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

Good morning, ladies and gentlemen, and welcome to the presentation of Enagás results for the first half of 2021. The results were released this morning before the opening bell. And as usual, they are available on our website at www.enagas.es. Mr. Antonio, Chairman of Enagas, will host this presentation, which is expected to last about half an hour. And afterwards, there will be a Q&A session during which we will do our best to answer any questions as thoroughly as possible. Thank you very much for your attention. And now I hand the floor to Mr. Antonio Llarden.

Good morning, ladies and gentlemen, and thank you for attending this results presentation. I'm joined on this online conference call by the Chief Executive Officer, Marcelino Oreja; the Chief Financial Officer, Borja García-Alarcón; the Board Secretary, Diego Trizio; the Investor Relations team, Antonio Velasquez-Gaztelu and Cesar Garcia Del Rio; and the Communications and Institutional Relations Director, Felisa Martin; [indiscernible] the Director of Management Control and Business Analysis. I'm going to share with you the company's key milestones since the last results presentation on the 20th of April. First of all, on the 27th of May, we held our General Shareholders' Meeting, which was conducted remotely for health reasons and in prioritizing people's health and safety. We have 136 more online shareholders than last year. The 2 most important proxy advisers IFS. And lastly, we've issued a recommendation to vote in favor of all the proposals on the agenda, which were subsequently approved by a very large majority of nearly 100%. They include the company's management and the annual accounts for 2020, which were timely approved with 99% positive votes. So the second consecutive year, Enagás General Shareholders' Meeting has been certified as a sustainable event by AENOR, Spanish Standardization and Certification Agency. Secondly, on July 8 and after, this resolution was adopted at the GSM, Enagás paid out a complementary gross dividend of EUR 1.008 per share, in line with the commitment to distribute across dividend of [ EUR 1.8 ] per share charge to 2020 profit. This dividend payout is therefore [ 10% ] more than in 2019. Shareholder remuneration is therefore a priority for Enagás. And thirdly, during this quarter, we have significantly intensified our commitment to decarbonization by promoting specific renewable gas projects that I will describe later on. The results for the first half of the year were highly positive because we are able to cushion in part the impact of the regulatory reform that, as you know, became effective in 2021. And which has led to a significant reduction in the companies regulated revenues, although we should also say that this provides us with a paper regulatory framework until 2026. There has been a significant improvement with regards to the second quarter of 2021 due to a higher contribution of our accolades to net income after tax, which already stands at 40.4% and also because we continue enhancing our efficiency. We delivered a net income after tax of EUR 213.1 million during the first half of the year. Let me now point out to the fact that we reported solid cash generation. We reduced our net debt significantly. We also increased our liquidity up to EUR 3.024 billion, and we also improved our debt financial cost, which went down to 1.8%. After the dividend payments planned for the second half of the year, one in July, which has already been made and the one to be made in December, our debt level at year-end will be fully in line with the budget. In short, the company's performance in the first half of the year and specifically during the second quarter was very positive, and this is indeed good news to reach the half-way point of the year with such results in that reporting. It should be put in mind that these figures include nonrecurring results in the first 6 months that will not be delivered in the second half of the year. For this reason, we prefer to take a prudent approach and convey the message that we are on track to meet all the targets set by year-end. During the first half of the year, Enagás's gas infrastructure as a whole were available 100%. With regards to the degree of use of our infrastructures, the figure that currently serves as an indicator is that of gas demand. So far this year, this reflects a very positive and upward trend supported chiefly by conventional demand, which includes household and other industry sector and which accounts for somehow the economic recovery in the country representing around [ 83 ] of total demand in Spain. This conventional demand has climbed by almost 10% so far this year compared to the same period in 2020. And in particular, in fact, demand has increased by 9%. Now talking about total demand for natural gas in Spain during the first 6 months of the year, coupled with gas used for electricity generation, total demand was in excess of the previous 6-month period by 6.3%. So this positive trend evidences a potential role that gas infrastructures have played in ensuring supply during COVID-19 and during the greatest cold front that hit Spain in recent years. Basically, the role that such infrastructures have and will continue to have in achieving the European decarbonization goals. These infrastructures are constantly evolving in terms of technology, efficiency and safety. And by way of example, among others, recently, the Barcelona regasification plant, the largest on the Peninsula and the second one in Europe, once again was given the better standard rating during the audit conducted on maintenance management and emergency management procedures. I would like to stress, as you well know, Enagás is an infrastructure company and a network operator. That is our core business, not the purchase or sale of gas. Therefore, the volatility of international commodities markets are not affecting us directly. With regards to our international accolades or investees, they performed very well in the first half of the year. And let me mention some highlights. As for Trans Adriatic Pipeline, there are 3 important milestones to be noted. First of all, it has been 100% operational, and its actual level of utilization as of July is already around 85% of its capacity. Secondly, as at July 1, it has already carried 3 billion cubic meters. That is 3 BCM to be delivered in Europe. And after reaching the so-called financial completion day on the 31st of March, in June, a true up was cut it out, reducing Enagás stake in the company. Therefore, our 16% stake in TAP that represents an investment of EUR 190.2 million with an expected return in excess of 11%. In the United States, the Tallgrass Energy business also performed very well in the first half of this fiscal year ahead of budget, and this was mainly due to the recovery of the U.S. energy market and a very good growth prospects. This had a positive impact on the results of producers, including some of Tallgrass's main customers. Currently, Tallgrass is moving forward and developing decarbonization projects in the North American market. And in this regard, let me give you a specific example. Last week, Tallgrass announced that the National Energy Technology Laboratory of the U.S. Department of Energy has awarded the company's federal funding as a part of the national effort to advance next generation clean hydrogen technologies. You have all the same more detailed information in this respect in the presentation that is available to you. The rest of our international affiliates also reported a very good results. For example, GNL Quintero, which in a context of strong gas demand in Chile, is operating at very high production levels. In Europe, our affiliate DESFA is one of the promoters of the White Dragon project to develop green hydrogen production value chain in Greece. So in summary, and as you can see in the presentation that in terms of our accolades are very positive and even somewhat ahead of expectations. All of them, on the other hand, are actively contributing where their infrastructures to the decarbonization process in various parts of the world. Just like every quarter, I'm going to provide you with an update on Gasoducto Sur Peruano. The arbitration proceeding is advancing as per the established procedure at calendar, which is quite positive. Tomorrow, the new President of Peru will be inaugurated, Mr. Pedro Castillo and Enagás will follow the formation of this new administration very closely and will convey, as usual, our willingness to reach an amicable agreement with the Peruvian state. In this respect, in recent weeks, the team of Peru's new President has expressed their confidence in maintaining and attracting international investments. Enagás, in developing its present and future activity, has ESG criteria in place as a general framework. And as an energy company, holds a clear commitment in this area, and with active contributions to the decarbonization process. Internally, we have been able to reduce since 2014 our carbon footprint by 63%. Therefore, we will be able to achieve our goal of becoming a carbon-neutral company by 2040 or even sooner. This has positioned us among the world's leading companies in climate action and keeps us at the top of sustainability indices and banking. And to name by a fewer words, let me mention the following. We have been included in the CDP climate change A list. We are one of the companies that have set out its climate commitments in the European Climate Act initiative, which is part of the European green deal. Recently, the Financial Times included us in their list of European climate leaders. In addition, we have bilaterally joined American emissions reduction initiative led by The United Nations Environment Programme in collaboration with the European Commission. We have also received very positive feedback on the first report we submitted to them and on our reduction plan. And we are working so that in the short time, we can be awarded the highest rating possible that is the Gold standard. In addition to all of our internal actions to become an increasingly sustainable company, our -- as an infrastructure company, our main goal is to contribute to the global decarbonization process. And to this end, we continue working to develop renewable gases. These are technologies which will be essential to supplement electrification and therefore, achieve the final or the ultimate European decarbonization objectives. And let me give you some concrete and relevant projects examples over the past 3 months. We are promoting several of the so-called Hydrogen Valleys or hubs with other partners. These are large scale initiatives that bring together various green hydrogen projects and involve a large number of stakeholders, so the governments, large and small companies, producers and consumers among others. And in this respect, we are promoting, for instance, the Hydrogen Valley of Catalonia with the Rovira i Virgili University and Repsol. This is a micro project that we presented on the 14th of May in Tarragona together with more than 100 institutional and business stakeholders involved. We are also promoting with other partners, the Hydrogen Valley in the Community of Madrid with EDF, Madrileña Red de Gas y Q-Energy. We are also promoting the creation of a green hydrogen hub in the Canary Islands, together with this company and the largest green hydrogen project in the Valencian community in partnership with Iberdrola and bp. We have also partnered with Navantia to promote 3 major projects to deploy the potential of green hydrogen across different regions in Spain and, therefore, contribute to decarbonizing the manufacturing in transport sector. We have also submitted together with various partners and energy transition project for the City of Malaysia and another one to generate green hydrogen in the Bay of Algeciras. So these are all hydrogen-related projects. As for biomethane, together with AXA, we executed an investment agreement with Trovant Technologies. This is a startup from [indiscernible] to develop a technology that will produce biomethane from biogas from wastewater or organic waste. This is, therefore, a circular economy project. We are also promoting renewable gases by encouraging investments in this kind of green technologies. For example, through the energy transition fund, Clima, which we developed together with Alantra and which this quarter completed its first closing of more than EUR 8 million on a kind of investment. In addition and in closing, we are aware of the need to conduct green hydrogen analysis. Therefore, we have joined the new Department of Hydrogen Studies at the Commission Pontifical University as a sponsorship company in order to promote this energy vector also in the field of research. And finally, and this is a social and an environmental commitment initiative jointly together with the regional government of Extremadura and other large companies. We have joined Motor Verde, the largest reforestation project in Spain that is promoted by the Repsol Foundation and Silvestri. So these are just a few examples of the 55 hydrogen and biomethane projects that we're currently promoting throughout Spain with more than 60 partners and which could represent an aggregate investment of EUR 6.3 billion. Many of these projects were already presented during this first half of the year to the different expressions of interest opened by the Spanish government. At this moment, we remain very attentive to the calls for proposals that are expected to be launched in the coming months by the Spanish administration. If you could allow me, I'm going to have some water. Thank you. And before closing, I would like to stress that the results for the first half of the year are in line with the attainment of our targets in 2021. This is a year that which -- in which the regulatory reform has become effective, as you will very well know, but which provides us with a stable regulatory framework and visibility of our regulated revenues until 2026. Let me remind you of our targets for 2021. We maintain our estimate of EUR 380 million of net profit by the end of the year. Solid cash generation, which will enable us to reduce our net debt and continue providing an optimal balance sheet structure. We continue intensifying our control plan and overhead savings, writing off all that is not essential to the business continuity and to current and future activity. We also maintain our solid commitment to employment just as much as we maintain our strong commitment to our shareholders and their remuneration. Cash flows generated enabled us to guarantee our dividend policy for 2021. And as you know, this will be set at EUR 1.70 per share, which accounts or a 1% increase compared to 2020. I will now finish off with 3 conclusions. First, on the 27th of May, we held the company's General Shareholders Meeting, approving all the items on the agenda by a very large majority, in many cases, close to 100%. Today, we have presented the company's good results for the first half of the year, thanks mainly to the good performance of our accolades and our efficiency-driven efforts. And as we have been announcing, we are working very intensely on decarbonization, hydrogen and biomethane projects. Today, we had briefly summarized the main progress made in specific projects over the quarter. Let me once again underscore as I do in every presentation that we hold a full commitment to decarbonization, and we are using all of our know-how and we are making all possible efforts to promote solid transformative projects that may contribute to a just transition to make our country's manufacturing sector more competitive and sustainable and ultimately to generate employment. Thank you for your attention. If you have any questions, please do not hesitate to raise them. And as usual, we will try to answer them as fully as we can.

[Operator Instructions] First, we are going to admit questions from the Spanish room. The first question is by Javier Suarez from Mediobanca.

I have a couple of questions. First, with regards to the guidance after such good results in the first half of the year. The question is whether it's fair to say that the company feels comfortable with the guidance of EUR 380 million net profit for this year. And also, if you could tell us in detail as those EUR 20 million one-off that we had in the first half of the year, what are they due to? And the second question is more top level. The European Commission has presented the new energy strategy for the next few years. And I would like to ask how do you see Enagás strategy in the context of a EU decision to give these assets also an important role in decarbonization? And another question is in the American market. The U.S. market, it seems that they're also seeing -- looking into the development of renewable gas from a different perspective with this new administration. I thought it was very interesting what was said by Tallgrass regarding federal investments. I would like to know how you see the future of renewable gases also in the U.S. market.

Thank you very much, Javier, for your question. We will discuss this for just a few seconds, and we'll get back to you straightaway. Thank you very much, Javier Suarez, for your questions. Let me just go quickly over this. First, the one-offs mainly are the most -- not the most important ones have to do with the cold front there was a EUR 10 million revenue in the case of Tallgrass that obviously may not be the case in the second semester. And then there are EUR 7 million from a recapture due to something we have a provision for GSP. And really, we think that we have really fulfilled the budget for the first half of the year, we believe that we'll meet the budget for the second half. I mean we have upsides. I mean it's true that we may have some upsides that will not be repeated but will not disappear there. So we are very optimistic with the compliance of our goals, but with the huge volatility that we have in the market, we prefer to be cautious as well as Enagás is not known for making huge announcements outright. And about the second topic, obviously, it's very important for the advancement and the progress of the European Union Commission in the decarbonation strategy. And there, we believe what we don't just believe we see that the EU believes so. There's been a latest report by the European regulator that states and focusing on what we do. They say that the infrastructure -- high-pressure infrastructures that we currently have in the whole gas infrastructure in Europe are very well prepared to help the deployment of renewable gas, which is something of a necessity. We want to reach the ambitious goals that they've set. And there, the hydrogen, both pure hydrogen but also blended hydrogen and biogas, will be a very important part that EU believes could work. And Enagás specifically believes we can play a role that is very important in order to help this work to make sure that we can create a market that we can help the recertification processes for green hydrogen, et cetera. So Javier, I don't have a lot of time to answer to you. But I think we are really in agreement with the proposals by the EU, and we honestly believe that over the next few years, because this will not be immediate, over the next 3 to 5 years. we will be able to develop this really well. And finally, yes, it's true in the U.S. with a change of administration with Mr. Biden, there's been an important change on how the federal government sees this issue of decarbonization. And I'm going to give the floor in fact, to the CEO, Marcelino Oreja. He can talk about Tallgrass. Marcelino?

Thank you very much, dear Chairman. In the U.S., the bet on hydrogen is very important, not just in green hydrogen, but also blue hydrogen. They have very important and a cheap gas reserves. And in Tallgrass, we are convinced that there will be many opportunities for growth in that field just like in Europe. The use of the current gas infrastructures will be very important in order to transport hydrogen with the green or blue, and I think in Tallgrass, we can also help with it. So I'm sure there will be many opportunities. And in fact, Tallgrass has already a small project in order to ensure that we are able to test both for the U.S. Thank you very much. Thank you, Javier Suarez. Thank you, Chairman, Marcelino. We are ready for the next question. Please go ahead.

The next question comes from Alberto Gandolfi from Goldman Sachs.

I have 2 questions first. I know it's quite early, but do you have an idea of EBITDA contribution up to 2026 or an idea of investments that are being managed by Enagás that will come from the recovery fund? Just to get an idea of all those projects, what could be the net contribution for the company from those next-generation plans? Secondly, when you give guidance of Tallgrass for 2021, commodities were lower. After the coal front, I would like to have an update on that guidance. And whether you -- if you are not increasing it, why are you not increasing it? Because in the environment of commodities and when looking at demand, it's been greater than expected. And I don't know if you could give an updated guidance on Tallgrass also for 2022. Is it possible that EBITDA for Tallgrass in 2022 will be greater than 2021 despite what's happening on the coal front and demand? Or do we think this will be just normalized due to climate change?

Thank you, Alberto. We'll talk for just a few seconds, and we'll answer immediately. Thank you, Alberto, for your 2 questions. But the first question, the EBITDA range for 2026 initially, it was before the cold front. After the cold front, we have gone and basically on what I remember is going from EUR 700 million to EUR 740 million, I think. So there's an update of the revenues by Tallgrass. Despite that, we have been -- Tallgrass so far has been foreseen any changes for the rest of the year. So we're working with that improvement. In the case of 2022, it seems that it's going to be an EBITDA improvement versus 2021, but we still do not have specific figures. We will calculate them together with Tallgrass during the second half of the year. But even in general terms, the guidance's and the information that we received from Tallgrass is actually better than what we would have expected at the end of last year. Thank you very much, Alberto.

So the next question comes from Lillian Starke from Morgan Stanley.

Just 2 specific questions about Tallgrass. Regarding additional contracts that you signed with con Express, I would like to know if this is more for about producers that are increasing their capacity or whether these are producers that are looking for certification in some of these countries? And the second question that I have is when you talk about opportunities for growth for this business, what type of projects are you looking into, especially to know whether they are fixed revenue or viable revenue projects?

Thank you. We will discuss this for just a few seconds, and we'll get back to you. Thank you. Thank you very much, Lillian Starke. I give the floor to Marcelino Oreja, the CEO, so he can answer both questions about Tallgrass. Marcelino, go ahead.

Thank you very much, dear Chairman. Well, in fact, with con Express the growth of the activity of the increase of flow is mainly due to the JV with the [ True's ] that we announced in the past and that will guarantee greater flows, becoming, therefore, a critical infrastructure. That will allow us to have Tallgrass -- to have more product in Tallgrass. With regards to the gas flow, that's also growing. We're having contract inflow in East to West and also direct flow growing also in flow demand, and in some cases, the growth both due to the creation of some carbon gas project. So changes from the current infrastructure to new customers. And we believe that in the future, there will be a greater consumption on process, and that's why we are very much committed to this company. Thank you very much.

The next question comes from Jose Ruiz from Barclays.

So I have one. Basically, you are -- in this presentation, you are doing a decarbonization commitment for the long term, not just in the Spanish market, but also in other markets. And I would like to know you -- what happens with your portfolio rotation or asset portfolio -- asset rotation strategy? These long-term commitments will mean that the asset rotation in the future will decrease?

Thank you very much, Jose Ruiz. Let us discuss this for just a few seconds, and we'll go back to you. Thank you, Jose Ruiz, for your question. Our commitment with decarbonization, which I think is very clear and I think the speed will depend, obviously, on was decided by the authorities in the different countries and the EU for instance regarding the pace and the specificities of the different projects. Having said that, this doesn't have to have an impact on a process that is a sensible process on rotation. I think there are 2 different things. We have decarbonization plans that we will adapt to the rules applied by the EU on the different countries' authorities. The example of Tallgrass is very clear, a year, 1.5 years ago, we were not talking about that, but now we can talk about this for Tallgrass. And simultaneously, there's a thought also for the potential asset rotation. But depending on how the markets evolve, how our improvement -- expectations perform, et cetera, so I would say that there are 2 parallel processes and one doesn't have to put a break on the other, if you know what I mean. Thank you very much.

The next question comes from Ignacio Domenech from JB Capital.

I would like to go back to the impact of the EUR 20 million one-off on the invested companies. And also to ask about the impact of the results of Tallgrass due to the cold front. And whether those EUR 10 million and the remaining EUR 10 million had an impact on the second semester also. The recurring contribution of EUR 190 million for the end of the year by the invested companies? And the second question is whether there's any news on the role that Enagás can play on the value chain of green hydrogen? And about the EUR 5.9 billion investment, what of that will be for Enagás?

Thank you very much, Ignacio. Please hold the line for just a second, and we'll get back to you. Thank you very much for your question. About the first question, I can ask the CFO, Borja García-Alarcón to answer. Please, Borja, go ahead.

Thank you, Chairman. Yes, in fact, the cold front of Tallgrass was some effect of the first quarter. The other effect has to do with the second quarter and for the whole of the year, the guidance of the results of invested companies.

Thank you very much. About the next topic, the role that Enagás may play or that we try at Enagás to play in this will depend clearly -- I spend on a different EU authorities and what projects are considered more interested by them are more of a priority and maybe the projects are not considered a priority or that are left for a second stage. So right now, it's impossible for us, impossible for anyone to give an idea on this, because we do not have information. But for all projects, we follow certain rules. First, we're never on our own. We always work with partners. This set of partners will -- we try that -- for the partners to represent the whole value chain from producers to consumers, we could say. And so it's not easy to say, depending on the project, we don't know what percentage where it may be. But on this general -- about this general figure, we cannot make any forecast because no one -- absolutely no one in Spain or in Europe has any specific idea about what will be the project for the first 3-year period for '21 to '23 or for the '24 '26 period. There is no calendar about this. We know that Spain has already received the approval by the EU. We expect, therefore, probably in September or in October, the Spanish government will start -- will give the green light and talk about the project's criteria and the final presentation to the authorities, and we are ready for that and also for anything that would come from Europe. And well, maybe soon, in a few months, we'll all be able to have a clear vision of what are the priority projects. We are -- how we are working on them and how we'll see them developed. Probably, this is active work in progress. And we are, in fact, improving some of the projects that were already presented and there will be changes, obviously, with arrival of new partners, et cetera. Today, what I can say is that in this whole process, what we're working and happy in the process, and we'll inform you every quarter. Thank you.

We have finished with the questions from the Spanish room, so now we'll move to the questions from the English room. [Operator Instructions] Our first question comes from Harry Wyburd from Bank of America.

My questions have already been answered. So I think in the interest of time, no further questions from me this morning. Thank you.

Our next question then comes from James Brand from Deutsche Bank.

Actually, I still have 3 questions. So obviously, we're spending a bit of time. But -- so 3 questions. The first is on GSP and the political situation in Peru, which you mentioned in the presentation. I was just wondering whether you expected that situation to delay the arbitration process at all or potentially even threaten the government's willingness to abide by any arbitration decision that is -- that comes next year? That's the first question. Second question on asset disposals. There was a question related to the green side of this. I just wanted to check on the timing. Should we be expecting asset rotations to come this year? Or is it something that's more likely to come next year? And then the final question is on hydrogen. You obviously talked a lot about the individual kind of projects that have been bid into this kind of stimulus schemes. I was wondering whether you're any more developed in terms of your thinking on hydrogen investments that might need to be spent on the kind of network or in storage, whether we should be having in mind a particular date where you might be able to give us a more comprehensive view on what you might have to invest in hydrogen across the whole of your network rather than just the schemes that are up for subsidies?

Thank you very much, James Brand. As for Peru, I already mentioned that we are waiting for the inauguration of President elect, Mr. Pedro Castillo. So we will try to contact an administration representative in due form and express our willingness to reach an agreement with regards to the arbitration procedure. At this point in time it's very difficult to provide any exact data in this respect, but we are having an active approach to it. Of course, this is normal in any arbitration proceeding, so we will see with the new administration what they have to say about their energy policy approach among other matters. We're also analyzing asset rotation related issues. This will depend on how the market performs. This is work in progress. And this year as well as next year, we will be working along these lines, and we will keep you posted in due time and form. And going back to some hydrogen-related figures, let me underscore what it is for. There are phase here, the European Commission as well as the European regulator [ Azur ] issued a number of papers over the past weeks conveying that for the purposes of the decarbonization process in EU, infrastructure will be critical even in place in Europe, because they are ready to carry green hydrogen. They can carry a pure green hydrogen. They can also do so with -- blended with natural gas. So right now, there are different papers that point to the fact that by 2040 and to account the huge volume of green hydrogen that is expected to be used in Europe, current estimates by the task force, the European Hydrogen backbone say that at the side of such volume might be carried through the existing infrastructure after, of course, making some entry investments due to the balance issues and the corresponds to new infrastructure or new storage facilities that might be necessary. Therefore, today, at this point, it's not possible to provide any more accurate information in this respect. But in the next 2 years, and considering the pace set by the European Commission and the decisions made -- but with regards to the Next Generation fund, we will have a clearer picture about this. But in Spain, all existing infrastructure to a large extent will be ready for use in the next 20, 25 years in order to carry green hydrogen. And a small portion perhaps will require some new investments that have not been made. Speaking about transportation, of course. But then we have green hydrogen production. That's a different issue that needs to -- that we will have to use renewable energies and make some additional investment. So this is the -- more or less the context that all companies in this sector are living in. In the next 2.5 years, I believe that we will have more specific information coming from state and European authorities as schedules that they foresee. Thank you very much.

We have no further questions registered.

Well, if there are no further questions, thank you very much once again for joining this conference all. Thank you very much for your interest. And even though we are now closing the conference call, remember that the Investor Relations team, will remain at your disposal to provide you any more information in detail that you may require. So thank you very much for joining us today. Thank you.