

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In answer to that question about the authorization process for acquisition of Hispasat, we frankly have got all of the authorizations we need. They've been granted. We are just waiting now for the Brazilian regulators' authorization. They are analyzing the file. It's being sent to them by the company. That was a few months ago. And recently they have just issued a ruling on a previous file that was waiting for approval. So that our file will go them next and we believe that over the next few weeks and maybe months at most we should be able to get that authorization from them. So our expectations or estimates for consolidation of the financial accounts of Hispasat in the last quarter of the year.

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Operator [14]

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Also JB Capital, Jorge Guimarães is asking, if we could give him an idea of the contribution to income and EBITDA from international businesses throughout the year 2019? And how much investment is necessary in the next few years for grids to be able to improve greenhouse effects?

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Roberto García Merino, Red Eléctrica Corporación, S.A. - CEO & Director [15]

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What role does the international business play, the contribution is about 2% to 3% of the total volume of the group at the moment? That is what international business represents. Although, by the end of Strategic Plan, we are expecting it to be 5% of total revenues and EBITDA for the group, and Teresa, you take the question about investment.

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María Teresa Quirós Álvarez, Red Eléctrica Corporación, S.A. - CFO [16]

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Let me just remind you that when we did announce the Strategic Plan to you, we talked about the huge investments that the company would have to make to be able to fully accompany Spain's transition process. So the average was EUR 575 million and we are talking about EUR 3.2 billion in total relating to the energy transition process in Spain.

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Operator [17]

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Finally, Álvaro Navarro is asking us the following.

Once the circular has been approved would the litigation process that the company has that is up and running for the assets before the '98 -- what could we expect from the results of this circular?

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Roberto García Merino, Red Eléctrica Corporación, S.A. - CEO & Director [18]

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I think it's too early to be able to assess the outcome of this process. I think our position would be a lot clearer when we have that final version of the circular and know exactly how pre-1998 assets are going to be dealt with. But Red Eléctrica, and I will say this again, will take many options open to it to defend its own interest and its shareholders interest.

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Operator [19]

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As we have answered all of the questions, now if there anything is pending we will be here to answer them once this conference call is finished. So thank you very much.

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María Teresa Quirós Álvarez, Red Eléctrica Corporación, S.A. - CFO [20]

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I would like to thank you all for your attention and have a wonderful summer.