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

Good morning, ladies and gentlemen, and welcome to this Earnings Presentation for Enagas for 6 months of 2024. Our earnings were disclosed this morning before the market opened, and the figures are available on our website, enagas.es. Arturo Gonzalo, as Chief Executive Officer of Enagás, will run through the figures with you. We expect this presentation to take about 15 minutes, after which we will open a Q&A in which we will try and answer your questions in as much detail as possible. Thank you very much for your attention, and I'm going to give the floor to Arturo.

Good morning, ladies and gentlemen, and thank you very much for your attention. I also would like to welcome you to this earnings presentation for our first 6 months of 2024. And here with me are our CFO, Luis Romero; our Board Secretary and CLO, Diego Trillo; our Chief Officer of Communications, Institutional and Investor Relations, Felisa Martin; our Head of Investor Relations, Cesar Garcia; and our Head of Management Control and Business Analysis, Natalia Mora-Gil. I will divide my presentation on 4 points. First, I will explain how we are rolling out our strategy plan with special emphasis on the milestones met in this last quarter, giving you some data on how the gas system operates. Secondly, I will go over the key financial performance indicators. And thirdly, I will refer to how we're performing in ESG. And I will wrap up by reminding you of the targets for this year 2024, and we'll go through some conclusions. This July marks 2 years since we announced our 2022-2023 strategy plan, which is being rolled out much faster than originally scheduled. In these last few months, significant progress has been made along 3 lines of action in the rotating assets to support decarbonization and the energy security of Spain and Europe, the basic milestone, as you know, was the divestment of our 30.2% stake in Tallgrass Energy for $1.1 billion, EUR1.018 billion to Blackstone Infrastructure Partners, which we announced on July 10, and the deal should be closed by the end of next week. Since this is a very recent and highly relevant transaction, let me go into a bit more detail to explain its positive impacts on the company. Firstly, it shows up our balance sheet and places us in a very sound position to undertake Enagas' investments in green hydrogen infrastructure to drive our long-term growth. It will also tie down the long-term sustainability of our dividend. Year-end debt will be reduced by roughly -- to roughly EUR 2.4 million (sic) [ EUR 2.4 billion ]. That's the more or less figure since 2008. Proceedings from the sale will be used to pay down $700 million of bank loans, which have a higher cost than wholesale funding. With the remaining cash, we will partially repay a EUR 600 million bond maturing in February 2025. After this debt cancellation, we will have no significant maturities until 2026, and the average tenor of our debt will increase to 5.2 years. Gross debt hedged at fixed interest, including interest rate hedging instruments will increase to between 90% and 95% of the total and the cost will go down from 2.8% to 2.6% in 2024. This boosts our cash flow on our income statement with a lower cost of funding and gross savings of some EUR 40 million on average each year. Another transaction reinforcing our asset rotation strategy has been the agreement reached a month ago to sell off our stake in the compression station of Soto La Marina in Mexico to Esentia for EUR 15 million. For Enagas, this will bring in some EUR 5 million in capital gains. And as for our contribution to Europe's supply security, a key milestone was met as the construction of the Stade terminal began, the first LNG terrestrial plant in Germany also adapted for green ammonia. A few weeks ago, we held together with our partners in the Hanseatic Energy Hub Consortium. We held the Stoning ceremony in the plant with the attendance of the Minister of Lower Saxony, Stephan Weil. As you know, we have a 15% stake in this [ Hanseatic Energy Hub ] project in which we are the industrial partner as well as terminal operator. A second line of action in our strategy plan is the control of our operating capital costs with our efficiency plan. We are meeting our commitment to ensure core operating expenses will not rise more than around 1% CAGR during the period 2022-2026 as well as with the control of our financial expenses. And the third line is decarbonization, where renewable energy is the driving vector. Both Spain and Europe are developing this vector are at an unparalleled pace. And in Enagas, we are in the leading edge of this development with significant progress also in this last quarter. All of our major hydrogen projects have been selected as PCIs or European Projects of Common Interest. This was ratified last April with the publication of the final list in the Official Journal of the European Union, which included the first main lines of the Spanish Hydrogen Backbone Network, the 2 storage projects on the European H2Med corridor. As for the national network, also in April and as required by Royal Decree 8/2023, we submitted the 10-year proposal Spanish hydrogen infrastructure for the domestic network to the Ministry for the Environmental Transition and Demographic Challenge. For H2Med, it is ever closer to becoming a tangible reality. In June, we signed in Madrid, a joint development agreement with our French peers, GRTgaz and Teréga in partnership with the German TSO, OGE, to develop the BarMar interconnection. It is a key milestone, which will define how we will carry out the feasibility studies needed for the interconnection and it sets the foundations both for future investment or final investment decision, FID, and the principles that will govern the joint SPV. We also signed a side letter with the Portuguese TSO, REN, to continue working together in the studies and the funding for the Spanish Portuguese interconnection Cel-Za (Celorico-Zamora). We have set up the hydrogen technology observatory in order to join forces with the entire value chain and promote and disseminate the latest technical developments in renewable hydrogen. These steps have been taken in the context of significant regulatory and financial progress at the national and European level, which have taken place in the first half of 2024, and which will shape developments in the forthcoming years, including the announcement of the outcome of the first European Hydrogen Bank auction on April 30, which clearly underscores the importance of Spain together with Portugal as the main European renewable hydrogen hub, with 5 of the 7 selected projects, the Iberian Peninsula accounts for 82% of the output. Publication last week on July 15 in the European Union Official Journal of the decarbonized gas and hydrogen market, the direct [ Peruvian ] regulations. And in Spain, looking ahead to the next regulatory framework, the Spanish Competition Authority, or CNMC, has put its methodology for financial remuneration of the electricity and gas system out to public consultation in order to make it for purpose for this next phase of attracting major investments in the energy transition. In the second half of 2024, we expect other significant milestones for the company, including the approval by the government of the final version of the 2023-2030 National Energy and Climate Plan and the beginning of the transposition of the decarbonized gas and hydrogen markets directive, the establishment of the National Energy Commission or CNE with powers for hydrogen regulation and the remuneration of [ HTML ] And on our side, we will be requesting in October, the funds from the Connecting Europe facility or CEF for the studies of our PCI projects. Before speaking about the performance of the Spanish Gas System, I'd like to highlight the importance of this new phase that Europe is embarking on. The EU road map for the next few years shows that the Green Deal, the Fit for 55 package and investment in green hydrogen are all firmly on the top of the European agenda, especially after the announcement of the clean industrial deal, this last Thursday, July 18. As was confirmed by Ursula von der Leyen in her speech in the European Parliament, hours before she was reelected President of the European Commission, and it's also in a program that she presented for her second term in office, which includes a firm commitment, investing in the deployment of a Europe-wide hydrogen network. Without a doubt, Spain will be playing a crucial role in the rollout of the Commission's new green agenda. As for the Spanish Gas System, during this first semester, it has provided 100% availability and enormous flexibility. So far, in 2024, we have received LNG or natural gas from 13 different points of origin. July ended, Europe storage stood at 79% of its total capacity with Portugal and Spain as first-in-class. Our country posted 95% storage at the end of June. As for the regasification plants, in the latest capacity auctions held in June, 241 slots have been allocated to 14 different companies. Currently, 2,189 slots for LNG offloading have been booked from October 2024 to September 2039, which shows the long-term vision of the retail companies in the Spanish Gas System and reinforces supply security. Industrial demand has grown 3.2% over the first 6 months of 2024, mainly due to the refinery, chemical, pharmaceutical and cogeneration sectors. Cogeneration in particular, has shown a demand increase of over 20% in these last months. Following the approval of the new regulatory framework for cogeneration order TD526/2024. In line with performance throughout Europe, total demand in the first half of the year was 7.2%, down year-on-year mainly due to the greater contribution of renewable energy sources to electricity generation and the high temperatures experienced during this last winter. And let me now discuss the most relevant figures in our financial performance. Our EBITDA stood at EUR 385.7 million, up 3.7% year-on-year. Recurring after-tax profit at June 30, without including the impact of the 2024 asset rotation with the sale of Tallgrass reached EUR 148 million. Also without considering the impact of the Morelos gas pipeline sale last year, the company's net profit rose 10%. If we include the sale of our Tallgrass stake, after-tax profit was minus EUR 210.8 million. This figure incorporates an expected capital loss on the books of approximately EUR 360 million once the sale goes through, depending on the exchange rate to be applied when the deal is closed. Apart from the deals I've just referred to, there are 4 factors behind the performance reported for this first half of the year. The impact of the regulatory framework on revenues has been partially offset by the increase in our COPEX and the positive impact from Musel E-Hub, the effectiveness of our efficiency plan, which has enabled us to keep core operating expenses in line with our strategy plan. Our subsidiaries have continued to report excellent performance and have contributed EUR 102.1 million to our EBITDA, that's 14.3% more. And as for the GSP arbitration case in Peru, the court last week on July 16th, outright rejected Peru's’ application to incorporate new documents to the proceedings. No further indication has been received from the court regarding when exactly will hand down the award. And so according to our legal advisers, we expect to receive it soon. Continuing with our investee companies, the sale of our TG stake has further bolstered our sound financial structure and our high liquidity position. Our leverage ratios have been considerably enhanced while the company's business risk profile has also improved. The rating agencies have taken note of this improvement. As you know, last week, Fitch notched up Enagas' rating from BBB to BBB+, maintaining its stable outlook. And Moody's raised its outlook for Enagás to positive whilst maintaining its rating at Baa2. With the backing of rating agencies and analysts, we have made the Enagas financial strategy even more robust with a sound balance sheet with which to tackle the new cycle of investment in assets such as hydrogen and other key molecules, vital for the energy transition, such as ammonia and CO2. Our ESG performance and positioning continue to make good progress as we continue to make good on our commitments. Over these 6 months, we have made progress in all 3 ESG areas, environment, social and corporate governance. And thanks to this, as you can see in the slide, we have maintained our leadership positions in the key sustainability indices worldwide. And just to mention two recent accolades. This quarter, the company was given the highest tax transparency seal by the Haz Foundation for 100% compliance with its indicators. And we've been named as one of the energy utilities with more female directors and senior managers in the Global Summit of Women report. And before I wrap up, and to give you an idea of our performance in achieving our annual targets. We are in the upper range of the targets we announced to you at the beginning of the year. And in fact, even have exceeded them without taking into account our asset rotation divestments. One example of the extent to which we have already achieved our road map is the fact that since we presented the plan in July of 2022, we have managed to reduce the estimated net debt figure for 2026 by some EUR 2 billion. That's 45%. And after incorporating the effects of the asset rotation deals, the performance would be as follows: 2024 after-tax profit of between minus EUR 90 million and minus EUR 80 million, EBITDA between EUR 730 million and EUR 740 million. Our net debt at year-end is expected to stand at around EUR 2.4 billion. The sale of our stake in Tallgrass Energy has fell into our dividend policy. In 2024, more specifically, we will be remunerating our shareholders with EUR 1 per share. This quarter, the company has reinforced its financial position even further, which bodes well for the long-term sustainability of the Enagás dividend. The dividend for 2023 of EUR 1.74 per share, has been fully paid out in July with EUR 1.044 per share after the interim dividend paid in December. Let me conclude with 5 take-home messages. First, we have shared the earnings of this half year, which show a high degree of compliance with our strategy plan. and bolster our financial balance sheet so we can confidently and comfortably execute our plan for investing in hydrogen, which we announced last quarter. Two, our focus is on Spain and Europe, and we continue to take firm strides along this road map, complying with the asset rotation strategy we announced divesting in the United States and Mexico and operating our profile in countries such as Germany through the Stade project. Third, both the divestment of Tallgrass Energy and the European and Spanish milestones in hydrogen, deployment gives us significantly higher visibility than we had 2 years ago on the company's challenges and opportunities for the future. As we have seen, anticipating this future will lead us to update our strategy plan in the next few months. Fourth, we have brought down our debt ratio to 2008 levels when we were in the midst of another investment cycle. Then we were able to strengthen Spain's supply security with gas. And now we're on the brink of a new investment and growth stage in which apart from guarantee in energy security, we will help to decarbonize Spain and Europe. And fifthly, our designation as HTML entails an enormous opportunity and a huge responsibility. Rolling out the green hydrogen infrastructures in good time. Spanish and European hydrogen network will become a reality. And now more than ever, we are ideally positioned to contribute to its success. Many thanks. And now we are, of course, available to take your questions.

[Operator Instructions] The first question is from Javier Suarez from Mediobanca.

Yes, good morning. Good morning, everyone, and thank you for the presentation. I have three questions. And the first is about the dividend. The Tallgrass divestment is obviously very significant for the company. You've described in the presentation that you feel that the dividend will be sustainable in the period 2024, 2026 and also sustainable medium term. But could you elaborate from the financial point of view, how you see the sustainability of this payout, not just until 2026, but beyond. So that's my first question. And the second question is about the whole arbitration proceedings in Peru. You mentioned in presentation that the award should be announced fairly soon because there is no possibility of additional appeals or requests from the Peruvian government. Can you confirm that? And above all, what are the implications of this in terms of the timing for reaching an agreement and receiving the amount owed for GSP and also to unblock situation in TGP. So could you give us an update on that time line, that would be very useful. And the final question is for the timing of your disclosure for new business plan. You're saying that you'll be updating the business plan in the coming months. And I was wondering what needs to happen for the company to actually announce that new business plan. Do you need to complete the Tallgrass sale? Of course, the Peru issue needs to be resolved and they have to be simpler indications from the regulator on the new regulatory framework. So when do you expect that to happen? I'd like to get a time line or your best estimate on the time line for that new strategy plan or business plan.

Thank you very much, Javier, for those questions. First of all, and as for the sustainable or the sustainability of our dividend medium term beyond 2026. Once again, I would like to reinforce our estimate or a vision of our sustainable dividend beyond that date with a payout ratio of around 40%. And up to the Tallgrass divestment, we expected mean flows from Tallgrass for the period 2027, 2030 of about EUR 150 million. And in the absence of these flows, however, there will be a very positive effect because of an improvement in the [indiscernible] of our underlying business of about EUR 40 million a year approximately because of lower interest cost for debt repayment. We are considering also or expecting also an improvement in the dividends received from our investee companies during that period of approximately EUR 30 million a year. And therefore, we believe that we can expect an average during that period of about EUR 540 million a year, over EUR 540 million a year. And therefore, with the payout ratio, I've mentioned, we will be within that range of sustainability that we defined between EUR 0.4 -- EUR 0.8 and EUR 1.2 per share. So that's the message that I wanted to emphasize that the divestment of our stake in Tallgrass Energy is actually reinforcing the sustainability of our dividend beyond 2026 and significantly increasing the visibility for that period and beyond. As for the arbitration proceedings in Peru, as described and as you've mentioned, now that there's been a decision on this last request by the Peruvian government. We expect the award to be announced very soon. And once again, we are, of course, willing from that point on to begin a process of dialogue and negotiations with the Peruvian government. So we can agree on the terms and the instruments for the repayment of the quantities that will be awarded by the arbitration court. And as for the timing, our vision is still to get that award in the first semester of last -- next year. If we get the award on GSP, we will also be able to start negotiations on that with the Peruvian government but baseline case as is, as we have said, to expect that award for the first semester of next year. As for the new business plan, we are, in fact thinking that it will happen in the fall of this year, before the end of the year. Clearly, the divestment of Tallgrass Energy gives us a lot of visibility to work on this plan but I'd like to underscore that it's just going to be an update of our strategy plan in order to present a new -- completely new plan, we will have to know not just the first signals from the regulator on the next regulatory period, but also more detailed knowledge of the period starting in 2027 with the elements of remuneration and a clear understanding of how they will approach the hydrogen regulatory framework in that initial period. And so we will be announcing an update of our strategy plan before the end of the year, but we won't present a new -- completely new strategy plan until we know the details of the next regulatory period. Thank you.

And the next question is from Ignacio Doménech from JB Capital.

Yes, I have two questions. The first about hydrogen. You said EUR 3 billion in investments for hydrogen projects for the hydrogen infrastructure projects. And I was wondering when you expect to get approval from the government? And also along the same lines, this week, we expected to announce some funding for hydrogen projects in the ministry. So I wonder if there's any of that funding, which might have some impact on your investment plan for hydrogen infrastructure. And my second question is about the arbitration proceedings in Peru. I'd like to know whether there's already been some discussions or talks with the Peruvian government, and what you expect once there's the award for the GSP process, might this facilitate the discussions for that second arbitration proceedings for GSP.

Well, thank you very much, Ignacio. And as for the investments in hydrogen, in fact, in February this year, we announced an investment program, which we estimate at EUR 3.2 billion for the Spanish mainlines and the two interconnections that will make up the H2Med corridor, these are net figures. This is a proposal that we have included in the submission requested by the Royal Decree for a nonbinding plan of the Spanish Hydrogen Backbone network, which we again presented in April. So now it's up to the ministry to proceed with that proposal, which I suppose they will open for public consultations at some point within the context also at the same time of the transposition of the director. But on the other hand, as you know, Royalty Decree 8/2023 also allows for the possibility of the cabinet allowing Enagás through a separate vehicle within the group to be entrusted with the commissioning of the PCI projects. Of course, we are in contact with the government in order to receive that authorization when the time comes, so we can start going through the PCI process promptly and so that we are able to apply for European funding in turn. And so we think that in the next months, we will have everything we need in order to begin that process of development of these projects. As for the projects that have recently been awarded funding by the government of Spain or which we'll be receiving funding soon, they will contribute to accelerate the feasibility of that Backbone, hydrogen Backbone because they will consolidate the existence of a solid hydrogen market in Spain. And for that market to reach its full potential as what why we need this Backbone network. But at the same time, some of these projects, as you know, already have participation of our investee Enagas [indiscernible]. So is also contributing to the deployment of Enagas' strategy plan but certainly its relevant aspect is the development of a strong hydrogen market in Spain, which is going to require our Backbone network and will make our interconnections with the other European markets going proposition. And so we are in contact with the Peruvian government. As I've said, as for the arbitration cases, we have told them that we are, of course, available to talk to them to find the best way of implementing that initial award, which we think will be in our favor but always with the spirit of partnership because we are still very relevant as they're in Peru through our stake in TGP, and we are convinced that the proper execution of the award and blocking the TGP situation will be mutually beneficial for both parties. And so we keep the lines of communication open and I would like to reinforce that point here again today.

Next question in Spanish.

[interpreted] I only have one question. Last week, the German government published an initiative to reduce the shelf life of gas assets to prevent sunken costs. My question is considering this new regulation and the new gas regulatory period, are you considering the possibility of increasing depreciation or regulation by accelerating asset reduction as part of gas assets?

Thank you, José. We are aware of this German government initiative. We have not, however, received any signs that the same thing might happen in Spain. At the same time, nothing seems to indicate that the gas system in Spain will meet a sunken cost situation, or assets that will cease to be important for the system. And I'm basing this statement on the huge commercial interest that infrastructures and our gas systems are generating in recent lot capacity auctions for storage in tanks and underground storage. As we have perceived, I was talking about the latest slot auction where we placed 97% of the slots under auction with huge commercial interest until 2039 so like I said, nothing seems to indicate that the Spanish system might be facing a similar situation. Quite the opposite, the commercial interest of Spanish assets remains very high as it has been for the past few years.

Next question comes from Manuel Palomo from BNP.

Yes, good day. I have two questions. First, above the PNIEC. As I recall, the draft was sent to the EU in June last year, and it was expected to be approved by June this year. So about that, my two questions, one, do you expect this plan to be approved? And also whether you expect it to be approved in agreement with last year's draft that considered a serious increase in hydrogen investments. That was the first part of the question. And the second one is clarification on a previous question. As part of your forecast, you're considering a smaller balance after disinvestment in Tallgrass. So as part of your long-term plans to keep the dividend sustainable at levels similar to today's, what's the annual rate to CapEx that you're considering for next year and beyond?

Thank you, Manuel, I apologize if I cannot answer for the publishing of the PNIEC. It is expected to be published soon. All members are rounding up the draft and working on it, but it is in the hands of the Demography and Green Transformation Ministry, not ours. Everyone in the industry is expecting the draft or the final document to be published soon, introducing improvements on last year's draft based on contributions from all participants in the sector as Enagas is one of them. So we're expecting a fuller version with the -- including the contributions made by all participants, but I cannot fathom the contents of the plan because it is not in our hands. We have no visibility on that final approval process, it's in the hands of the ministry. As for forecast and expected CapEx, Manuel, I believe I already said it during the presentation, Manuel, any extra details will be provided in the strategy update. However, as I said, already, we have a clear idea on how to maintain our long-term investment program. Mainly the core element will be hydrogen. And for the period 2027, 2030, we set up a EUR 3.2 billion investment plan. And that beacon -- and that would help us translate our debt and grow our spread in margins to tackle this investment plan. But extra details will be supplied in the next few months with the strategy update.

There are no further questions in Spanish. Next, we will take questions in English. The first question in the English room is from Arthur Sitbon at Morgan Stanley.

The first one is actually on the balance sheet impact of the Tallgrass transaction. It represents quite a significant amount of cash that you get back. I was wondering what would be your plan with this additional balance sheet headroom? Is the idea to get a better credit rating or is the idea that it could fund further growth options for the future? So I would be particularly interested in that. The second one, I was just wondering, in your press release, you talked about the increase in revenues from El Musel and the COPEX, would it be possible to quantify the expected improvement on the revenues from these two drivers in 2024?

Thank you, Arthur. Concerning what's going to be our plan for these new maneuvering space in terms of balance sheet. Our aim is to have enough capabilities to develop, to deploy the CapEx program of EUR 3.2 billion for the hydrogen infrastructure. However, it's true that this additional EUR 1 billion of cash gives room for improving our credit rating and this is also a priority for Enagas. And this is something that is already taking place. You know that Fitch, as I said, has improved our rating from BBB to BBB+. And this is showing, I think, the next steps that we are going to see also from other rating agencies. So this is very important. But even though there is additional space for other growth opportunities, very, very well analyzed and very well aligned with our strategy, but we think that we are going to have room for some growth opportunities related to other molecules important for the energy transition. And in particular, we think that there are going to be opportunities for CO2 for gathering, transporting and storing CO2. We think that our plans offer very important synergies for handling CO2 molecules in a very efficient way. For instance, you know that for liquefying CO2, the spare cold of our regasification plants may be a very efficient source of cold and also for ammonia. So we will have additional maneuvering space for taking those opportunities, although giving always the priority to the hydrogen infrastructure program and to improving our credit rating and the leverage of the company. Concerning your second question, Arthur, the COPEX is going to provide some additional EUR 10 million this year in 2024 and Musel E-Hub is going to provide approximately EUR 5 million of additional revenues. Luis, the CFO can elaborate a little bit more.

Thank you, Arturo. Yes, just to complement a bit the answer. I think Musel the full year -- the contribution for the full year at EBITDA level is going to be around EUR 30 million. And if you see only the line of the revenues for the full year, the contribution is going to be around EUR 40 million. In terms of COPEX also for the whole year, the contribution of the COPEX is going to be expected around EUR 40 million. So between both, Musel and COPEX in terms of revenues, we have a contribution to the full year of around EUR 80 million.

Currently, we have no other questions registered in the English room. Let's check if there are any extra questions in the Spanish room, please? We do have a question from Ignacio Doménech from JB Capital.

Yes, just a follow-up because I didn't hear you -- I didn't fully hear your answer about dividend beyond 2026. I mean how sustainable can we expect that euro per share to be. I thought I heard something about EUR 0.8 to EUR 1, but I wanted to make sure I heard you correctly. And what kind of net debt are you expecting after 2027 after all the maturities you mentioned.

Thank you, Ignacio. About the first part of your question, our range for a sustainable dividend beyond 2026 considering this FFO payout of 40%, our range, as I said, goes from EUR 0.8 to EUR 1.1 per share, EUR 0.80 to EUR 1.10. The improvement on financial costs that debt reduction brings after selling Tallgrass, also considering better dividend contribution and our stakes leads us to estimate an average FFO of [ 27 ] to [ 30 ] above EUR 540 million per year, which would place us within the aforementioned range, EUR 0.8 to EUR 1.10 as I mentioned before. As for the FFO to net debt ratio, the present levels to justify an increase or an enhancement of our credit rating above the present ones, as we see reflected in Fitch's appraisal.

No further questions in the Spanish press room.

Very well then. If there are no further questions, we thank you all for your participation. And as usual, we remain available to answer your questions in the Investors Relations division to -- for further questions and follow-up. Thank you very much, and see you the next time. [Statements in English on this transcript were spoken by an interpreter present on the live call.]