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Edited Transcript of REE.MC earnings conference call or presentation 26-Feb-20 11:30am GMT

Full Year 2019 Red Electrica Corporacion SA Earnings Presentation

Madrid Mar 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Red Electrica Corporacion SA earnings conference call or presentation Wednesday, February 26, 2020 at 11:30:00am GMT

TEXT version of Transcript


Corporate Participants


* Irene Gómez Barrio

Red Eléctrica Corporación, S.A. - Head of IR

* María Teresa Quirós Álvarez

Red Eléctrica Corporación, S.A. - CFO

* Roberto García Merino

Red Eléctrica Corporación, S.A. - CEO & Director


Conference Call Participants


* Daniel Ortea

BBVA Research SA - Research Analyst

* Fernando Lafuente Seseña

Alantra Equities Sociedad de Valores, S.A., Research Division - Research Analyst

* Gonzalo Cantabrana Fernandez

S&P Global Ratings Inc. - Credit Analyst




Irene Gómez Barrio, Red Eléctrica Corporación, S.A. - Head of IR [1]


Good morning, ladies and gentlemen. We're now ready to begin our presentation on the results for 2019. I'd like to welcome you all. Thank you for attending in person as well as those of you watching via the webcast. Today, we're joined by the company's CEO, that's Roberto García Merino; and by Teresa Quirós, she's our CFO, of course.

To begin then, our CFO, will be giving a presentation on our financial results for 2019 financial year. After that, our CEO will add some brief comments about our compliance with our objectives in our 2014 to 2019 plan as well as the progress that we're making with regard to the current plan, that's the 2018 to 2022 strategy plan. At the end of the presentation, we'll also have time to answer any questions that you have. So that'll be the Q&A session.

Now I'd like to turn the presentation over to our CFO, Teresa Quirós.


María Teresa Quirós Álvarez, Red Eléctrica Corporación, S.A. - CFO [2]


So hello, everyone. Welcome here to our headquarters, and thank you for joining us again this year to, first, report to you our 2019 financial results.

Let me start off by taking you through the significant milestones from 2019. After that, I will go through the significant events that took place. 2019 was a very busy year, an intense year, full of milestones, full of significant events. It was a very important year for Red Eléctrica. We -- as a transmission company and system operator, the company had to take on major challenges so that we could promote the energy transition in our country. We also made a lot of progress in the electrical infrastructure business. Internationally, we established our basis to initiate activities in Brazil, and we achieved a significant milestone in Red Eléctrica Sistemas de Telecoms business with the acquisition of Hispasat on the 3rd of October, almost 90%. As a result then, that was in October last year, we could incorporate the satellite company results in our fourth quarter financial statements. These advances have transcended an investment level, which was a record figure, EUR 1.87 billion, almost EUR 400 million, EUR 396.4 million of that figure corresponds to investment transmission activities in Spain. EUR 226 million (sic) [EUR 225 million] represent the international investment, and EUR 1.21 billion was the figure we invested in our telecoms activities. The net profit, I'm sure you've already seen it already, amounted to EUR 718 million. That's up 1.9% on the profit figure from 2018 financial year. And it's in line with the growth target that we had set out in our 2018-2022 strategy plan.

On top of that, yesterday, our -- on the 25th of February, the Board of Directors have proposed a final dividend that has to, of course, be approved by our general shareholders meeting. It's a final dividend of EUR 0.7792 per share from the earnings for the financial year 2019. So if you add that to the interim dividend that was paid in January of 2020, EUR 0.2727 per share, I'm sure you can work with that yourself. But the final dividend then will lead us to a total dividend for the financial year of 2019 of 1.7 -- EUR 1.05 per share. That's up 7% as we'd agreed on.

So let me also talk about the milestones with regard to the progression of the energy transition. One is the transfer of the powers to Spain's National Markets and Competition Commission, the CNMC, that's on the regulated activities. So now we have an independent regulator for the regulated activities in line with European law and in line with other countries. The second milestone was the approval of the new compensation methodology for electricity transformation for the 2020 to 2025 period as well as the compensation methodology for the electrical systems operator.

During 2019, a road map was drawn up for the energy transition in Spain, which will set out the way forward 2021 to 2030. In February, Spain's council of ministers, the Spanish cabinet sent out its first draft version of that Integrated National Energy and Climate Plan, NECP, to the European Commission. And just recently, a second draft version -- an updated draft version of the NECP has been published, incorporated with the commissioner's comments. Now that the road map has been designed, the 2021-2026 planning process has been launched. That's very important for this company. It will mean we can identify the investments that will have to be made in the transition grid in order to manage the major changes that are going to be taking place in the electricity sector. In our case, in the regulator's case, it will -- it means that we will have visibility on investments over that period.

Turning to other key goals for us. You know that we -- one of our goals is to help to configure that single European market. Now to do this, Red Eléctrica, working in collaboration with 7 other electricity transmission system operators, TSOs, has launched the European -- we have launched the European energy balancing platform known as TERRE, T-E-R-R-E. That allows coordinated management to the European level of the balancing between electricity generation market and demand after adjustments of the scheduled interchange market. This new multilateral platform will allow even more efficient management of the energy balance, and it will also contribute to reducing the final price of energy at the same time as it optimizes the integration for renewable generation in Europe.

Let me carry on telling you about significant events in 2019. As we all know, the energy transition includes the incorporation of a major proportion of renewable generation during the next few years. In this context, and you also know this, I'm sure, Red Eléctrica in Spain is the company responsible for grid access and collection procedures for agents, all those procedures they have to complete, both for new facilities and for modifications affecting [listing possibilities]. So we -- in order to have made electronic management platform available to the user agents last year, they can use it to submit applications and for procedures. It's much simpler. It means it's more flexible. And as a result of that, during 2019, had access granted to 102 gigawatts of wind and PV solar generation.

We've also seen a significant step-change in terms of integration renewables with the connection of 6,456 megawatts of new renewable generation to the grid. That's a figure, which is much, much higher than the previous year. Integration of that component is -- essentially, we're talking about renewable wind and PV technologies, has marked a record, an all-time record for Spain's electricity system. And it's also contributing to delivery of the energy transition targets that have been set out in our Integrated National Energy and Climate Plan.

2019 was also a noteworthy year in terms of reduction of CO2 commission -- emissions rather, because for the second consecutive year, the rate that was achieved is approximately 60% emission-free generation. Red Eléctrica is also in electricity infrastructure managed internationally. And as such, and I did mention this just a moment ago, we did take a firm step towards entering Brazil in 2019. It is Latin America's primary market in electricity transition -- transmission sector. And we enter Brazil through an agreement reached with Grupo Energía de Bogotá, the Bogotá Energy Group for the joint acquisition in equal parts, 100% of the shares, in a Brazilian company, Argo Energía. Now that's a company that's dedicated to management of high-voltage transmission grid. What will happen is then is we will be co-managing a grid consisting of 1,460 kilometers of circles in Brazil. Now that figure can be added to the 1,686 kilometers that the regulatory group is already managing through and the 1,729 kilometers managed in Chile. And we did talk to you, didn't we, about the acquisition of the 100% of the Carhuaquero-Moyobamba line in Peru for $205 million. So that's an expansion on that.

Additionally, Red Eléctrica has established its position as a global telecoms operator with the acquisition of 89.6% -- 68% (sic) [89.68%] of the checkup of Hispasat for EUR 933 million. Now with the fibre optics business in -- we can -- we've expanded our customer portfolio during 2019 for fifth consecutive year of growth.

Finally, we did talk to you last year, didn't we, about our strategy plan. And I also want to reiterate the contribution that we're making to energy transition and telecoms through the conceptualization, incubation, acceleration of technology-based initiatives. This is all about creating a platform -- a cross-cutting platform that will help us to promote the importance of technology, make it all available to companies. This technology component, we believe will be one that we'll be promoting from Red Eléctrica.

Let me talk about corporate governance now. At the meeting held yesterday, 25th of February, the Board of Directors agreed the appointment by cooption of Mrs. Beatriz Corredor Sierra as a Director of Red Eléctrica Corporación S.A. in the category of other external directors, in accordance with the report issued by the Appointments and Remuneration Committee and the Board of Directors, and also to appoint her as nonexecutive chairperson of the Board of Directors and of the company following the resignation of the previous Chairman, Jordi Sevilla Segura. Let me just congratulate Beatriz on her appointment, and I'm so sure that she will be successful in her office.

In May last year, less than a year ago, remember, Mr. Roberto García Merino was appointed as the new CEO of the group. So I'm sure you do remember that. Also in the area of corporate governance, changes have been made to the Hispasat Board of Directors. The number of directors is now 13 instead of the 23 directors in the past. We have -- also have a new CEO, outside of the company.

As a facilitated energy transition in Spain, Red Eléctrica is one of the companies that is spearheading commitment to green financing. In 2017, you may remember, Red Eléctrica was the very first company in the utility sector to transform. It wasn't -- we didn't sign it. We transformed an EUR 800 million syndicated loan into sustainable financing by adding ESG criteria to the interest rate. So following along the same lines, in October 2019, Red Eléctrica took another step forward by presenting its green financing framework. This is all about [designing] financial products that will allow us to promote projects accelerating the energy transition in Spain. Only 3 months after that, Red Eléctrica made its very first issuance of green bonds, EUR 700 million, in order to finance eligible projects within that same green framework. These initiatives are evidence of Red Eléctrica's strategic commitment to sustainability. In this case, through responsible and transparent financial management.

Let me finish this section on corporate governance by talking about an ambitious project that we have been running throughout 2019. What we've been doing has been adapting our risk management model to the recommendations of the Task Force on Climate-related Financial Disclosures, the TCFD. So in line with those recommendations, the company has analyzed the risks and opportunities associated with the modification of climate variables that could directly affect the electrical systems facilities or reliability. Now this work is a major step forward with regard to adaptation to climate change. That may change; adaptation to it is one of the relevant points that relate to a group, including its commitment to combating climate change. So in addition to publishing the results of that work, the group will also be able to make further progress in terms of transparency of information it provides to its stakeholders.

Let me now talk you through the figures. Perhaps it's not so entertaining, but it's very important. So let me talk about the performance of key figures. Very positive. Revenues totaled EUR 2 billion, that's up 3% compared to 2018. As I said before, we have incorporated Hispasat -- 3 months of Hispasat revenues in these figures. Without Hispasat, if we strip Hispasat out, the growth would have been 0.8%. But revenue figure includes compensation for electricity transmission activities in Spain and the regulated income that's related to the operation of the system as TSO. Telecommunications activities totaling EUR 175.4 million for -- and also revenues derived from the international activities by EUR 51.6 million. To that figure, we also have to add earnings from the Chilean company, TEN, EUR 7.6 million, which included in the EBITDA as investee company profits because of the 50% stake we have in that company.

Gross operating profit, EBITDA totaled EUR 1.582 billion, that's 2.8%, let me say, if I could round it up to 3% up on the previous year's figure, incorporating EUR 33 million contributed by Hispasat. The financial loss that we report in 2019 was EUR 134 million, which is in line with the figure recorded of the previous financial year. The higher average gross financial debt totaling EUR 5.93 billion has been offset by a lower average interest rate, which decreased from 2.42% in 2018, 2.29% in 2019. Net profit, I did mention that figure earlier, didn't I, was up to EUR 718 million. That's 1.9% higher than the amount recorded for the previous year, and the effective tax rate paid was 24.3%, in line with the figure recorded also in 2018. In relation to debt, net financial debt figure was EUR 6.026 billion at 31st of December, and we maintained optimal solvency ratios. In relation to this, we can see that the net debt-to-EBITDA coverage ratio reached 3.8x with the FFO debt ratio at 20.8%. It would have been 22% if we had incorporated Hispasat.

We are a more complex group now, and I believe it's important for us to give you, as a result, a breakdown of the revenues figures by type of business. You can see the comparison now on screen 2018 to 2019. And there has been aggressive increase in the weight of unregulated business. Now that is the outcome of the efforts that have been made deliberately by the group towards diversification. Operating revenues and EBITDA stemming from operation and transmission activity in Spain were around 90% of the group's total for the 2019 financial year. Also telecommunications infrastructure business, now that represents 80% -- 8%, rather, of total revenues, although the figure would have been 14% if the contribution from Hispasat has been included for the full year. What we're hoping is that during 2020, the participation of unregulated business will record significant growth, resulting from the consolidation and entry into service of the investments in diversification that took place in 2019.

Let me talk about the financial structure now. You can see that the maturity schedule for long-term debt falling due for Red Eléctrica over the next few years. The average life of debt is 5.2 years. And right now, liquidity is approximately EUR 2.097 billion. We are -- you could see this from the slide covered for almost the next 3 years for debt maturities. If I can focus now on the debt structure by type of instrument, you can see that our debt is highly diversified, 78% of our debt is at a fixed rate until maturity. And there's a predominance of the euro over other currencies.

Credit rating is high. The 2 rating agencies that give us those ratings, Standard & Poor's and Fitch, after the conclusion of the TSO regulation in Spain have confirmed the A- long-term rating with a stable outlook for Red Eléctrica Corporación. As I pointed out earlier, during the year 2019, we have launched a multitude of initiatives that provide evidence to Red Eléctrica's strategic commitment to sustainability. We had -- we presented and shared with the market our green framework, and we also made that initial issuance of EUR 700 million in green bonds. It's an 8.5-year issuance with a competitive price, 0.5%, very well received by the market. There was a lot of interest by investors in this bond issuance by Red Eléctrica, and investors only welcomed our commitment to the green framework. We have received proposed interest of more than EUR 4 billion upon the market. The welcome by the financial market to this issuance level was highly positive.

Thank you for your attention. Let me give the presentation over to CEO, Roberto García Merino.


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


Thank you very much, Teresa, and hello to everyone. I think everything that Teresa has discussed, I think, we're basically talking about a very successful 2019 year for Red Eléctrica. It's a pleasure to be able to address you all today, especially now at this time after closing a fantastic 2019 financial year. We've finally completed our ambitious 2014-2019 strategic plan, which we announced 5 years ago. It is highly satisfying for me to say that we have concluded the plan. We're successfully delivering on all the commitments that we gave to our shareholders back then. In relation to this, we have achieved an investment level of EUR 4.861 billion for that period.

Into the efficiency, significant results have been achieved at an operational level, following the review of operations and maintenance policies and the criteria for the supply and construction. A higher demand for units, more strategic unit, operational maintenance costs approved at the end of 2014 -- 2015 have required greater efforts by the company in reviewing those policies, while at the same time, maintaining our quality standards for construction and operations. These achievements have taken place while maintaining our net debt-to-EBITDA solvency ratio at around 3.4x. It has allowed us to maintain our credit rating similar to the sovereign rating, which is critical for our company with compensation linked to the cost of capital.

In addition, earnings per share for the period averaged 5.2% on average. And so we have delivered on our commitment to the market to distribute dividends that have grown at a rate of 7% year-to-date from the beginning of the period.

That closed -- successfully closed 2014-2019 plan with great performance, and we're now focused on a new plan under a new context with new challenges, for which we're working on every day with the satisfaction of knowing that we have completed and delivered all the commitments that we stated 5 years ago. And now with a lot of excitement facing this new 2018-2022 strategic plan, which was announced in February last year.

I would like now to summarize the most noteworthy aspects of new competition methodology for electricity transmission activities, which was just approved by Spain's National Market and Competition Commission, CNMC, in December last year. I think it's important to emphasize that the methodology defined for the second regulatory period is one of continuation with the methodology applied during the previous regulatory period, and it's one that continues to present incentive for availability and efficiency. It established a 6-year regulatory period covering the years 2020 to 2025. The compensation provided is based on the net value of the assets, and the model makes use of unitary measure of values for investment in operations and maintenance.

In order to establish the financial compensation rate, the methodology proposed is one aligned with the European Union's regulatory best practices, specifically by making use of the WACC, the weighted average cost of capital. That's one of the novel features of the new compensation, and we believe it is a positive one that will guarantee transparency and provide predictability for future rates. The financial composition rate applied is 5.58%, pretax nominal rate that is, and establishing regulations, adjustments to the financial compensation rate may now see 50 basis points annually. This means that the rate applied during 2020 will be 6% and then 5.58% during the rest of the period.

In relation to extension of the useful life, a positive modification has been included with regard to the previous model, with a 30% increase in the annual amount paid for maintenance of assets coming to the end of the useful life. That compensation represents an incentive for extending the operation of facilities and solutions that have exceeded the useful life in terms of compensation, but are still providing services to the system. The possibility also included to -- for renovated facilities and [essentially] then have reached the end of the useful life or they are close to exceeding it based upon the rate of entry into service.

With regard to the [circular] compensation for the electrical systems operator, it must be pointed out that this is the first time a compensation methodology is being established for that activity. And we believe this represents progress almost creating a context of legal security for carrying out our activities as a system operator. In general, the principle of being applied is that of establishing composition that is appropriate for low-risk activity, taking into consideration the cost required when that activity is defined by an efficient, well-managed company, plus an additional margin, which is 5%.

A standard financial compensation element is incorporated, which applies a compensation rate of 5.58% on the net value of the fixed asset used for the system operational activities, along with the standard depreciation. The proposal of the inclusive compensation element for incentives for the systems operators, TSO, which can range minus -- plus/minus 5% for the system operation remuneration. However it says in that, so the CNMC believes it is most appropriate to implement those incentives gradually during the first regulatory period, that range will be plus/minus 2%. The regulatory priorities have been defined for a 3-year period, with the first regulatory period being 2020 to 2022.

On the 31st of January, the CNMC approved the resolution that establishes a system operators' compensation for 2020. This represents the first application of the methodology from Circular 4 2019, which is approved by the plenary session held by CNMC on the 27th of November. The compensation for 2020 financial year is established at EUR 74.7 million.

Another of the most relevant features for the next few years is the energy planning for the 2021-2026 period. The proposal for development of the transition grid in this period is key in order to achieve the targets established for the electrical system in the NACP in relation to the combination of efficiency and to connections. This proposal must take into account key elements such as ensuring the security of supply from transmission grid and maximizing production from renewables, while optimizing the use of the existing grid and making it to development compatible with the conditioning environmental factors. In addition, the planning must cover all the needs of the system, which are international interconnections and interconnections from -- for systems on islands as well as investment needed to support electrification for deployment of railway systems.

The analysis and approval process for this planning is tending to get complex and will take some time. The second phase, which is studies phase, was recently finalized. On the 3rd of December of 2019, the systems operator sent the initial report off to the ministry for ecological transition. Still remaining are the comments phase and consolidation of the various proposals so the final authorization process can be initiated.

We will now present some comments on the progress we made on our 2018-2022 strategic plan, which was presented, if you remember, February of last year. At the beginning of this presentation, Teresa commented on the significant progress achieved in terms of execution of investments that were included in the strategic plan. As you recall, in the strategic plan, we announced investments amounting to EUR 6 billion to be made during that period. And after 2 years of that plan, we have achieved 46% of that goal. At a national level, we can highlight, all the way to 2019, investments in the transmission, investments reached EUR 735 million.

I'd like to highlight here the projects on the interconnection between the islands of Mallorca and Menorca, with entry into service being planned for the third quarter of this year. The western interconnection with France, which, as you know, was declared the Project of Common Interest, PCI, for 2013, and that represents an important challenge between France and Europe in terms of achieving their objectives towards the European energy transition. In the peninsular we've made considerable progress in the Northeastern access, fundamentally in the [Buenas-Itasca] line and (inaudible) line.

If we now look at our international activity, we can highlight that in November 2019, as Teresa mentioned, the Red Eléctrica group, and Energía de Bogotá reached an agreement to jointly acquire in equal parts, 100% of the shares of the Brazilian company, Argo Energía, which is dedicated to management of high-voltage transmission grids. With our acquisition of 50% of the company, the group kicks off on activities in Brazil, which is Latin America's primary market in the electricity transmission sector, and we have become a co-manager for a 30-year period of 3 electrical concessionaires that now cover a total of 1,400 high-voltage circuits in electric substations.

Progress has also been made in Peru with investments of EUR 219 million during the last 2 years, involving the acquisition of a transmission line in the country's northern region of Cajamarca along with coming to service and development of other projects, (inaudible) 2, 3 and 4.

Finally, in Chile, promises made during 2018 and 2019 construction of a project located at Pozo Almonte are with a company where the content is REDENOR and with the acquisition of Centinela Transmisión, a transaction that also includes the works for expansion of facilities. These investments represent investments of EUR 145 million for the 2018-2019 period.

In addition, I would like now to address our target-location activities where we closed 2019 with a significant milestone for the company, which is the acquisition of Hispasat for a total investment of EUR 103 million -- sorry, EUR 133 million. In addition, now at the beginning of 2020, fabrication of a new, more efficient and flexible Amazonas-Nexus satellite has been initiated, which will replace the Amazonas 2 currently operated by the company. This satellite will allow Hispasat to gain new customers and markets providing high capacity mobility in the airline and maritime transport industries, while still providing services to current customers. The new satellite will be launched into orbit during the second half of 2022, and we'll have coverage over all of North and South America, the North Atlantic corridor, a high-traffic zone for air, and maritime transport and Greenland, it is expected to have a useful life of about 15 years.

At the group, we are continuing to work on multiple advances that, like Amazonas-Nexus, respond to the growing demand for connectivity and allow scope -- allow the scope of activities to be expanded.

I would now like to address, talk about the international operations and the compensation models where Red Eléctrica operates. These models are based on -- are very slow, but stable and predictable over time. In Peru, we have had -- been avoided a competitive tender, for boot contracts, by own offer and transfer for a 30-year period. Revenue levels are established during the initial tendering and then updated each year, taking into account the factors such as inflation in Peru, and on this, such -- but always linked to the U.S. dollar.

In Chile, the model operates in a similar model -- manner. With new transmission grid expansion projects being awarded via tenders covering 20-year periods, again, awarded in U.S. dollars, again, taking into account the Chilean inflation and the exchange rate. After -- once the initial 20-year period has expired, compensation for the assets continues in accordance with the replacement value. The compensation rate also takes into account the evolution of the performance of the country's interest rates, with the compensation being revised every 4 years.

Finally, in Brazil, the expansion of electricity transmission system also takes place through a concession and tendering for 30-year periods. Just as in other cases described, candidates for a new contract participating in competitive tendering, during which the annual revenues for the projects are established. Those revenues are then updated every 5 years so that profitability can be maintained, even in the event of changes in macroeconomic variables.

Red Eléctrica with its presence in Peru, Chile and Brazil has benefited from these recurrent cash flows, which has enabled the company to achieve -- to carry out significant investments with a very limited recourse to its shareholders.

As I explained, we're presenting our 2018-2022 strategic plan. At Red Eléctrica group, we believe that the telecommunications business will be key during the upcoming years. The Internet of things, the arrival of 5G and autonomous vehicles are just a few examples of how the demand for reliable, flexible, high-quality telecommunications networks and systems will be growing exponentially during the next 5 -- few years.

In recent years, our group has been establishing its position as a telecommunications infrastructure operator by trying to cover this demand. In this way, Reintel has now become the largest neutral operator of dark fiber optics in Spain with more than 50,000 kilometers of fiber optic grid installed along the electricity transmission system and railway network. Reintel is seen as a leader for the digitalization of society and it guarantees transparent access under equal conditions to all agents and operators in the telecommunications sector.

During 2019, the Red Eléctrica group also acquired 89.68% of Hispasat. This consolidated as a leading operator and opens a way for a very dynamic industry. At present, we are defining a new strategic plan for Hispasat using 5 basic lines of synergy.

First, strengthening and growth of the current business with Hispasat continuing to emphasize development of the current business and promotion of projects that allow for coverage of new vectors of growth through the market, such as the case of mobility services to the new Amazonas-Nexus satellite will provide.

Synergies with the rest of the companies with Red Eléctrica group will also be covered. This is an opportunity for -- to the group to offer and develop connectivity projects that can drive and energize a fight against depopulation and the digital divide in Spain, and it could support the rollout of new technologies such as 5G.

The third line is to be committed to technology as a driver of evolution or change in the business. Hispasat is a driving force behind the development of aerospace technology in Spain and intends to continue to play that role thereby generating value to its customers.

Fourthly, encouraging development of sustainable and competitive national industrial fabric in order to maintain and strengthen its global positioning.

And lastly, responsible sustainable management focused on people. With regard to development of new lines of business, during 2019, the group initiated a pilot project to analyze use of its infrastructure elements as a basis for the rollout of 5G mobile communications, which took place with the collaboration of operators and manufacturers from the telecommunications field.

In terms of our commitment, the EBITDA margin on average will be greater -- will be more than 36% based on our -- based on efficiency policy that offsets the division of the financial competition rate and that captures efficiencies for maintenance activities.

In relation to this, we have taken the following measures. Firstly, our plan for introducing new talent and onboard new talent within the context of process optimization and automation of processes that will allow optimization of the workforce; and secondly, progressive reduction of external operating expenses. Also, once the regulatory review has been finalized, the accounting [compensation] policies will be adapted to the new compensation framework.

In addition, we will be consolidating our financial discipline, maintaining an average net debt-to-EBITDA ratio of approximately 4x for that period while focusing on maintaining credit rating level in agreement with our activities.

In terms to -- in terms of our commitment to sustainability for net profit and dividends, we can see that we are on the right track showing a compound annual growth rate of more than 3% for the net -- of net profit during the 2018-2019 period.

Also in 2019, we maintained a dividend of EUR 1.05 per share, which represented a return of more than 5% during the year. We're maintaining our commitment to distribute a dividend of at least EUR 1 per share for the 2020-'22 period.

Our policy in dividends and shareholder returns has led to an increase to the average dividend EUR 0.89 (sic) [EUR 0.98] per share distributed during the execution of the 2014-2019 strategic plan, which now can be compared to the high average dividend of EUR 1.01 per share, included in 2018-2022 strategic plan. In relation to this, we are maintaining a dividend aligned with our solvency ratios and the company's investment plan.

Finally, I'd like to tell you about our commitment to the energy transition and to Horizon 2030. Now as you know, that is the primary challenge that the company will have to take on during the forthcoming years. The 2021 to 2030 Integrated National Energy and Climate Plan, INECP, is part of the road map that's been designed along with the draft version of the Spanish Climate Change and Energy Transition Act and the just or fair transition strategy in order to make progress towards long-term goals of investment neutrality in 2015.

Now after an initial draft version of the INECP, that plan was sent to the European Commission back in February 2019. Spain's Ministry for the Ecological Transition Demographic Challenges published an updated draft version of the 2021-2030 INECP within the context of the public consultation period for the strategic environmental study on the plan.

I'd like to emphasize a couple of aspects about that draft version, if I could. For the year 2030, the INECP contains plans for a total installed capacity of 161 gigawatts in the electricity sector, with 74% of the total electricity generated during 2030 coming from renewable sources. Now that's consistent with a path towards 100% renewable electricity sector by 2050.

As you can see in the figures on the slide, the use of thermal power has fallen significantly. Coal has dropped from 10 gigawatts to 0 gigawatts. And nuclear power goes from 7 gigawatts to 3 gigawatts, while renewable energy increases at a pace of 5 gigawatts, annual pumping goes from 3 gigawatts to 7 gigawatts. Teresa did also mention to you earlier that we were able to integrate 6.5 gigawatts in 1 year. So Red Eléctrica is already working intensively in order to make that scenario possible.

During 2019, Red Eléctrica granted access permits to more than 110 gigawatts in new renewable generation facilities concentrated mainly in wind, 26.7 gigawatts and portable tank solar power, 81.5 gigawatts. And as a whole, this represents an increase of almost 70 gigawatts with regard to the generation that had access permits at the close of 2018. That is a notable milestone.

It also reflects a significant effort that we're making in terms of investment in development of the transmission grid because more than 150 new generation positions in -- that would be added to the almost 100 positions explicitly included under the current planning.

The new generation then associated with the permits that I've been talking about represents an achievement of the predictive power [NIMS] for wind generation, more than doubles those forecast for total generation for Horizon 2030 in the context of the energy transition. That's according to the draft version of the INECP draft plan.

There'll also be a need to optimize grid access capacity and to improve transparency in order to provide indications of where projects can be located.

Other key aspects under the scenario described, will also be international interconnection, storage and promotion of adequate demand management.

In order to make progress with the energy transition and to achieve that goal of decarbonization that has been set out for the European Union energy system, a European electricity market that functions properly is essential. Sufficient physical interconnection with neighboring countries is important so that member states and neighboring countries can all benefit from the positive effects of the internal market.

Let me remind you of the recommendation that was established by the European Union. 15% interconnection ratio by 2013 (sic) [2030], that is the target currently. Red Eléctrica is working on the submarine interconnection with France across the Bay of Biscay. Now that new connection will allow the electricity exchange capacity between Spain and France to be increased to 5,000 megawatts. That's about 5% of that 15% target, that interconnection ratio by 2030 I was talking about.

And the project is now in the study phase. During the next few months, there will be a public consultation phase. Among other scenarios though, they plan -- the INECP incorporates a level of [communication] with [brands of] 8,000 megawatts, including not only the Bay of Biscay interconnection but also to additional products -- projects, rather, crossing the Pyrenees that will be included in the Projects of Common Interest under the EU.

Over the next few years, we also have to make progress towards the commonization systems on the island, especially in the case of isolated systems, increasing energy storage capacity as a tool to improve system operation and thereby avoiding under their losses of clean energy during nonpeak periods while at the same time improving the security of the electricity system.

Over the course of the year, 2020, Spain's Ministry for the Ecological Transition Demographic Challenge will be producing its plan for the development of electricity transmission grid. And when the planning has been approved by the end of the process, we will have a much better view of the investments the transition grid will have to take on in order to accompany the energy transition process in view of the need to comply with those goals set for 2030.

Well that concludes today's presentation. And many thanks for your attention. And we are here very happy to take any questions from you.


Questions and Answers


Irene Gómez Barrio, Red Eléctrica Corporación, S.A. - Head of IR [1]


So now that we've heard the presentation, we can go straight to Q&A. First of all, we will start with the questions in the room, and then we will take questions that have come in to us through the webcast. A question here from BBVA.


Daniel Ortea, BBVA Research SA - Research Analyst [2]


I actually have a number of questions for you. The first one is about the investment plan. It's true that you are well ahead of schedule with regard to diversification. Hispasat was certainly a milestone, and you've done an awful lot to expand internationally.

My query is more about the national, the Spanish transmission grid to 2022. I think there was about EUR 3.2 billion that we set out for investment in the national grid. It's about EUR 800 million, I think, so far. So I wonder whether you'll be speeding up on the investments you have to make in the national grid over the next 3 years? Or will it be more in the 2021-2026 plan? I mean what will be the investment rate in Spain as we move forward, if you could answer that?

Second question, as part of that national investment plan, there's a lot of weight there for those big projects. The interconnect projects isn't there. So in your investment plan, could you tell us about how you see yourselves at the end of the period? How much ongoing investment is there? I mean what about that? I know we have a plus 1% growth rate in after tax profit. I mean how much will they be affected by the investment that you're making?

The next question I have for you is more specific. It's about 2020. Can you give us what can we expect from you with regard to your income statement? It will be full year accounting for Hispasat. We'll also have the regulatory impact of the lowering of interest rates. So can you tell us what we can expect with regard to investment, net profit and EBITDA figures for 2020, give us some guidance, if you would? And then another question, in the press, we've read about the fact that you've started legal proceedings vis-à-vis the new regulation. I'd like to understand exactly what the company is doing there? Where -- what point are you in the process? And what can we expect of that whole process?


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


Thank you very much for your questions. Okay, regarding the investment plan, yes, you're quite right, the strategic plan for 2018-2020 period has set an objective of EUR 3.2 billion of investments in transmission operation assets for Spain.

It's also true that we reported the breakdown of investment, and most of that is focused, what we said in the last 2, 3 years, very much linked, as you said, to unique one-off projects, which will pick up pace in the coming years. So when you wrap up our planning period, and you start another one, you sometimes -- you're sometimes left with a very clear vision, certainly, as much as we'd like to, as we start the second part of the plan. But certainly, the investments will definitely start to grow in coming years. And I think we'll have a much better picture in the course of this year as we make our planning more specific.

On the breakdown of the plan and how these investments impact the profits, indeed, as you all know, work in progress in the remuneration system currently in force, that's currently not being remunerated. We're talking about a significant project here with a significant period of execution. So there will be an increase of nonremunerated work in progress, which we expect at the end of the period, probably beyond -- in the period 2023, 2024, will start producing recurring results. But you're quite right, all the way to 2022, we'll probably see an increase in work in progress that will reveal fruits later down the line.

Now Teresa, do you might want to comment on 2020?


María Teresa Quirós Álvarez, Red Eléctrica Corporación, S.A. - CFO [4]


Well, as you know, we can't give you advanced details of 2020, but I want give you comment, thoughts. Now 2020 will be impacted by the impact of 50 basis points. It's TRF that will have an impact of about EUR 50 million. Standards and maintenance will also have an impact of about EUR 40 million. Hispasat will probably offset some of this. And then Argo comes into force in between either half way through the year, which means that Argo's contribution for the 2020 will not be complete, but will be consolidated in 2020. This means that the results that we could expect for 2020 will probably be lower than 2019, naturally, given these changes. Because even as we set efficiency measures, we put more efficiency measures into place, it's very unlikely that efficiency measures will offset all these milestones that will happen, which will be, by the way, transitioned here. This doesn't mean that in 2018, '22 period, as we discussed, we will have an increase of pretax income of 1.1% approximately -- sorry, that's profit of 1%, after tax that is, because we'll have some projects also that we completed.


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


And then regarding on the legal grounds, legal matters, indeed, the Board of Directors, which met in February, authorized the appeal to look at that to address the issues behind these circulars.

Now to give you a snapshot, we think that certain assets of the circulars are, we actually value positively because it's a new remuneration for CSOs, and the financial remuneration, there are certain measures that are being considered that previously not considered to manage assets that are coming to the end of their useful life. That is a significant progress, and we do need to acknowledge the work that CNMC has done in this regard. But we still have certain discrepancies regarding some of the circulars that we're still analyzing. And we're seeing, well looking at the scope of these circulars as well as the board will be taking a decision in the coming weeks. So we're working on that.

But as I said, within a positive framework, given some of the measures that the CNMC has introduced that we think are good, against some discrepancies that I mentioned that we're looking into.


Fernando Lafuente Seseña, Alantra Equities Sociedad de Valores, S.A., Research Division - Research Analyst [6]


Fernando from Alantra Equities. I've got 2 questions. First question, $1 million question I suppose, on the dividend policy of the company. Back then, the strategic plan established a position that was -- [well in a sense] the position was perhaps conservative by the very sense of it being at least EUR 1. This year, you've paid EUR 1.05. So I'm wondering -- so just your opinion on what you feel about the 2020 -- what your views on the 2020 dividends? And it'd be great if you could tell something about 2022.

And finally, on Hispasat outlook because next year around 2020 will be the first year full contribution for the financial of the company. So how do you see the company now that you -- how do you see the company, now that you are inside the company? And what's the outlook for this company in the coming years?


Roberto García Merino, Red Eléctrica Corporación, S.A. - CEO & Director [7]


Thank you very much, Fernando. Yes, that's great first question, dividend policy, as we said in the presentation, we are keeping to our commitment that we announced in February last year in our strategy plan, that we would be paying out at least EUR 1 per share for the period '20 to '22. It's true, though, with a new regulatory framework, we have more visibility in the medium term, but we're still missing the other key pillar here, which is more certainly about the investment plan, which is linked to the planning process at the moment. And so we prefer to stick to our commitment that we made last year, in February last year. And when we do get more visibility, then we will perhaps set out a more medium-term scenario and change that commitment if appropriate.

But as you know, anyway, maintaining an adequate return policy to our shareholders is so important and it will continue to be important. The question about Hispasat. After 3 intensive months, almost 4 now, of activity since we acquired a stake in that company, I would say that the point we're at now is defining the new strategic plan. There's a lot of work being done to get a clearer view on the path for the company in the medium and long term. Close of 2019, the financial statements, it's really not comparable, is it with 2018 because we had extraordinary -- we had one-off impacts didn't we in both financial years. But nevertheless, I think the company is reacting very well to the traditional business. And Hispasat, you probably know, half of the business is in video and half in data. And data, I'm sure you all know this, are going to be recording almost exponential growth there. But the traditional market, the traditional business is suffering at the moment. And Hispasat is being -- is also feeling that impact. But with the new strategy plan, the new move forward with that new satellite that we talked about, people are convinced that data connectivity, mobility are the key to the future. And in the midterm, I do think that the company will have an upturn and will be able to offset the downturn in the traditional business.


Irene Gómez Barrio, Red Eléctrica Corporación, S.A. - Head of IR [8]


Are there any other questions here in the room in Madrid? Or can we move on to the questions that have been sent in to us through the webcast?

Okay, through the webcast. We've had questions from Javier Suarez from Mediobanca; Harry Wyburd from Merrill Lynch; Fernando Garcia from Royal Bank of Canada; Jorge Guimarães from JB Capital and James Brand from Deutsche Bank.

What we've done with the questions that you all sent in is grouped them together. I know some of the questions have already been asked here in the room. We wouldn't like to repeat those.

The regulatory situation, first of all, the questions that are being asked are: what is the current status of the legal initiatives, the legal challenges that have been carried out by the company with regard to the pre-'98 assets? And whether we believe that at some point, we will get proper treatment of those assets that will improve the current results from the review of the regulatory situation.

There's another question also about the pre-1998 assets. And it's -- if we feel that somehow, we will be able to avoid the regulatory cliff edge in 2024 because of the pre-1998 assets.


Roberto García Merino, Red Eléctrica Corporación, S.A. - CEO & Director [9]


Well regarding the operated issues that we have pre-1998 assets and other things that we have outstanding, I think in the course of this year, we'll have some more news to report all of the processes that we have open at this time. We are analyzing -- looking at those circulars that I said to complete that appeal that we're working on. And of course, the idea is to be able to adjust things vis-a-vis 2024 cliff that you were commenting in your -- because you're clearly talking about 2024. So it's something that we're looking into and see whether we need to introduce into those appeals that we're currently working on.


Irene Gómez Barrio, Red Eléctrica Corporación, S.A. - Head of IR [10]


The next question is regarding Hispasat. Can we give any breakdown or details on the contribution of Hispasat for 2019 vis-à-vis EBITDA contribution for the whole year? The stand-alone EBITDA, that is, of Hispasat. Also some estimates on how we expect that EBITDA to perform throughout 2020.

And again, on Hispasat, the next question is at some point here, we've seen news in the press on the possibility of capital -- Reintel opening up to new partners. Is this something that's still under consideration? Or is this in consideration for Reintel and Hispasat that is.

And then on Hispasat, another question. The level of investment expected for the coming years.


María Teresa Quirós Álvarez, Red Eléctrica Corporación, S.A. - CFO [11]


Let me start, if I could, with that contribution by Hispasat to EBITDA and the full year outlook and also contribution in the future. As we said before, within the EBITDA for the group, EUR 33 million comes from Hispasat, it would be about EUR 130 million if you multiply it by the 4 quarters, and that is approximately the contribution we'd expect from Hispasat in 2021 on a recurrent basis from Hispasat.


Roberto García Merino, Red Eléctrica Corporación, S.A. - CEO & Director [12]


That's perfect. As for the strategic vision of whether we would actually bring in new partners into either Hispasat or Reintel, I think this is something that's still on the table. We would have to try and seek contributions from new partners, new shareholders that could be complementary for us and expand our business here in both Hispasat and Reintel and help us to really unlock the full value of the investments that have been made, which I don't think have been properly understood yet by the market.

And then that estimate for investments to be made at Hispasat, as you know, the Amazonas-Nexus project is the next one. We're talking about a satellite that will have investment of about EUR 250 million. Some of that investment will be self-financed with the contracts that have already been signed with some of the future clients at the start. They've already joined the project at the start of the mission. And the rest of the financing for -- the rest of the funding of that investment will come from the company's own cash flows. Remember, our leverage level is pretty low. It's about 2x EBIT at the moment.


Irene Gómez Barrio, Red Eléctrica Corporación, S.A. - Head of IR [13]


Let me continue with more questions about telecommunications, if I could. There's a question from the Royal Bank of Canada, Fernando Garcia, about the possibility of contract with Adif or the renegotiation of that contract.


Roberto García Merino, Red Eléctrica Corporación, S.A. - CEO & Director [14]


Well, as all of you know, back in 2014, Reintel won a public tender for the right of use of fiber optics, the railway fiber optics for 20 years. Surplus fiber optics capacity will be used by Reintel, that is by Red Eléctrica. That's as far as we -- that's a contract linked to public tender with closed terms, so we don't believe there should be any renegotiations whatsoever.

However, one can establish certain combinations to look at different business opportunities with Adif outside the scope of that tender. And of course, we're fully open to discuss with Adif or explore with Adif or even other potential operators' new business opportunities. But certainly, as far as the surplus of the dark fiber, we would basically adhere to the contract that we signed.


Irene Gómez Barrio, Red Eléctrica Corporación, S.A. - Head of IR [15]


So I move on to a question on investments in the transmission business in Spain. When would you have a number for the investment level in order to introduce the -- into the grid all the renewables that already have a license in Spain. And also related to investments, we're asked about the current commitment of a EUR 6 billion investment. Do we believe that CapEx should be higher as a result of energy transition and why?


Roberto García Merino, Red Eléctrica Corporación, S.A. - CEO & Director [16]


Well, I think we've talked about this, at least a couple of times throughout the presentation. And one of the key factors that we're missing to have a fuller use in the medium and long-term is the end of that planning process that will take us from 2021 to 2026. I think there are still months of work to be done before we get to that point.

But when we talk about these volumes of integration of renewables, first and foremost, there has to be a rollout of the grid without talking about figures because only when we -- when that planning process is completed will we have the figures. But I could say that the incorporation of new renewal generation will, of course, require that rollout that will be in line with the volume regeneration, and it will be probably by the end of this year. Until then, by the end of the year, we won't get a better view on the content and of planning.


Irene Gómez Barrio, Red Eléctrica Corporación, S.A. - Head of IR [17]


Next question that has been sent in is on international investment. The question is, could we give more visibility on the contribution to EBITDA or our profit from the stakes we hold in companies Latin America for the next few years?


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


Well, as Teresa mentioned at the beginning of the presentation, with the acquisition of Argos (sic) [Argo], we think we've given a big leap forward to our strategic plan. I think what's been already closed and what's committed for the coming year is we pretty much covered 80% of our international investment objective.

Now regarding the work in progress and the investments that may be wrapped up or introduced, I think in the medium term, we're talking about most everything -- once Argo is already consolidated, we're talking about of EBITDA of around EUR 75 million.


Irene Gómez Barrio, Red Eléctrica Corporación, S.A. - Head of IR [19]


The next question is on the company's objectives. We're being asked whether the objective of increasing earnings per share of at least 1% for the period, is the company comfortable with that given the regulatory review and current changes in Hispasat?


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


Well, that commitment, that dividend policy commitment is at least 1% EPS. So we talked about that, that we would certainly feel comfortable with what we said in the strategy plan that at least 1% increase.


Roberto García Merino, Red Eléctrica Corporación, S.A. - CEO & Director [21]


And after 2018 and 2019, and from what we've seen so far, I would say that the -- that commitment to our earning per share increase is going to be maintained without shadow of a doubt.


Irene Gómez Barrio, Red Eléctrica Corporación, S.A. - Head of IR [22]


The next question is about the Hispasat business as we move forward and timing. What about net profit and dividend policy? I mean when will the company be able to organize a Capital Markets Day to tell us this?


Roberto García Merino, Red Eléctrica Corporación, S.A. - CEO & Director [23]


As we mentioned, the company has been working for a number of months already in drawing up the strategic plan, which I believe will be completed in the next couple of months. So in the course of this year, we'll give you some more better outlook on Hispasat.


Irene Gómez Barrio, Red Eléctrica Corporación, S.A. - Head of IR [24]


Well, that covers all the main questions and maybe -- apologies, there's another question here in the room?


Gonzalo Cantabrana Fernandez, S&P Global Ratings Inc. - Credit Analyst [25]


Gonzalo Fernandez. Back in October, it seemed that, well regarding energy transition, the plan that the government had laid out with investment levels that they had published was to have -- was not going to be -- [our strategy] was not going to be sufficient to meet our 2030 objectives. And if you need to report on how that might impact your strategic plan?


Roberto García Merino, Red Eléctrica Corporación, S.A. - CEO & Director [26]


Well, I think right now, the planning or the proposal for that planning process is still in the hands of the ministry. And as I've said already, this is not an easy process. It's complex, but it is fundamental if we are to actually hit our targets for 2030.

And so it was all connected with this initial proposal. I think we are delivering most of the requirements for new generation but it's all in the hands of the ministry still. And we won't have a full view on what will happen until we get to the end of this year. In this new scenario of new renewable generation, 160 gigawatts installed capacity in the system while, of course, the grid has to provide support and the operator also has to cover the new generation in Red Eléctrica. Well, obviously, we have a key role to play to be able to ensure that the necessary infrastructures are available, and we will be there following what the ministry sets out and the government sets out that we have to do.


Irene Gómez Barrio, Red Eléctrica Corporación, S.A. - Head of IR [27]


Are there any other questions here in the room before we finish?

Well, we do, as I said before, hope we have answered all your questions. If you do have any more questions that we haven't answered. So get in touch with the Investor Relations team. Thank you very much for the presentation and joining us at this event. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]