Enagás, S.A. (ENG) Earnings Call Transcript & Summary

[Interpreted] Good morning. Good morning, everyone. Welcome to this result presentation conference for Enagás' 2019 and our perspectives for the years 2020-2026. The 2019 results have been published this morning before the market opened and they're, as always, available on our website, enagas.es. Mr. Antonio Llarden, Chairman of Enagás, will host this presentation. We foresee that it will last around 30 minutes. And then we will open the traditional Q&A session, where we will try and give you as much detail as we can. Thank you very much for listening. And with no further ado, I will now give the floor to President Antonio Llarden.

[Interpreted] Good morning, ladies and gentlemen, and thank you so much for listening. During this conference call, we will summarize the main milestones of 2019's results, and we will try and give you the main lines of action for our perspective going from 2020 till 2026. The whole presentation, with all details, all figures, will be available for you and have been since this morning. 2019 has been a difficult year for all companies in general and for the market. And more specifically in the case of Enagás, it has been an especially hard and complex year. In this context, it is a great satisfaction for me to announce today that our results for 2019 are in line with what the company considered for the exercise, and they're actually a bit better. We have been for 13 consecutive years following the commitment and the objectives expected. Let me summarize in 4 points the situation. Net profit after taxes was EUR 422.6 million, which was more than what we expected. Our goal was EUR 417 million. That's what we set in the budget at the beginning of the year. These results that are a bit more positive were possible thanks to 2 factors mainly: firstly, thanks to Enagás' efficient management of the Spanish gas system, together with the country's positive economic performance; secondly, thanks to our affiliates' contribution, who have contributed EUR 162 million to the company's EBITDA. They have had an especially positive role, our international affiliates, the contribution since April of Tallgrass as well as the positive impact of DESFA's purchase in Greece and the best -- well, the performance from GNL Quintero and TgP that were better than expected. The company's -- net debt of the company is in line with the goal set at the beginning of the year. We need to take into account the funds needed for the capital increase that took place in December. These funds will be used in the take-private for Tallgrass throughout the first half of this year. We additionally have a strong financial position, with over 80% of our debt being fixed rate and a financial cost of 2.1% and with no significant maturities until the year 2022. Now the solid financial position on the one hand and the end of the regulatory uncertainty on the other, after the final publication of our remuneration framework for the period 2021 till 2026, have had a positive influence in the review of our ratings. Both Standard & Poor's and Fitch have set Enagás' rating at BBB+ with a stable perspective. This is in line with other similar companies and other European TSOs. Lastly and as we promised to do until 2020, we have increased once again our dividend by 5%. The second point is the fact that 2019 has been a year of important challenges and also a year of historical milestones for Enagás which have had generally a very good welcome by the market. This is an event that has marked most of the exercise. It's the fact that we have closed the regulation for the period 2021-2026. As you know, this has been a very intense year in which we have been informing you timely about this process. I am not going to repeat what we have been saying for the last 7 months, but I would like to tell you that, as you know, at the end of December, the CNMC published a circular establishing the method for determining the remuneration of natural gas transport facilities and LNG plants. So we have started 2020 with a stable regulatory framework, with a time frame of 6 years that goes from 2021 till 2026, which encourages and supports the energy transition objectives and that establishes reasonable returns which are in line with our European comparables. Another fundamental milestone has doubtlessly been the fact that we entered the U.S. through our investment in Tallgrass, which has been the largest international operation in the company's history. As you all know, it was carried out in 2 phases during 2019. The last phase took place in December. After the closure of the take-private of Tallgrass in 2020, probably around the first semester, Enagás will have a participation of approximately 30%, which will involve a total investment in dollars of $1.623 billion. This operation fits perfectly with Enagás' strategy, which has 2 clear objectives. We need to maintain the maximum effectiveness, efficiency, and safety in the operation and management of the Spanish gas system. And the second objective is, bearing in mind that, if there is a global market, if there is one that is -- that of LNG, in that case, our experience in Spain and our knowledge are very useful in the international market in order to continue growing as a company, in order to maintain and increase employment and maintain the trust of our stakeholders. The investment in Tallgrass in a country that was identified as a priority for us, which is the United States, and in a diversified company with midstream infrastructures reinforces the long-term sustainability of our dividend. And with this operation and the dividends that were contributed by Tallgrass, Enagás is almost fully offsetting the effect of the regulatory reform for the period 2021 till 2026. In order to finance our increasing participation in Tallgrass while maintaining a prudent leverage position, in the year 2019, we have carried out for the first time in our history a capital increase, which amounts to EUR 500 million. We are very satisfied with this operation, which has had the lowest discount and the best subsequent market performance of a capital increase of this nature in Spain. The capital increase took place in record time and exceeded manyfold the total new shares that were issued. The success of this operation shows the market confidence in the company as well as its support to Enagás' international growth strategy. This capital increase has meant as well a reinforcement of Enagás' shareholders base: first of all, with SEPI, which has participated in the capital increase to maintain its 5% stake at Enagás; and the entry of Pontegadea, also with 5%. So when we considered the best way to carry out this capital increase, our priority was and still is that -- the following: that our shareholders maintain their profitability and their dividend. And the fourth milestone is the following: in 2019, we registered the highest demand for natural gas in our country ever since the year 2010 -- that's been 10 years -- 398 terawatts per hour. It's almost 400 terawatts. The demand for natural gas in Spain closed 2019 with a year-on-year growth of around 14%. This growth was mainly due to an extraordinary demand for natural gas for electricity generation 80% higher than that of 2018. Furthermore, the greater participation of natural gas in the thermal gap has allowed us to reduce our CO2 emissions by 25%, which has allowed to avoid issuing 14 million tonnes of CO2. These data highlight the importance -- the important role that natural gas has in a context of decarbonization, both in the guarantee of supply as with regards to backup for renewable energies in times of record demand. According to the data that were announced last week by the International Energy Agency, in 2019 global energy-related CO2 emissions were stabilized, thanks to the role of renewable energies and also thanks to the progressive replacement of coal with natural gas, which are the main factors that need to be considered here. And finally and in this context of strong demand, I wanted to highlight the maximum operational efficiency with which the infrastructures, the gas infrastructures, have operated in Spain in 2019. Let me give you some figures. We have worked with almost 100% of the technical and commercial availability. With regards to regasification plants, the tanker offloading service has increased by 17%. The regasification has increased by 28%, and LNG stored in tanks has increased by 32%. I'm always doing a year-on-year comparison. And we also have used the -- we have increased the use of [ this storage ] by 4%. And the contracting of storage services currently stands at more than 95% of the availability. As I said at the beginning, the effective and efficient management of the Spanish gas system is an absolute top priority for Enagás. I want to talk to you now about one of our biggest challenges, present and future: the climate emergency and Enagás' role in the ecological transition process. At Enagás, we have a strong commitment to sustainability and a clear objective to be carbon neutral in 2050. The road to this carbon neutrality started some time ago. We drew up a strategic plan with some well-defined objectives based primarily on specific technical measures and with some very rigorous measurement processes. As a result, between 2014 and 2018, we have reduced our CO2 emissions by 47%. Our medium-term commitment is to reduce them, by 2030, by an extra 25%, and by 2040 by an additional 61%, with the ultimate goal of being carbon neutral in 2050. Thanks to this commitment, this year, we have been recognized for our role in the energy transition. Enagás has been included in the A list of the Carbon Disclosure Project's climate change, and we have obtained the highest rating in our subsector. We have also been world leaders in our subsector in the Dow Jones Sustainability Index for the fourth year in a row with the Gold Class distinction for our performance in sustainability. As you know, we understand sustainability in a broad sense, and our commitment goes beyond decarbonization and environmental management. Therefore and amongst other milestones and awards, in 2019 we attained for the 10th year in a row the top employer rating as one of the best companies to work for. And we are currently among the top 100 of world-leading companies in gender equality of the Equileap ranking. Now in order to explain the role Enagás plays in the ecological transition process, we first need to take into account the global energy environment, which continues to be characterized by the abundance of gas at competitive prices. According to the national Integrated Energy and Climate Plan, we foresee then that in 2030 demand for natural gas will increase its weight in the energy matrix, and this is due to several reasons: firstly, the importance of industrial demand, where gas is irreplaceable due to its power and versatility; secondly, its greater weight compared to the reduction of nuclear and coal energy; and its role as a backup for renewable energy. Now further in the future, we know that electrification will undoubtedly play a very important and increasingly growing role, but with today's available technology, it does not seem that in the medium term 100% electrification will be possible. We will hence have to have other ways to move forward. And that is exactly where renewable gases will play a fundamental role, because they make it possible to decarbonize all sectors, even those that cannot be electrified 100%. Now transporting these renewable gases using the existing gas infrastructure is essential in order to move forward in the energy transition at the lowest cost. Therefore, and as I mentioned in the third quarter results presentation which took place on the 27th of October, in '19 -- in 2019, we created Enagás Renovable, a new subsidiary from which we are promoting projects in this area. According to estimates today, between 2020 and '26, we plan to allocate around EUR 300 million to hydrogen, biogas and biomethane projects, some of which we are already working on. And you will be able to find more information on the presentation that we're using today. Now in the specific case of hydrogen, among other initiatives, we have already presented a proposal to the EU in Brussels for an ambitious hydrogen deployment program in Spain which can also supply part of Europe. And that ought to be what within the EU we call an Important Project of Common European Interest, IPCEI. Enagás has an infrastructure network with sufficient geographic capacity and vertebration to connect potential production and consumption points. And we are currently developing a road map to ensure that this network can solve the transport and storage needs derived from the new hydrogen economy for 2020 to 2026. Furthermore, as part of our role in the ecological transition, Enagás is promoting different projects in all types of mobility. And taking advantage of the strategic position of the Iberian Peninsula, we want to strengthen the bunkering and the small scale through regasification plants. The gas replacement projects that Enagás is already engaged in, in Spanish ports will avoid between 2 million and 4 million tonnes of CO2 in the maritime sector by 2030. All these projects are in line with the guidance of the national Integrated Energy and Climate Plan as well as the EU's Green Deal. And we are working on them with the ministry for ecological transition, the Spanish Ministry for Ecological Transition; as well as with the Spanish Ministry for Industry, Commerce and Tourism. Now finally, I would like to share with you our 2020 to 2026 outlook. First of all, in 2020, we anticipate a 4.1% growth of profit after tax, thus maintaining our commitment to increasing the dividend per share by 5%. And we also expect to practically double the dividend contribution for our affiliates. For the first part of the 2020-2026 period, the company's priorities in terms of investment are the following: first of all, to close the take-private of Tallgrass in this first half; secondly, start up the Trans Adriatic Pipeline, T-A-P, TAP, which is planned for this year; and thirdly, to continue progressing forward in the resolution of the GSP arbitration, whose completion, according to our legal advisers, is expected to be at the end of 2022. Now with respect to TAP, the current overall progress of the project has already reached 92%, and this is in line with our schedule. In November, we started gas tests on the Greek section of the pipeline. And the Italian ministry of environment has already issued the last pending permit. And so on the 1st of February, the work on laying the submarine gas pipeline in Italy began. Regarding the South Peruvian pipeline, I can confirm that the arbitration in ICSID continues its course according to the procedural schedule. Enagás filed the formal lawsuit almost 1 month ago, 20th of January. And it is now up to the Peruvian state to submit the statement of defense. As you can see, we're following the schedule and the deadlines established by ICSID. We would be happy to negotiate an amicable solution with the Peruvian government that could put an end to the arbitration process, if at all possible. Now between '20 and -- 2020 and 2026, the company will continue to maintain the strong cash generation, and this is very important. Our funds from operation, FFOs, or the funds from the accumulated operations in the period, will amount to EUR 5.378 billion. Now this is a figure with high visibility due to the stability of the regulatory framework until 2026 and also due to the predictability of dividends from our international subsidiaries. Now after committed investments, mainly in the second phase of Tallgrass, we will have an available cash flow of EUR 4.328 billion. From this, we will assign to the dividend during this period EUR 3.138 billion, which means that we will have an accumulated discretionary cash flow of EUR 1.19 billion at the end of 2026. Now if GSP arbitration is favorable, as we expect it to be, the discretionary cash total would increase by EUR 459 million, up to EUR 1.650 billion. Now both amounts, without taking into account additional investments, are sufficient to ensure continued commitment to our dividend policy and sustainable future growth. Now talking about our subsidiaries. You know that we have a very diversified portfolio of subsidiaries. And since we started our internationalization process in 2018, Enagás has invested an approximate total of EUR 2.9 billion. And in this regard, we expect that the average contribution of affiliates to dividends in the 2020-to-2026 period will reach EUR 300 million, which means a large increase compared to the EUR 123 million in 2019. Now considering shareholder remuneration, which is one of our strategic priorities, we have ratified the dividend policy that we set until 2023. Now from 2024 and until 2026, we commit to maintaining a sustainable dividend of EUR 1.74 per share. And this is supported by, amongst other things, the high predictability of cash flows, the high quality of funds from operation generated and discretionary cash flows generated. In addition, this is completely compatible with the company's projections for our income statement at the end of 2026. And to conclude, 2019 has been a very important year in the history of Enagás. It's been a difficult year with many challenges, many milestones for the company, but we closed very positively with a stable regulatory framework, with an important investment in the U.S., with a capital increase in excellent conditions, good ratings and also expanding our shareholder base in the long term. We have hence laid the foundations to face the new 2020-2026 period that we have begun in good standing and which we have commented on the main strategic alliance today. Thank you very much for your attention. And if you have any questions, please feel free to ask the whole team, headed by Marcelino Oreja, our CEO; as well as the rest of the Board. We'll try to answer your questions in as much detail as possible. Thank you.

[Interpreted] [Operator Instructions] First question comes from Mr. Javier Suarez, Mediobanca.

[Interpreted] I -- it caught my eye when you talked about dividend. The company talks about dividend, a sustainable dividend in the long term until 2026. And I understand that the comment with regards to long-term sustainability, they are referring to over 2026. Could you please explain this vision of the company and sustainable dividend, whether it stops in 2026 in that EUR 1.74 that you talked about which was the minimum, or if you think that with the change in regulation and Tallgrass and so on, this sustainable dividend goes beyond 2026? In that sense, I was interested in really understanding where your net income would fall for 2026, and if beyond 2026, in the period that goes from 2026 till 2030, and that figure that you see for 2026, do you see stability as a consequence of the recent regulatory changes? And my third question had to do with your expectations for Tallgrass, its profitability, the profitability of the investment in the U.S. and how relevant is that becoming for the company. In a scenario of gas prices that are particularly low, could you give us some further details or visibility with regards to how the business model for Tallgrass' growth in America could be compatible with a scenario where international gas prices are particularly low? What is the current contracting situation for Tallgrass? So how could this have an impact on your growth plans for the company? And the last questions that I had have to do with RCS in the internal model in the -- in your social responsibility, corporate social responsibility. Do you still think that this gives additional income to the company? Or do you think that, beyond 2026, they would be canceled out? And the last question is, in your business plan, when are you going to do [ TgP session ]?

[Interpreted] Thank you very much, Javier. You have asked many questions, so we're going to have a master's degree in answers today. So some of the questions, we think, are linked. So we think that it is clear now that, until 2026, we do believe we could have a sustainable dividend with no problem whatsoever. And we always have to remember that this is considering that we haven't done any additional investments in this period. If we were to do some additional investments, then we would have a greater cash flow. Now what we do think is that in 2026, from 2026 onwards, if we add our PPA to our net income, we would have a payout that could be around 100%. We think we have an income stability that is quite good because the new regulation, that we're not going to dig deep into because we don't have time to explain all the technical details. You were talking about RCS. Well, yes, in fact it's true that one of the key points of the new regulation is that we did not eliminate the RCS, which was a topic that really worried us. There is a final amount for 2026 that I remember are EUR 50 million, if I'm not wrong. And everything seems to indicate that RCS could keep on living because that was actually the will of the regulator when they put in place the changes. So we have a series of income that I cannot detail for you here -- but maybe later during a call, phone conversation, we could explain in depth -- that allow us to maintain, considering that no further investments are being done, after 2026 we would have very interesting cash flows that would allow us to maintain our dividend. And we could even increase it, but we are content with saying that we have sustainable dividend payout expectations beyond 2026. So I think that this topic, well, is explained now. Now as for GSP, we -- our legal advisers said that it would end in 2022. The arbitration would end in 2022, so we could recover that amount from then onwards. Obviously, when we have given you our cash flows, you could -- I'm sure you have seen that we have given a first cash flow and then we added this [ pay-in ] as a reinforcement, but the cash flow that we have, we believe, maintains our general policy and our dividend policy and make them seem very sustainable. As for Tallgrass, I will now give the floor to our CEO, Marcelino Oreja, so that he may answer your question.

[Interpreted] Javier, the Tallgrass investment is going to give us a profitability that will be above 10%, and we are very happy with it. We believe that the low prices of gas will allow for greater transportation and greater consumption of gas. We are one of the links in the middle of the chain. We are simply providers for the internal market. And these low prices allow for growth in demand both in the U.S. and outside. And these low gas prices will allow for an increase of gas demand in Europe as well.

[Interpreted] And the next question comes from Alberto Gandolfi, Goldman Sachs.

[Interpreted] I'm going to ask only 3 questions. First of all, when talking about strategy, what is the mid/long-term objective for Tallgrass? Is it going to stay a financial asset? Or is it -- do you see any value in, at some point, taking control of the company and integrating the company? And could you also tell us about our competing pipeline, especially in terms of oil? Because there aren't plans for a pipeline competing with [ Onyx press ]. And also, the second question, about dividend. We keep talking about sustainable dividends, sustainable, sustainable, sustainable. There's an arbitration that's going to cost about EUR 500 million. We have cash flows, free cash flow, of -- at the Slide 27, discretionary cash flow at EUR 1.6 billion. And I'm just trying to figure out here. Leverage would be very reduced by 2026 in this scenario, wouldn't it, especially if arbitration works in our favor? So the idea is, with discretionary cash flow of about, including leverage, EUR 1.5 billion and EUR 2.5 billion, wouldn't it be reasonable to assume that we could have another [ EUR 75 million to EUR 100 million ] towards net profit for 2026? And in that scenario, if we used this completely, what would be our dividend policy? Would we have to take 80%, 90% of incremental dividend on net income that we could potentially have? And my last question: this is a bit more about details. Could you explain the EUR 48 million of amortization and depreciation? Would that be recurrent? And what happened with the tax rate? Because with associates it was quite high. And are we going to manage to lower that in the future towards the 25%?

[Interpreted] Thank you very much, Alberto Gandolfi from Goldman Sachs. Concerning your first question, or the questions concerning Tallgrass, I'm going to give the floor to Mr. Marcelino Oreja.

[Interpreted] Yes. Alberto, well, we think that our investment in Tallgrass is strategic. It's industrial. We are an industrial partner in this project. We're part of the Board and we're part of the management. We have participated in the creation of the Board, of the management team design, the strategy design. So Tallgrass is for us an growth platform. And with our partners, we will use Tallgrass as a platform to grow in the U.S. and to find new investment and business opportunities. Now concerning the possibility of having a pipeline, it is true that there [ are ] some projects that currently exist; and we're working on those. We're working on our available -- ability to absorb oil in different places and to take part in the gasoduct as well. Tallgrass is a very diversified company with water, oil, gas and many other businesses in different industries. And so it has the potential to keep growing and to keep on contributing to different business parts. So we know the company very well because we did the first acquisition phase in March last year. The second phase was announced in December. And I'm sure that, adding our expertise as infrastructure manager, we will be able to make it more profitable.

[Interpreted] Thank you very much, Marcelino. I'm going to answer your other 2 questions, Alberto. It is true that our structure, when we say that we have a sustainable dividend, is based on those cash flows that you have yourself explained. And it is true that, if we keep on going the way we are and if we didn't have any further investments, by 2026 we would have a much smaller leverage and hence would have more discretionary cash flow available. So what you were asking is in some way the conclusion. Obviously, after 2026, we could think that our dividend could be increased, but we have to be modest because we are in February 2020. So thinking about 6, 7 years from now that it was going to grow would be a bit too ambitious or risky, but we are convinced that in this 2020-to-2026 period, taking into account GSP or not, we have very strong cash flows to maintain our dividends policy. And beyond 2026, both regulation and our current cash flows allow us to think that we will be able to increase our dividend. But our commitment, which we think has to be in the short mid-term, as you were asking -- I am saying short mid-term -- our commitment is what we said on the presentation, that we are very happy, very optimistic with what we're doing and beyond 2026, which is by the way something we wouldn't be able to say, we would not been able to say 6 months ago. Now concerning the EUR 48 million provision. This is not something that will be recurring. This is a very specific subject because, as you know, during 2019, the EU got rid, in principle, from its main projects, the interconnection with France. So we have taken note that, at least for the time being, the money that we have committed in assets for this project would be on standby. And what we've done is to do a write-off. Now if in the following years the European Union will change its criterion, then obviously we would get these numbers back, but for the time being we thought it was prudent to do a write-off, a nonrecurring write-off. And hence this project is for the time being eliminated from our assets. Now concerning tax rate, our experts confirm that it is true that we are currently on 25%, which is almost the corporate tax for Spain. I would like to add something to what Mr. Marcelino Oreja said, something that is very important for us, because our [ present ] in the U.S. with Blackstone, let's not forget that. And we are very proud of being partners with such an important hedge fund. I visited Blackstone some 2 weeks ago in New York in order to reaffirm, on the one hand, our availability and satisfaction for being their partners. And also, they have told us in return -- and we're saying this very humbly, but they have [ said to us ] that a partner like us is very interesting for them, especially because of what Mr. Oreja has said, because we add -- honestly, we add a real asset management experience both to do with plants, with storage, with gas networks in a context that is not new, that has been flexible for a long time. And hence our presence in the U.S. in this sense is not -- it's not a financial presence. It's something more in depth. It's something more technical. And we do see some options for growth, for secure growth in that context. So we are very satisfied with our alliance with Blackstone. And very humbly, I have to tell you that Blackstone, at the highest level, have said to me that they are indeed very happy with us. And this is -- we're talking about a fund that would have and would need partners because they have sufficient funds. They could do everything directly, but they have appreciated that we can add experience, and that's what we're trying to do. Board, including the CEO, have permanent presence in the meetings that take place in the U.S. And we hence think that for our business this is a very important market in a very complex world, the world we live in right now, but this is one of the more stable markets and industries. And that's where we want to keep on developing our work, as well as in other places in around the world, but this for us is a very important investment and a very long-term investment as well.

[Interpreted] Next question, by Javier Garrido, JPMorgan.