Redeia Corporación, S.A. (RED) Earnings Call Transcript & Summary

[Interpreted] Good morning, ladies and gentlemen. Let's get started this morning with our presentation of our first half year 2020 results for you. Welcome to all of you following us this morning on the webcast. With us here in Madrid, we have Roberto García Merino, he is the CEO of the company. We also have Teresa Quirós, who's our corporate CFO. First of all, the CEO will talk you through the highlights of this first half year 2020. The first half of year has been characterized, of course, by the exceptional situation with COVID-19 crisis and the Corporate Director will give you the financial results. And lastly, the CEO will be explaining the significant role played by Red Eléctrica in the energy transition and also talk you through the key conclusions.

[Interpreted] Thank you very much, Irene. Good morning to all of you. As you've already heard, we're going to start off this presentation this morning by running through the most significant highlights of this period, this exceptional period that we have been experiencing this year with the appearance of COVID-19 and its speedy spread across the world, which has led to exceptional measures taken by governments that have had an impact on our day-to-day life. We'll also be sharing you the company's results for the first half of the year. And subsequently, we'll be analyzing the developments that have taken place during the first months of this year with regard to the energy transition and the significant role that Red Eléctrica is to play in that transition. So let's get started with our highlights of the first half year 2020. As you're all aware, of course, the appearance of COVID-19 at the start of the year and the fact that it started to spread like wildfire all over the world forced governments to take a number of exceptional measures. In this regard, Red Eléctrica group's commitment with the objectives that have been set by the Spanish government has been absolute. We have taken a number of extraordinary measures in order to enforce and comply with the obligation to guarantee continuity and security of supply. Let me highlight some of those for you. One is the deployment in record time of a third electricity control center, the isolation of key personnel, independent teams of operators for the electricity system or maintenance of the transmission grid as well as teleworking for all nonessential activities. Nevertheless, the 8% drop in electricity demand in Spain that was recorded during this phase of the year has, of course, entailed a huge challenge for the system operation. It has meant that we've had to implement adequate control of voltages in the system in Spain. Additional scheduling of energy due to the technical strains because of voltage control and the more intensive use of the available resources in the transmission grid have allowed us to control, without any incidence, the exceptional situation caused by COVID-19. With regard to the impact of COVID-19 on our results of this first half year 2020, I will say that they are moderate, it's a moderate impact. And I'd highlight some temporary delays in investments in the transmission grid in Spain and Latin America as a consequence of the total standstill or partial standstill of economic activities imposed by different authorities, the depreciation of Latin American currencies, especially the problem with the Brazilian real. Also, in the case of Hispasat, the COVID crisis has an impact on the commercial activity of the company via it's delayed the completion of projects that were already underway or affected the conditions of some of the contracts that were already enforced. During the first half of 2020 then, let me highlight for you some of the key legislative changes that have taken place relating to the electricity system. One is the passing of the Royal Decree law 11/2020, that was 31st of March, adopting urgent measures, supplemental measures for social and economic issues to deal with COVID-19. There's also the Royal Decree law 23/2020, 23rd of June, approving measures with regard to energy and other fields for -- to encourage economic recovery. Royal Decree Law 2030 -- 23/2020 contains a series of provisions to aid a green exit of the crisis, speeding up the energy transition in line with The European Green Deal in the European Union and highlighting, for example, the increase in the limit or the cap on investments in the transmission grid or measures to guarantee the financial stability of electricity sector. There's also the notification of a ruling by the Supreme Court, that was on 29th of June, with regard to the declaration of damages to the public interest on Order 981/2016. That ruling partly accepts the declaration of damages of that order and partly, therefore, accepts some of the arguments defended by Red Eléctrica and orders the regulator to review the calculation methodology for some of the parameters that were being revised. As we don't know what the final resolution is, we nevertheless consider that the -- in view of the information available right now, the company has covered the possible result of this process reasonably. Also during June, the Supreme Court issued a procedural ruling with regard -- rejecting the appeal for dismissal before the Supreme Court of the cassational appeal, that is the point of law appeal, on extending the useful life of pre-1998 assets. There can be no further appeal in this case. Lastly, let me highlight to you that in the results of the first half 2020, there are some new regulatory parameters and new unit values, those referenced for O&M, because of -- for tangible and fixed assets approved in November, December of the previous year. Turning to the financial area. During this whole period, the group has had a solid, sound financial position to be able to deal with the uncertainty caused by COVID-19, and we have taken measures to reinforce and bolster that liquidity more. Investments, first of all. Let me highlight for you, on the 18th of June, we commissioned the new submarine Menorca-Majorca link. And internationally, let me highlight the acquisition of 50% of Argo Energy once the condition precedent in the purchase -- share purchase deal had been complied with. The shareholders meeting -- the general shareholders meeting this year was held remotely for the first time. It ratified the appointment of Beatriz Corredor as Chairman of the Group and my ratification as CEO. The same general shareholders meeting approved the dividend for 2019 of EUR 1.0519 per share, in line with our strategy plan. Lastly, let me highlight for you some of the developments in innovation and digitalization that have taken place in the group through ELEWIT, our subsidiary, which is focused on innovation. And over these last 6 months, it has made commitments to financing projects related to highlight -- hyperloop, rather, technology and cybersecurity. I will give the floor now to Teresa Quirós, our corporate CFO, and she'll be talking you through the results for the first 6 months of this year.

[Interpreted] Thank you very much, Roberto, and good morning to all of you listening to us this morning. I do hope you're all safe and your families are also well and safe. As you've already heard from Roberto, we'll be talking to you about the key financials in our P&L account for this first half year 2020. These results, of course, have been affected by a new regulatory environment and also the exceptional situation that we have experienced this year because of the coronavirus crisis. Revenues totaled EUR 978 million. That's 1.5% down compared to the same period of last year because of the application of the new remuneration parameters contained in those circulars that were approved by the CNMC, the regulator in Spain, at the end of last year. EBITDA totaled EUR 766 million, so that's down 1.7% compared to the first half of 2019 results. I would also like to highlight to you the great endeavors that we have made to achieve further efficiencies. That's over the last few years, and we've redoubled those efforts in 2020. The increase -- plus 20% increase in the amortization because of the incorporation of Hispasat and also the higher financial burden because of the increase in net financial debt have taken our net profit in this first half of the year to EUR 331.7 million, that's 8.4% below the figure that we achieved in the first half of 2019. And lastly, still on debt, let me say that net financial debt totaled EUR 6.26 billion with a cost of debt of 1.93% and a coverage ratio, net debt-to-EBITDA of 4x. Turning to the P&L account for the group. I can tell you this morning that our revenues have been positively impacted by the good performance of operations in the system. And as you know, there was new methodology that was approved at the end of last year by the regulator. There's also been a positive impact of the incorporation for the very first time of Hispasat with EUR 79 million in revenues. And also because of the good performance of the commercialization of fiber optics and our international activity, only the electricity transmission business has performed negatively compared to the previous year, as a consequence of the application of the new remuneration parameters that affect transmission activity in Spain since June. The financial return rate has fallen by 50 basis points to 6%. There's also been an adjustment, an accrual adjustment, for the commissioning of assets completed in 2018, 2019. They've had to be adjusted to the new standard O&M values. These have also been the trigger for lower revenues. Let me also highlight to you this morning the efforts we have made to contain cost -- operation cost and other supplies and operational cost despite of the fact that we've been including the expenses associated with Hispasat and an estimate of provision for the incident incurred on Tenerife, on the island, which was 3% down compared to 2019. The higher provisions for amortizations associated with Hispasat, EUR 59.7 million, were partially offset by the lower provision for transmission assets in Spain because of the adaptation of the useful life of the older assets and the completion of the life of certain assets. Financial results, negative results, were EUR 69.5 million, 9% higher than the first 6 months of 2019. Now that increase is essentially a consequence of the higher gross financial debt that we have, which rose from EUR 5.77 billion on 30th of June 2019 to EUR 6.91 billion a year later. The performance of amortizations and the higher financial burden have taken our net profit figure to EUR 332 million. That's down 8.4% on the previous year, as I said before. Our actual tax rate was 24.6%, very close to 25%. I would like now to look at the breakdown of our revenues and performance of our different businesses. Here, it is breakdown per business. Notice a gradual improvement -- increase in nonregulated -- the increasing weight of nonregulated business as a result of diversification of the group businesses as we develop also our strategic plan. Notice that businesses -- business results from transmission in Spain have dropped a little bit, offset by growth in infrastructures of telecommunications, which have grown 14.9% -- accounted for 14.9% of total business turnover, similar figure for EBITDA. Notwithstanding the O&M, our existing infrastructures for -- in Spain continues to represent about 80% or account for 80% of the business turnover and EBITDA of the company, so the most relevant and continues to be the most significant part of our business. At the beginning of the presentation, our CEO mentioned that the unexpected COVID -- eruption of COVID-19 has impacted in a moderate way the business of the company -- has impacted to a certain extent the business of the company. And here, I'd like to highlight certain delays of investments across the country, mainly due to delays in construction processes throughout the state of alarm and also delays in licensing. We expect that this pace will pick up in the coming months and recover partly the delay by 30 -- at the end of the year, to recover the delays through 30th of June. I'd like to highlight some of the delays in the Basque Country, Andalusia and Galicia. This is smaller -- lower rate of interconnections, but we've had a positive impact and good performance in the ending of the -- completion of integration between Menorca and Mallorca. Good pace of investment also in control systems and operational applications. Other delays also on international level due to the stoppage of economic activities imposed by different authorities. These delays are -- we hope to be able to pick up the pace in these activities before the end of the year. And at the close of the first half of this year, investments is up, total of EUR 398 million, highlighting the acquisition Argo in Brazil for EUR 374 million. And also, there's the starting of operations in Tesur 3 in Peru, which got kicked off in early March. We are continuing also with [indiscernible]. These are the 220 kilovolt Tintaya-Azángaro line; and also in Peru, the axis Nueva Pozo Almonte-Parinacota; and also in Chile, the Centinela axis and also REDENOR 2 in Chile. In telecoms, the higher investment conducted in the course of this year in launching a satellite, Amazonas Nexus, for a total of EUR 21.5 million. The satellite will go into orbit by mid-2022. It's more efficient, more flexible satellite to adapt to market developments in communications. The satellite will enable us to access new customers and markets, providing services -- mobility services in air and maritime transportation. We will also continue to provide services to customers who continue to use the capacities of Amazon 2 (sic) [ Amazonas 2 ]. Finally, investment in Reintel at the closing of the first half is up -- is EUR 0.7 million, accounted mainly for the main fiber optic investment in railways vis-à-vis the infrastructure deployment of 5G. Now I'd like to address some of the points regarding the financial structure of the group. Now looking at the financial structure of the group, we can highlight the long-term maturity schedule which our group will have in the coming years. The average life of debt is almost 6 years at present with average costs below -- at 1.93%, as I mentioned earlier. And the amount to be repaid in the next 4 years are covered by liquidity, which at present is more than EUR 2.5 billion. Turning now to the structure of debt per instrument type. We can state that the group currently has a well-diversified debt structure, with 83% is fixed-term to maturity and mainly in euro against other currencies. I'd like to highlight also the strength of our balance sheet with a solvency ratio of over 70%, which allows us to maintain our current credit rating, which as you know is among the best in Spain. As indicated vis–à–vis liquidity, we have a very comfortable liquidity position with over 70% of instruments in long-term instruments. In this first half year, we made -- we've taken these significant decisions to strengthen our liquidity, which will enable us to face more complex situation in the market in the case that things should turn now more difficult. During this period, we have issued a EUR 300 million green bond at a cost of 0.5%, that was earlier this year; and the second issue of EUR 400 million at 0.94% with maturity of 5 years and disbursement date of 4th of April. Red Eléctrica is -- Red Eléctrica Corporación is guaranteeing this issue. This is not necessarily -- this not directly linked to the regulated activity. We've also signed new loans and credits for about EUR 475 million. I'd like to highlight also that the credit rating agencies Standard & Poor's and Fitch have given long-term rating to our corporation of A- with stable outlook. Thank you very much for your attention. I'll now give the floor to Roberto García Merino who will now discuss key financial -- main highlights of the first half of the year regarding energy transition.

[Interpreted] Thank you very much, Teresa. It's a pleasure now to discuss with you some of the progress we made in the course of this first half, which have represented significant [ events ] in our energy transition. The European Commission is highlighting this transition as part of the economic stimulus of EUR 750 billion announced to impact the -- to offset the impact of the coronavirus. This would help us consolidate the future of -- sustainable future for coming future generations. The strategy approved to make progress towards climate neutrality and be able to achieve the 15% interconnection of electricity by 2030. At national level, the road map for energy transition has been drawn up, aligned with European objectives. And other steps necessary to make progress to energy transition have been taken. In this regard, the Board of Directors look forward to -- with regard to this project. With respect to the space commitment, in this regard, at 31st of March, Spain submitted to European Commission the Integrated National Plan for Energy and Climate. This plan as an objective ensure that 75% of generation of electricity by 2030 is from renewable sources. In order to achieve this, this plan in its annual report determined that total investments in networks and electrification has to be about EUR 59 billion of investment. About EUR 9 billion will be invested in transmission lines after 2030. Finally, to complete this road map, we're making progress in the analysis of the plan -- of the infrastructure plan 2021-2026, whose main purpose is to turn this TSL -- sorry, the energy transmission network into a key vector of energy transition. Regarding the infrastructure planification, in recent months, the following points -- measures have taken place. Initial proposal for the system operator and network management was sent to the ministry in December last year. This is for the period 2021-2026. This possibly includes the road map for the plan, national plan, with an estimated investment of EUR 6.44 billion for that period. This also includes international interconnections with member states of the European Union for 755 -- EUR 759 million. In annual terms, the total investment for the period 2021-2026 will reach almost EUR 115 million per year. After submitting this initial proposal for development of the network, the ministry for energy transition as head of the planning process is now managing the next steps of the process, and the CNMC, the autonomous communities and autonomous cities are also participating. In this regard, the CNMC issued a report on the initial proposal, which establishes some recommendations, mainly linked to providing greater detail on the methodology, the actions proposed and overall assessment. At present, planning is awaiting for the ministry for energy transition to start its evaluation. Finally, I'd like to complete this presentation with some points I'd like to highlight. The results in the first half of the year are based on a very complex environment marked by the crisis of COVID-19. But for this group, we can say that it has a very moderate impact. These results reflect the application of the new regulatory parameters that apply all the way to 2025 and give the company clarity and stability for the next 6 years. The results are introduced for the first time -- the results for the first time include the results for Hispasat, Argo and the Peru Carhuaquero-Moyobamba line. Also, the company continues to have its rating of A-. We have delivered our commitment with shareholders to deliver a dividend of EUR 1.0519 per share, booked against results in 2019. And finally, I'd like to stress this company's commitment to energy transition and the satisfaction with the results obtained, which will help us deliver on the ambitious objectives of the national energy plan. Thank you very much to all of you. And now we move on to the questions and answers.

[Interpreted] So good morning to you all yet again. First of all, we'll be taking questions that will be coming in across the conference call. After that, we will take the questions that have been sent into us on the Internet. [Operator Instructions] The first question is from Javier Suarez from Mediobanca.

[Interpreted] The first question I have is about the company's CapEx. The company's CapEx is still below EUR 500 million a year, isn't it? So I would like to understand why. You've obviously explained COVID-19 and how that's impacted investment, but Red Eléctrica, I believe, is running difficulties -- more difficulties than expected developing its CapEx plan, its investment plan. Could you explain the reason for this? And what contribution could Red Eléctrica make to the economic recovery in Spain with regard to accelerating investment in the short term? That's the first question. The second question is about your proposal for infrastructure planning up to 1926 (sic) [ 2026 ]. You're talking about a EUR 900 million per year investment figure. So that's an increase, isn't it? What is your view on timing and the approval of the infrastructure planning provisions? And is this -- this increase of annual CapEx up to EUR 900 million a year, in principle, is it something that will happen in '21 -- in 2021, 2022? Then I have a question about the pre-1998 assets. Can you give us an update on the conversations that you're having with the government or regulator on how these assets are going to be dealt with as we move forward?

[Interpreted] Thank you, Javier, for your questions. Now regarding questions on overall investment -- level of investment, indeed, this year -- well, this year is not a normal year, as we've mentioned already. We've had some delays in our investment plan -- execution of investment plan. Well, we try to make up for it in the course of the rest of this year and early next year, but we've had basically 2 months of absolute standstill of activity. Some of the projects did go ahead, but that is the main reason that accounts for that lower investment level or at least below what we have planned. But again, we have to make up for that in the course of the second half of the year and early next year. On the impact that Red Eléctrica might have in economic reactivity, I think our reactivity -- I think we can play a key role in reactivating Spanish economy. We have a lot of projects basically for execution across the country, all them linked to transmission lines and integration of renewable lines. They're in different stages of development. But we believe that if -- with a good coordination with local legislations, government that is, we can definitely develop -- boost investments across the country to help reactivate the economy. On planning, we're actually quite pleased with the progress being made here of the analysis and approval of the plan. Now we move on to -- after the CNMC's report, the next stage is to have a public consultation period and another phase of evaluations with remaining -- with the other autonomous communities. And that's a key process, in fact, to make the final step into approving the plan. And we believe that in the course of next year, towards the end of 2021, we might have -- we could very well have a finalized and approved plan and basically prepare to execute it. Now when we reach the average level of investments included -- contemplated in this plan, well, as you know, we first have to go through a period of licensing, permitting, environmental permitting and execution licensing and that obviously takes some time. So that cruise -- before we reach that [ grace ] period, it would probably take a year before we get to that. But we believe that within 2 or 3 years, we can reach a good execution pace. Finally, on the final question, it's a long process. In the course of this year, in terms of the process on the pre-1998 asset situation -- going to last part of your question on discussions with the regulator. Finally, the regulatory position is contemplating the end of financial remuneration for pre-1998 assets. That will be the end of 2024. Now some aspects of these circulars have now been appealed in order to try to improve one of the aspects that have been reflected in the circulars. And now what we have is a process in which these assets will have additional remuneration based on O&M to incentivize the use of these assets in the system. And of course, we'll continue to work with the regulator to achieve the best operational management and financial management of these assets, which have reached their useful life -- regulatory useful life, but continue to provide service to the system.

[Interpreted] Next question from Javier Garrido from JPMorgan.

[Interpreted] My first question is related to a point you just mentioned regarding recommendations on certain circulars after incentives that we've had. And I'm seeing -- I'm wondering if you can give us an update on which aspects -- which are relevant aspects of -- are still going through legal process and what sort of change in exposure you might find in this situation. Or do you think all legal processes that are currently open are now less relevant than that of the declaration of damages vis-à-vis assets prior to 1998? Second question -- 2 questions on Hispasat. The first question is after completing the analysis, TP analysis, are you expecting any changes in the Hispasat amortization and depreciation? And what is your current depreciation or amortization plan for Hispasat? And then also this is on comments you had on the impact of the pandemic on Hispasat. Do you still expect this contribution of about EUR 130 million to EBITDA for 2020? That is Hispasat contributing EUR 130 million to EBITDA. And the third question is related to planning. We've seen that the British regulator in the regulatory proposal for the coming future period is going to remain open to ensure that in that regulatory period, there could be a lot of -- we can reopen -- particularly with respect to CapEx, reopen regulatory period to be able to introduce a higher amount of CapEx. Do you think that might be possible for Spain? Or do you expect that you will follow the current plan and the approval process of the plan?

[Interpreted] Thank you very much, Javier. The first question about the circulars. I think we have talked to you about this issue in the past. We really do appreciate everything that's been done by the CNMC about the fact that we will be given this stable structure for this regulatory period and subsequent periods as a result of the work. Now in the process of approval of the circulars, there was a period in which -- where we could make -- put forward our arguments to the regulators. Some of those were picked up on. But yes, you're right, there were some specific aspects in those circulars that we still don't think have been properly dealt with and that there still hasn't been a fully satellite fee solution. For instance, I'll just pick out one for you. The management of the collection for infrastructure 2 years after their commissioning date and also the issue of approval of the reference standard benchmark values for O&M, that issue -- these are some -- although they may sound minor issues, they are relevant, and we were hoping that in the appeal process they might have been dealt with. But I think with the approval of the circulars, I think all of the issues have been now fully defined. Turning to Hispasat now. Well, after the PPA exercise, the impact on Hispasat is relatively small. I think with the estimate that we had made for this year, that will be the figure. There should be no additional impact because of the PPA exercise, although I did say in presentation that this year has been a very atypical year. It's been a year that has an impact on some of the commercial activities of the company, some of the projects that were to be completed by the company. And these months of confinement and the fact that everything has come to a standstill have affected the process. So although we're talking about 100 -- about EUR 130 million in recurring EBITDA, there may be some lower impact there. So it might be slight lower figure. But certainly, it could be a reference for you if you're thinking about the impact for the next half year because, of course, there will be this additional impact from the COVID-19 crisis. You're asking about planning as well, impact on CapEx. This is an exceptional time for the electricity sector, isn't it? And with this integrated plan and our ambitious goals, we do think there may be some additional extraordinary measures taken. One good sign is what we've seen in that Royal Decree law 23/2020 with the inclusion of the new thresholds for investment for the transmission grid. That is a key sign, I believe, that the -- both the regulator and the ministry are trying to encourage further investment in the transmission grid and, therefore, to try and use those investments to really achieve the goals in the plan. And though we would hope, of course, that -- we did say that we had hoped that those investment caps could be reassessed, and they have been, and that's good for the delivery of that integrated national plan. Then CapEx and how that is going to evolve as we move forward, that increase in the ceiling for CapEx and the figures that are starting to be used in the initial planning process, we think, are very reasonable for further deployment of the grid and the system as a whole.

[Interpreted] Let's move on to our questions coming in, in English now, please. Thank you.

[Operator Instructions] We have a question from Olivier Doosselaere from Exane.

I have 3 questions, please. The first one -- maybe more of clarifications. On Hispasat, can you just please confirm, is there any PPA number in the P&L of your company today? What is the amount? And will that be a structural amount going forward? Second question is on the pre-1998 assets. Following the Supreme Court's decision, that means the end of potential proceedings on your side to hope for an extension of the useful life of those assets. And then my third question. I wonder if you could give us an indication in terms of where you expect EBITDA and net income for the company to land this year. If you don't provide any such indication, could you please highlight to us where the uncertainty really lies because we see very few utilities not being able to give a guidance today? And probably your business profile should actually be more [ resilient ] than theirs given the very regulated nature of your activity.