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

Good morning, ladies and gentlemen. We are going to begin our earnings presentation for the first half of 2026. We'd like to welcome everyone who's joining us on the phone and on our webcast. Joining us today, we have Roberto García Merino, Chief Executive Officer; Carlos Puente, Corporate Director, Strategy and Diversification; and Emilio Cerezo, Corporate Chief Financial Officer. I'll now hand over to our Chief Executive Officer, Roberto García Merino.

Thank you, Sal. And thank you, everyone, for joining us in this earnings presentation for the first half of the year. Allow me to begin by referring to the environment in which the company is carrying out its business and the most significant milestones in the period. And then our Corporate Director of Strategy and Diversification will discuss the main metrics and the progress made in our strategic projects. Afterwards, our CFO will go into greater detail on the numbers for the period before we conclude by reminding you of our view for the 2026 year-end. Let me begin by giving you a bit of context about the company's activities, a key sector for the energy transition marked by electrification, the integration of renewables and the need to guarantee a secure, efficient and resilient grid. In the last months, we have entered a particularly relevant stage of the electricity sector in Spain and globally since grids have moved from being merely a supporting infrastructure to becoming an essential component of energy security and of the transition towards a more electrified model. The geopolitical context has highlighted the importance of having robust, resilient infrastructures ready to integrate renewable generation locally. At the same time, demand growth connected with electrification, industry and new consumption vectors like AI and data centers require faster investment in transmission grids, interconnections, storage, digitization and cybersecurity. In addition, the European Commission recently published a proposal and an action plan for electrification, which confirms Europe's commitment to accelerate demand electrification in industry, transport and the residential sectors. The proposal to set an indicative electrification target of 46% by 2040 aims to reduce our external energy dependence, increasing our energy security and achieving more competitive prices for consumers. To achieve these objectives, investment in grids is essential and Red Eléctrica remains committed, as it has been to date, developing and improving the electricity transmission grid in an agile and efficient manner in order to serve current and future demand, benefiting from a sustainable, secure and competitive electricity system. For Redeia, this environment, therefore, represents a historic opportunity and a structural change for the company. Our role as electricity system operator and transmission operator is key to ensuring that the electricity system can absorb more renewables, respond to new consumption patterns and volumes whilst always maintaining security of supply. At domestic level, Spain continues to move quickly in the transformation of its electricity generation mix. Renewable generation still at very high levels, close to 60%, confirming the strength of the decarbonization process and our country's distinctive role within Europe. And this progress is not just about generation. For more renewables to enter the system efficiently, we need a grid capable of transporting that energy from the points where it is generated to the centers where it is consumed. And that's why the expansion and modernization of the grid is an essential precondition to capture the full value of the energy transition. If we look at the recent evolution of the Spanish electricity system, we see a very relevant signal. Demand has returned to growth in recent years. But perhaps even more importantly than the growth in energy demand is what we are seeing at moments of peak system demand. Demand peaks are increasing, confirming the need to continue reinforcing the grid in order to accompany the electrification of the economy. It's not just higher annual demand, but also greater instantaneous power needs that the system must be able to meet with complete security. Amongst the factors influencing the shift in trend are the growth of industrial consumption and the increase in final electricity uses like heat pumps and electric vehicles. Also, long term, we expect very significant growth in demand due to the growth in deployment of data centers, electrification of ports, industry and transport, railway corridors and battery factories. It is therefore clear that investment in grids is becoming a strategic priority. Renewables are transforming how electricity is generated. Electrification is transforming how it is consumed, and it's the transmission grid that makes both possible. Our investment plan responds precisely to these needs, integrating more renewables, moving with the electrification of the economy and preparing the system for a more complex environment. It's not just about more capacity, but about a smarter, more flexible and more secure grid. For Redeia, this translates into a solid platform for growth with a direct contribution to the energy transition and the -- country's competitiveness. Now that we've analyzed the sector context in which we're operating, I will present the most significant milestones of the first 6 months of 2026. During the first half of the year, the TSO has maintained a solid pace of investment, which reached EUR 631 million. That's 12% more than in the same period of the previous year. Of this amount -- EUR 551 million corresponding to investment only in the transmission grid. This performance enables us to anticipate that the TSO's investment will reach and probably exceed EUR 1.5 billion by year-end. This increase once again demonstrates our commitment to reinforcing critical infrastructure, improving the quality of supply and responding to the needs of the system. I'd also like to highlight other relevant milestones in the period. First, yesterday, the Council of Ministers approved the third amendment of the specific aspects of the 2021-2026 plan with a planned investment of EUR 615 million. This proposal includes actions aimed at increasing the resilience of the electricity system and reducing electricity costs for consumers. We also approved the grid investment cap through to 2030, which was an essential step for the approval of the new 2025-2030 plan. In addition, the Council of Ministers has commissioned Red Eléctrica with the construction of the Güímar pumped storage hydroelectric plant in Tenerife with a capacity of 200 megawatts. It's a strategic infrastructure for the Canary Islands electricity system and strengthening storage capacity and facilitating greater integration of renewable energies. This project is similar to the Salto de Chira project in Gran Canaria with an investment of over EUR 1 billion over the next decade. This award represents a very relevant milestone for Red Eléctrica, reinforcing its role in the deployment of essential infrastructure for the energy transition, opening up a new long-term investment factor. And in the financial area, EUR 154 million has been received from the Recovery, Transformation and Resilience Plan as well as EUR 158 million in grants linked to congestion income to finance the Spain-France interconnection. In addition, in April, a 6-year EUR 500 million hybrid bond was issued at an interest rate of 4.375%. We currently have EUR 1 billion in hybrid bonds. And as envisaged in our strategic plan, our goal is to increase this figure to EUR 2 billion, thereby consolidating a solid financial structure aligned with our long-term investment needs. Finally, I'd like to highlight a particularly significant achievement for Redeia. For the first time, we've been recognized by Standard & Poor's as one of the most sustainable companies in the world, positioning us amongst the top 1% globally for sustainability performance. Only 2 companies in Spain have obtained a similar result and 70 globally. This recognition endorses our commitment with creating sustainable long-term value and reflects the progress made in recent years, moving from the top 10% to the top 1% globally in just 2 years. I'll now give the floor to Carlos Puente, who will explain the main figures for the period and progress made in our strategic projects.

Thank you very much, Roberto, and good morning, everyone. As you've heard, the semester has seen very relevant operational, regulatory and financial milestones, reinforcing the delivery of the road map that we presented to the market in February. This evolution is reflected in a widespread improvement of the group's main indicators. Particularly noteworthy is the 9% increase in investments, which I will analyze later, and the growth in our net profit, reaching EUR 280 million. That's 4% more than in the same period of the previous year. I'd also like to remind you that after approval by the General Shareholders' Meeting on July 1, a final dividend charged to 2025 results of EUR 0.60 per share was paid, thereby fulfilling our commitments with the market with a total dividend booked last year of EUR 0.80 per share. We now move to an in-depth analysis of our investments during the first half of the year. During this first half of the year, Redeia has invested EUR 657 million. Of this amount, as previously mentioned, EUR 631 million corresponding to TSO investment. This figure reflects the significant investment effort the company is making to accelerate the development of the transmission grid in Spain. Regarding Red Eléctrica's main projects, I'd like to highlight the following. The progress has been made in the electricity interconnection between Spain and France with the Bay of Biscay, which continues to be executed on schedule. Civil works are well advanced, and we began receiving the first power machines in the Gatika converter station. The objective is to commission the first link in 2027 and the second in 2028. Also progress in the second interconnection between the Iberian Peninsula and the Balearic Islands, including the new high-voltage direct current link between Castellón and Mallorca. This project is complemented by other key investments to move forward with the decarbonization of the Balearic electricity system, including the installation of synchronous compensators in Mallorca and the deployment of battery storage systems in Menorca and Ibiza. Also progress in the Transmanchego axes and the La Sagra axes, 2 key initiatives to reinforce the electricity corridor between La Mancha and Madrid, eliminating technical constraints on the grid and facilitating greater integration of renewable energy generated in Castilla-La Mancha. During the first half of the year, progress was made in the environmental and administrative permitting of the different sections. The Morella-La Plana axes, a key initiative to reinforce the transmission grid along the Mediterranean coast, has reached an important milestone with the granting of the administrative construction permit. Project continues the execution phase with a target commissioning date of 2028. The Itsaso-Castejón-Muruarte line project has recently obtained the main administrative authorizations to begin execution. This project is a key initiative to reinforce the meshing of the transmission grid in the north of the Peninsula, increasing transmission capacity between the Basque Country and Navarre and facilitating the integration of renewable generation. This infrastructure will also contribute to maximizing the use of exchange capacity with France. Finally, and regarding our Salto de Chira project in Gran Canaria, we've completed the drilling of tunnels and galleries and practically all the cavern excavation. In addition, works continue on the hydraulic circuit and testing has begun on the desalination plant. The project is therefore on schedule with commissioning expected for 2028. I'd also like to underscore that 96% of our investments are eligible under the European taxonomy, reinforcing Redeia's commitment with sustainability. In short, and in line with the objectives of our strategic plan, we continue to increase our execution capacity and making progress on the investments that will drive Redeia's growth in the coming years. Let's now review the results of the first half of the year. If we look at the P&L as a whole, I would emphasize the excellent performance of all lines during the first semester. The contribution of regulated businesses to our EBITDA exceeds 90% at the end of June. And this is a particularly relevant figure because it confirms that the growth of our regulated activities continues to strengthen the quality, recurrence and visibility of our earnings. And to give us more details about these figures and the results of the semester, I'm going to hand it over to Emilio Cerezo, our CFO.

Thank you, Carlos, and good day, everyone. Group revenues increased by 6.8%, driven mainly by the regulated business in Spain. New facilities entering service net of grants and higher regulated revenues for the system operator after the update of remuneration parameters for the 2026-'28 period contributed to this performance. In addition, in 2026, there was a change in the regulated useful life of repowerings from 40 years to 8 years for the entire asset base from 2022 onwards. This change involves a positive impact on first half revenues of EUR 24 million, including the nonrecurring effect of the regularization of revenues from previous years. The international business declined due to lower third-party projects in Chile, the depreciation of U.S. dollars versus euros and lower results from Argo in Brazil as a result of higher financial expenses following the increase in company leverage after the dividend distribution in 2025. These effects were partially offset by the good performance in Peru and Chile. At the same time, the fiber optic business was affected by contract renegotiations according to plan in the context of market consolidation, partly offset by the effect of inflation and CPI-linked contracts. Operating expenses show an increase of 8.9%. However, excluding expenses with the counterpart and other operating income such as the progress of works in the Chira-Soria project and those linked to the damages caused by the 2025 weather event, growth was somewhat lower at 7.6%. Staff expenses also increased due to a higher average workforce required to address the strong growth of assets in the group. And external expenses increased due to higher asset maintenance costs, system operation, project costs and other general expenses. The evolution of revenues and expenses leads to an EBITDA growth of 5.8% compared with the previous year, thanks to the contribution from the TSO. However, without the positive effect of this change in the regulated useful life of repowerings reaching EUR 24 million, comparable EBITDA growth stood at 2%. We should also highlight that the aforementioned EUR 24 million are fully neutralized at EBIT since depreciation and amortization increased by the same amount. And to conclude with the income statement, net profit reached EUR 280 million or 4% higher than in the first half of the previous year for several reasons. Depreciation and amortization increased linked to higher assets in operation and the change in the regulated useful life of repowerings. Also, the financial result improved by EUR 4 million as a result of lower financial expenses than in the same period of '25, mainly due to the placement of cash surpluses and higher capitalization of financial expenses in projects associated to the higher investment volume. These effects were partially compensated by a higher average gross debt and a slight increase in its average cost. And finally, the corporate income tax was in line with the previous year with an effective rate, excluding the result of companies consolidated under the equity method, of 24.6%. From a financial perspective, the group's net debt stands at EUR 5.009 billion or EUR 465 million under the values of 2025. In addition, the group maintains EUR 1 billion in hybrid bonds, which are fully recorded as part of equity. The generation of a solid operating cash flow of EUR 518 million, funds raised through the hybrid bond issued in April and the receipt of grants from both congestion income of EUR 158 million and PRTR funds for EUR 154 million offsets the group's strong investment effort and the payment of the interim dividend. Thanks to all that, we preserve a solid financial structure with a net debt-to-EBITDA ratio of 3.9 and an FFO to net debt of 22.1%. Finally, about our credit rating, we maintained a BBB+ rating, both by Standard & Poor's and by Fitch. So back to our Chief Executive Officer.

Thank you, Emilio. And now to conclude this results presentation, I can only tell you how we expect the company's performance to evolve in the second half of the year and how we expect to close 2026. I would like to insist that the results obtained during the first half of the year and the expected performance on the coming months allows us to confirm our outlook for 2026 in line with the objectives presented in our strategic plan for '26-'29. Therefore, we expect to close the year with a net profit exceeding EUR 510 million and a growth of dividends per share of 2%. In parallel, we will continue to make progress in the execution of our investment plan. In 2026, TSO investments will reach and probably exceed EUR 1.5 billion, showing the significant effort made in recent years to progressively increase our execution capacity. In this regard, we moved from a phase of accelerating activity to a phase of consolidation and pursuit of efficiency. After several years, we have finally reached cruise speed, enabling us to face the challenges of the new electric planning with confidence. In short, a very positive first half of the year, allowing us to envisage a year-end in line with what we announced in February and constituting a solid start to our new strategic plan. Thank you very much for your attention, and we are available to answer your questions now.

[Operator Instructions] The first question coming from Ignacio Doménech from JB Capital.

I have 2 questions. The first one is about approval of the investment cap. I wanted to understand your perspective on that aspect. And as for -- on the side of planning, what are your forecasts for your potential investments starting with that EUR 0.5 billion in 2026. My second question is about potential improvements or reviews in the regulatory framework, having seen that the regulation in other sectors are considering seasonal aspects, too. Do you expect anything similar to happen in your own sector in the next few months? Or if it's not related to inflation, are there any other components that might lead you to expect an improvement in the regulatory framework?

Well, excellent, Ignacio. Thank you for your question. As for yesterday's announcement about the investment cap, we have a very positive view, not only because of that cap. Yesterday, the present planning -- a change in the present planning was approved yesterday by the Council of Ministers to make the present plan more efficient and to make energy cheaper. So our first impression is very positive. As for investment cap, well, it's just a reference, a limit to investment, much needed to continue the analysis and approval process for energy planning, which will be a guiding light for our investment framework in the next few years. You know that this cap was much needed. And in the CNMC report last month, assessing the planning proposal for approximately EUR 13 billion, it was clear that the previous cap was insufficient and the new announcement makes the new limit comfortable for the investments to ultimately get approved in the planning. But it's relevant precisely because it was much needed to continue the planning analysis and approval process, which will earmark the investments in Red Eléctrica for the next few years. As for yesterday's approval of changes to the present planning, I perceive it as good news, particularly for the electricity generation system as it will bring extra elements into the system to provide higher resilience. So my take on both announcements is very positive. As for the remuneration model, well, the truth is the model was approved in December. We have objected some aspects in the model, which we believe can be improved. We believe that the model is insufficient, particularly in the present environment and the one we're considering for the future. And we have given the CNMC our opinion and filed the corresponding appeals. In other remuneration models for similar activity to ours, we have seen the introduction of a concept like an inflation adjustment, which we've required or asked for in our consultation process with the CNMC. We believe this would be a positive measure to accommodate the evolution of prices in the remuneration process. And we also requested from the CNMC an update of our remuneration model, an amendment we consider reasonable and which we requested last year in our dialogue with the CNMC. So there is still room for improvement in the model. So there are appeals and an explicit request for an update were filed to the CNMC.

Next question from Javier Suarez from Mediobanca.

I have a couple or actually several questions, as follow-up to the previous question. About the updating of the current plan until 2026, the government announced yesterday an increase of over EUR 600 million. But the question is, when do you think that, that additional investment could be made? Is it something that's going to happen within your business plan running up to 2029 or beyond that? And the second question is about the National Energy Infrastructure plan, which has to be approved running 2 years behind and probably run only up to 2030. So the question I have is, once this new infrastructure plan is approved, will you be updating your business plan? And in that update, how much visibility would you have? That is I'm trying to understand whether this new infrastructure plan could give the company more visibility beyond 2029? And the next question is in the context of the investments that are required, do you think that the infrastructure plan should extend significantly beyond 2030? Is there any possibility that the government might reconsider the duration of the infrastructure plan beyond 2030, maybe up to 2035? And my final question is, when will the company update its business plan? And how far will it extend visibility?

Perfect, Javier. Thank you. As for the investment connected with the proposal for the amendment of the current plan, it was approved yesterday. Of course, some preliminary work is required, engineering analysis and permitting management and to start the tendering process for equipment and so on. So in our '26-'29 plan, there will be some of that investment already executed. But of course, these kinds of investments have longer development times. But because of the type of amendments and the previous ones, we have seen both with the synchronous compensators and also probably with this kind of investment, the Rev versus CapEx ratio is actually a bit more favorable because these are processes or facilities that require less permitting time. And so there, we expect to be able to accelerate the process a bit. But as for the EUR 615 million, the impact on the current business plan will be relatively limited because it will take us a while to see the real impact on our investments, but it will be towards the final years of the plan. As for the planning and the updating of our strategic plan, we said it in February, and perhaps Carlos can give you a bit more color. The essential part of our strategic plan is connected to the planning. Obviously, once the planning is approved, we have to look at the scope and the content before thinking of potentially an update of our plan. In February, we gave a description of where we thought investment might evolve up to 2030, 2031. But now that the planning has been approved with the evolution this year of the most strategic projects, which are moving forward pretty successfully, I think we will have more visibility and perhaps extend our visibility on the strategic plan to 2031. But we'll have to wait and see until the actual planning gets approved because that's the essential component we work on to construct our business plan or our strategy plan. Carlos, do you want to give any more color?

Yes. Our current strategic plan 2026-2029 included investments connected mostly to the current planning, the '22-'26 planning with all the various amendments that have taken place. And once they publish the new planning, we will have more visibility on investments for the years beyond 2029 with their respective commissioning dates, and we'll be able to do that update of the numbers that Roberto mentioned. And then also, Javier, what you were saying about the planning time line. Obviously, that's the government and the ministry's decision. But perhaps most European countries in our environment, you're correct, do tend to have planning that run at least 10 years into the future. But we think in an electricity system, that's quite a reasonable time line to reflect the changes and modifications that could occur in future years. But in any case, it's up to the ministry. But it's true that a lot of European countries have that kind of a time line in their plans. And the recommendations from Europe tend towards longer-term plans than the one we work with in Spain.

Thank you. There are no other questions in Spanish. Let's now move to questions in English. [Operator Instructions] The first question comes from Arthur Sitbon with Morgan Stanley.