Enagás, S.A. (OTCPK:ENGGF) Q3 2022 Earnings Conference Call October 25, 2022 3:00 AM ET
Company Participants
Arturo Gonzalo – CEO
Luis Romero – CFO
Conference Call Participants
Javier Suarez – Mediobanca
Manuel Palomo – BNP Paribas
Ignacio Domenech – JB Capital
Antonella Bianchessi – Citi
Arthur Sitbon – Morgan Stanley
Operator
Good morning, ladies and gentlemen. Welcome to Enagas Conference Call in which we’re presenting the company’s financial results for the first-nine months of fiscal 2022. The figures were released this morning before the opening bell and are available on our website at www.enagas.es.
Arturo Gonzalo, Chief Executive Officer for Enagas will lead this conference, which is expected to last around 20 minutes. Afterwards, there will be a Q&A session during which we will try to answer any questions as well as possible. Thank you for your attention.
Now I will hand the floor to Mr. Arturo Gonzalo.
Arturo Gonzalo
Good morning, ladies and gentlemen, and thank you for joining us today. I would like to welcome you to this presentation of results for the first-nine months of 2022. Joining me today are the CFO, Luis Romero; the Legal Services and Corporate Affairs General Manager, Diego Trillo; the Communications, Public Affairs and Investor Relations, General Manager, Felisa Martin; the Investor Relations General Manager, Cesar Garcia; and the Control and Business Analysis General Manager, Natalia Morajel (ph).
Since we presented our 2022-2030 strategic plan on the 12th of July and the half yearly results on the 27th of July, there have been many developments in the European scenario and in particular in our energy sector. To give you some specific details, last week, the European Commission presented a new package of measures in response to the energy crisis that provides for joint gas purchases and sets out rules to ensure energy solidarity among member states, together with mechanisms to protect the economy and citizen from high energy prices.
One matter of great interest is the announcement by the Presidents of Spain and France as well as the Prime Minister of Portugal, regarding the agreement for the development of the Green Energy Corridor, which envisages the connection between Celourico da Beira in Portugal and Zamora in Spain and an offshore connection between Barcelona and Marseille. This project makes perfect sense for Europe as it combines both solidarity and decarbonization. In turn, from a technical point of view, this project will have the minimum environmental and social impact.
Furthermore, this project is quite a success for all three countries and great news for Europe, a sign of solidarity among European countries. Further details on the project will be provided at the next meeting to be held by all three countries scheduled for the 9th of December. So all these steps will enable us to move towards a more united Europe and energy and infrastructure will, to a large extent, be the thread that binds all five steps together.
My presentation is organized in three sections. First, I will summarize the state of progress in the implementation of our strategic plan and we’ll give you some details on the level of utilization of our infrastructures. Second, I will review the main financial performance indicators. And lastly, I will remind you of the targets set by the company for 2022.
Since July, we have advanced in the implementation of our strategic plan, meeting our goals and deadlines and in full alignment with the national government’s line of action. Before discussing the specific details of each project, let me refer to the More Energy Security Plan presented by the Spanish government just two weeks ago, which is quite relevant against the current background. This plan includes 73 energy security measures, some of which are key for Enagas.
Such measures encompass the reinforcement of energy infrastructures to further increase Spain’s contribution to Europe today through gas and tomorrow through hydrogen. In this regard, progress in outlining the future Iberian Hydrogen Corridor is critical. Other key measures for us include the integration of renewable gases into the gas system or the electrification of natural gas compressor stations with motor compressors to speed up the reduction of emissions in the system.
The More Energy Security Plan incorporates other measures contained in Enagas strategic plan on which a great deal of progress has already been made. Specifically, the startup of the El Musel plant in Gijon as a logistics plant, for which we have already obtained administrative authorization from the ministry for the ecological transition and demographic challenge.
Now we are only waiting the final approval of its remuneration model by the Spanish National Markets and Competition Commission, CNMC. This terminal will be able to deliver up to 8 bcm of LNG a year to Europe. It is scheduled to be commissioned in January 2023 and last week, we officially welcomed the new team of some 50 professionals who had already been trained to start up and operate the plant.
The extension of the Irun interconnection, which is now ready to export an additional 1.5 bcm of gas per year. This new capacity will be available for contracting as of the 1st of November. Then the extension of the Barcelona plant jetty, that will make it possible to send more gas to Italy in small vessels. This extension has already been offered to us by the ministry and will be available as of November as well.
And then the ratification of Enagas GTS as a transitional entity responsible for the Guarantee of Origin System for renewable gases on which we’re working. Its commissioning has been brought forward to March 2023. And production plants for these gases will be ready to start registration as of January. All of them are key milestones and were included in the growth pillars supporting our core business and related businesses under our strategic plan.
In addition to these projects, we have also made steady progress in attaining other goals under our strategic plan. And let me review them briefly. As regards our asset rotation strategy, we continue to make progress on the plan we announced in July, which we are implementing to the letter. Last week, we announced that Navantia, a company owned by the SEPI Group has acquired a 5% stake in Enagas Renovable.
Let me remind you that in July, other stakeholders also acquired an interest in the share capital of Enagas Renovable, the Hy24 Fund, a joint venture of Ardian and FiveT Hydrogen that acquired a 30%; and Pontegadea, a recent shareholder of Enagas had acquired a 5% stake. Enagas holds a 60% stake, a shareholding, which, of course, complies with all of the CNMCs requirements regarding the separation of activities.
Hy24, Pontegadea and now Navantia’s commitment consolidates Enagas Renovable as a platform for the development of green hydrogen and biomethane in line with the announcement already made under our strategic plan. Also, regarding asset rotation, let me remind you that in July, we announced the sale of our 45.4% stake in GNL Quintero.
One of our growth pillars is international development with a focus on Europe. As you know, we are collaborating as much as possible with other TSOs and operators. And an example of this is the formalization in October of an agreement with the Albanian operator AlbGaz, whereby Enagas could become a potential shareholder thereof, we’ll therefore continue analyzing joint projects, both in the country and in the Mediterranean area, but also continue in promoting the expansion of TAP, the Trans Adriatic Pipeline to 20 bcm.
And in connection with TAP, the Greece-Bulgaria interconnector that connects this infrastructure to the Bulgarian gas network and has a capacity of up to 3 bcm was launched this month.
Regarding our innovation, technology and digitalization pillar, I would like to underscore the Klima energy transition fund to begin with in which we participate with Alantra that reached a final close of EUR210 million in September, thus surpassing the initial target of EUR150 million. This month, the fund manager Hy24 closed it’s Clean H2 Infra Fund at EUR2 billion, this being the largest hydrogen fund in the world.
And together with other companies, Enagas participates with the TSOs, Snam and GRTgaz as anchor investors. On the other hand, the GSP arbitration procedure in Peru is on schedule, and we shall keep you timely informed about it. The final ICSID hearings were held in September and according to our legal advisors, a final award should be issued in the first half of 2023.
I would like to close off by highlighting that Standard & Poor’s has ratified our BBB rating. And this stable rating outlook proves the strength of this score. As stated in our strategic plan, maintaining our credit rating is a clear cut priority for the company. Therefore, we are delivering on our strategic plan faster than expected, and we hope everybody attains some important milestones.
Now I would like to turn to another issue that continues to be in the spotlight, capturing the utmost attention, the functioning of the Spanish gas system. In the current context in Europe, the fact that Spain’s gas infrastructures continue to operate at 100% is very good news. And here are some figures. Underground storage facilities are already 93% full, LNG plants are filled to more than 80% on average. We have already completed 250 ship of loadings so far this year, almost the same number as in 2021 in total. We continue contributing to European supply.
Exports, year-to-date, have reached 26.6 terawatt hour, which is tantamount to more than 26 methane tankers. We have, and increasingly more, one of the most diversified sources of supply in the world. Today, we have received gas from 18 different origins. The sum of gas demand in Spain and exports in the first-nine months of this fiscal year was 8.2% higher than in the same period of 2021. Demand for electricity generation is particularly noteworthy, which rose by 80.2%. The current context has brought to light the importance of Spain’s gas infrastructures, both for our country’s security of supply and to contribute to that of other European countries.
Also, we have provided more competitive energy, thanks to our six LNG plants, gas prices in Spain have been among the lowest in the European Union since the start of the war, and have since then resulted in savings of around EUR7.8 billion in the national energy bill. Also worth mentioning is the fact that Spain’s regasification plants had a total cost of approximately EUR4.5 billion.
I will now turn to the company’s key financials for the first-nine months of fiscal year 2022. Ordinary net profit amounted to EUR353.4 million. This result includes the capital gains from the sale of GNL Quintero and the entry of Hy24 into Enagas Renovable as well as the impairment in Tallgrass that we have already informed you about. This net profit was therefore up 15% compared to the same period of 2021 and is on track to achieve our estimated year-end result.
Another important issue in the current economic context is the fact that if we remove the non-recurring effects of our operating expenses as well as audited expenses that are offset by higher regulated revenues, you will see that the company’s total expenses have evolved well below current inflation figures. Specifically, expenses rose by 3.5% against an inflation rate in Spain of 8.9% and up 9.9% in Europe. This is the result of implementing the measures under our efficiency plan, which makes the expenditure outlook announced in our strategic plan fully realistic.
Today’s data show that we are on track to meet our goals in this regard. Both our cash flows and net debt have also evolved in line with the budget over the third quarter, including the cash inflow from the divestment of GNL Quintero. By year end, our net debt will stand at around EUR3.7 billion. So we plan to use the cash from GNL Quintero before the closing of this fiscal year to pay off debt in dollars, which is more expensive than euro denominated debt.
More than 80% of our debt is hedged at fixed rates, which allows us to mitigate the impact of current interest rates. In any case, let me remind you that our strategic plan in July already factored in a potential scenario of interest rate hikes in the markets. The leverage ratios are fully consistent with a BBB credit rating. As for our affiliates, they reported a result of EUR153.9 million over the past nine months, and they continue to contribute to the security of supply and the decarbonization of the countries where we operate.
Let me share some details with you. In Europe, Trans Adriatic Pipeline continues to contribute to reduce independence on Russian gas, especially in Italy and Greece. With 98% utilization, this pipeline has delivered to Europe 7.9 bcm of gas up to the 30th of September.
In Greece, total demand increased by 13.2%. Our affiliate Desfa is reinforcing the key role of the security of supply of the Revithoussa terminal, which covered 42% of the country’s total imports over the period, receiving LNG from seven different countries.
In Spain, our affiliate BBG and Saggas continue to operate with high levels of utilization and contribute significantly to meeting demand.
In the Americas, first off, in the United States, the Tallgrass infrastructure has seen a high level of contracting and utilization during the first three quarters of fiscal year 2022. In particular, the Rockies Express pipeline performed well with an average contracted capacity in excess of 90%, while Pony Express reached a utilization rate of 85%.
As you know, Tallgrass is engaged in a major investment plan which is on schedule. In September, the company announced an agreement with Equinor to develop large scale clean hydrogen and ammonia production and infrastructure opportunities jointly and they will announce further developments in the near future.
In Peru, where we are present through TGP and COGA, demand has increased by 10%. And in the current international price context, there is a high utilization of the gas transport network for export standing at 83%.
In Mexico, the TLA Altamira plant had 100% availability in the first-nine months of the year, and we continue making progress in closing the sale of Gasoducto Morelos.
As to ESG performance, which is critical for the company, in the last quarter, we have updated Enagas sustainability strategy in line with the new strategic plan, focusing on three main areas: first, decarbonization of our operations and our value chain; second, transformation with a focus on people and digitalization; and third, regarding governance, ensuring due diligence on human rights and the environment.
We, therefore, continue to place emphasis on safety, security and cybersecurity. We continue to hold leading positions on the world’s main sustainability indices, and I would like to highlight a recent milestone. In September, we ranked among the top performing companies in our sector on the Dow Jones Sustainability Index.
The results for the first-three quarters of 2022 that we are presenting today are fully in line to achieve our 2022 targets, namely the following. First off, to deliver a net profit between EUR380 million and EUR390 million. This net profit would, therefore, be EUR360 million without the capital gains and the impairment of Tallgrass.
Second, to achieve a dividend adjusted EBITDA of EUR740 million. Third, to reduce, for the second consecutive year, our net debt, which included the cash inflow from asset rotation by year-end will be around EUR3.7 billion. And finally, our cash flow generation gives us sufficient slack to fulfill our dividend policy commitment with a 1% increase year-on-year, that is EUR1.72 per share in 2022.
I would like to close with the following conclusions. First off, we are going to meet our targets in a very challenging year globally and particularly in Europe in the energy sector. Secondly, these results will enable us to start off 2023 on solid grounds to continue implementing our strategic plan.
Thirdly, noteworthy, the fact that we are materializing the strategic plan at a very good pace and even faster than expected. And fourth, asset rotation in pursuing our goals strengthens the company’s balance sheet and our sound financial position to take advantage of new opportunities in the current decarbonization process either way in Spain and Europe, both the European guidelines of forward power yield to the most recent measures and the Spanish government’s More Energy Security Plan as well as the new Green Energy Corridor announced this week by the governments of Spain, Portugal, and France further reinforce our strategic plan.
Thank you very much. And now we are open to answer any questions you may have.
Question-and-Answer Session
Operator
[Foreign Language] Thank you very much ladies and gentlemen. The Q&A is open. [Operator Instructions] The first question comes from Javier Suarez, Mediobanca. Please go ahead.
Javier Suarez
Hello. Good morning, everyone. Thank you very much for your presentation. I had three questions. First, regarding the agreement between the Spanish and French government and Portuguese government to build the very important offshore interconnection BarMar (ph). I am aware of that international meeting or summit between the three governments in early December.
But I would like to know if there are any other details regarding the amount — the funds that should be invested by Spain or by Enagas towards this interconnection? And also, could you indicate what are — what is the schedule, the time line of this pipeline to diversify the sources of gas supply in Europe? And also, what type of financing should we expect? Should it be similar to TAP? Should it be through European funds? Do you have any idea of the equity Enagas would put into these interconnections? That would be my first question.
Second question regarding the capital structure of the company. We’ve seen a significant increase of interest rates, and of course, that is having impact across industries and particularly highly leveraged businesses. Does this change the way you see your capital structure? Do you believe the company should accelerate the disposal of assets, given the fact that, well, this scenario is different, and we should be looking at CapEx and dividend payout from a different angle?
And third question regarding the guidance on the net income. Do you — would you agree that the net income guideline seems quite conservative following the results of Q3 and also the fact that Morelos has not been accounted for yet? Thank you.
Arturo Gonzalo
Thank you very much for your questions, Javier and good morning. Now regarding the agreement announced by the governments of Spain, France and Portugal, there is not much more I can say today beyond what the three governments have explained already. We must get into the technical details of the agreement announced by the three governments, so that in the summit coming in December 9, we can get further information on the time lines, the cost estimates, the expectations to use EU funds to build this infrastructure or not.
I can only echo the statements made by the spokespersons of the governments involved, and that would not really add any value to this conversation. In any case, I can tell you that when all of these details are disclosed on December 9, we will definitely work to see how this new infrastructure fits into our own planning. But definitely, this is something that we will need to talk about later on and in further detail when the budget for 2023 is presented.
Regarding the capital structure and the impact that the interest rate hike has on Enagas. Enagas is very well protected from interest rate hikes. As of September 30, 90% of our gross debt was at fixed rates or it was fixed via derivative instruments. And therefore, the interest rate hike impact is limited for this company. The financial cost for 2022, as a part of net debt, will be very much in line with our initial forecast, which was EUR87 million.
Now regarding the maturities coming up in 2023, we believe that for the most part, the interest rate hike will be offset by the very positive impact that these interest rate hikes have on the cash we hold both in dollars and euros. Therefore, the net financial cost in proportion to the net debt for next year will also grow very moderately. And this is in line with our strategic plan where we forecasted some EUR110 million for next year.
And then you asked about how the impact of interest rate increases can accelerate our disposal of assets or change our point of view on the use of CapEx or dividend payout. Like I said, the impact of interest rate increases is moderate for us. We believe we are very well hedged from it in any case. And I wouldn’t think we need to change or steer away from our strategic plan. We are working to work on 2023 with no further changes on the credit revenues (ph) that we had already announced.
And then regarding the net income question, we believe we’re going to be within the range, probably towards the higher numbers of the range. We are conservative, but we believe this is the correct guidance for the market. And thank you very much Javier.
Unidentified Company Representative
Thank you, Javier. Next question please.
Operator
Next question by Manuel Palomo from BNP Paribas.
Manuel Palomo
Hello. Good morning, everyone. I must say my questions are quite similar to Javier. So let me just add one. Regarding the expectations on the demand, conventional demand is down by 17% year-on-year and the other type of demand is — were up by 80% year-on-year as well. So I have a question regarding Enagas’ expectation for 2023, when there could be some sort of hydraulic normalization, and therefore, the use of gas might fall. But particularly, what are your expectations regarding conventional demand for next year? Thank you.
Arturo Gonzalo
Thank you very much, Manuel. Your figures are correct, and they show this year has been quite the exception. And this is — this amounts to a net increase of 8%, which we believed is noteworthy, given the fact that demand was expected to curve over the next few years. We continue to see the demand growing steadily and demand for the gas system continues to increase. Certainly, there is a drop to conventional demand and this is due to the effect of the price.
We believe this drop to the demand is not structural. We believe most of that demand will pick up once again when prices normalize. This applies in particular to the industry — industrial demand because the lower demand in — and the industry responds to a switch of fuel, and this will be favorable to gas once again as soon as we go back to normal. The drop in the use of gas in the industry does not correspond to a destruction of the activity, but rather the fact that they’re switching to other fuels and we believe this can be reversed.
And like I said, when we go back to normal, we believe this demand will pick up again as will conventional demand. We still think that cycles will continue to have high use, high demand. The expectations of exports of electricity to our neighboring countries over the next few months are high. There’s going to be a high level of offloading and loading of vessels on our plants.
And this is linked to the floating regasification plants that will be started up across Europe. These plants will require storage facilities that make their operations more flexible. As a result of all of these, we believe that in 2023, conventional demand will pick up again. And in general, the global demand will be very robust for the Spanish gas system.
Unidentified Company Representative
Thank you very much Manuel for your question. Moving onto the next.
Operator
Next question from Ignacio, JB Capital. Please go ahead.
Ignacio Domenech
Good morning. Thank you very much for attending to our questions. My first question is regarding Nigeria. I’ve seen on the presentation that 14% of the supply comes from Nigeria. Regarding the announcement made last week on Nigeria, do you have further information or visibility regarding potential disruptions in that country? And my next question regarding asset rotation. Would you consider selling your stake in Tallgrass? Has anything changed? Do you have any new data points that you could give us regarding the potential sale of Tallgrass going forward?
Arturo Gonzalo
Thank you very much for your questions, Ignacio. Regarding Nigeria, there is nothing we can share. We have not received expressions of concern from the TSOs or the commercializing companies. And in fact, the situation came to be at a point when no significant tankers were expected to arrive from Nigeria. But like I said, we are not concerned regarding supply to Spain coming from Nigeria due to this force majeure situation.
And then regarding asset rotation, news — the latest news talk about — well, messages that we have communicated to the markets through our strategic plan as of July 12, strategic long-term assets for the company and the search of new development opportunities for this company will take place in Europe going forward under the framework of an increasingly integrated infrastructure between gas and hydrogen in Europe and TSOs will play the leading role in that scenario.
The other international assets of this company are valued highly and we are confident they will contribute with a lot of value. However, they are not long-term strategic assets for us. However, we still see great opportunities ahead. We believe these assets can grow. They’re a part of important value chains for us. Tallgrass Energy, in particular, is an increasingly important value chain for Spain, Europe and Enagas because most of the gas molecules we get in SLNG (ph) to our plants are traveling through Tallgrass pipeline systems.
And Tallgrass is involved in decarbonization projects, transportation, capture of CO2 production of clean hydrogen and ammonia. And all of these projects are very significant going forward, and Enagas is particularly interested in these projects. So there are no changes regarding our position. We are comfortable with these assets. The day we need to finance greater CapEx as these assets have come to maturity and provided that the market is favorable, we might consider to rotate our assets as we’ve done in the past. Thank you very much.
Unidentified Company Representative
Thank you, Ignacio for your question. Moving on to the next. Thank you. There are no further questions in Spanish. Are there any questions in English.
Operator
Let’s start with the questions in English. The first question comes from Antonella Bianchessi from Citi. Please go ahead.
Antonella Bianchessi
Thank you. [Technical Difficulty]
Operator
Antonella, your line is open. [Technical Difficulty]
Antonella Bianchessi
Yes. Hello. Good morning. Just a quick clarification on your target for the EBITDA, EUR740 million would imply pretty bad, let’s say, Q4. Can you elaborate on the definition of target? The number is, as well, below consensus. So if you can just clarify what is included and what is not, and also if you can give a little bit of clarity on the contribution of the international affiliates as to this target?
My second question, if you can give a little bit of granularity on the contribution of the international affiliates to the nine months EBITDA in, particularly, Tallgrass and the TAP, if you can give us the numbers behind it. Thank you.
Arturo Gonzalo
Good morning, Antonella and thank you very much for your questions. I will answer the first one, and I will ask Luis Romero, our CFO, to answer the second regarding the contribution of our international affiliates. Concerning our EBITDA target for the 2022 whole year, we are maintaining the target for EBITDA or the closing in the range of EUR785 million — EUR790 million and the EBITDA target of EUR740 million for the EBITDA adjusted for dividends.
This means that we are expecting a lower contribution in 4Q especially because we have a concentration of some expenses in this last quarter and because of calendarization of the contributions of the affiliate companies. I think this is it mainly, and then Luis will comment on the contributions in the first three Qs of the affiliate companies. Thank you.
Luis Romero
Good morning, Antonella. I think in terms of the contribution of the international business, nowadays, I think the expectations of the contribution by Tallgrass in the total contribution of the third quarter, I think, is around EUR26 million previous to apply the PPA. So this is the specific figure for Tallgrass in the current financial statements.
Arturo Gonzalo
Thank you very much Antonella for your question. We are ready for the next. Thank you.
Operator
Our next question comes from Arthur Sitbon from Morgan Stanley. Please go ahead.
Arthur Sitbon
Hello. Thank you very much for taking my questions. The first one is on the Spain’s regulation on gas transport networks. My understanding is that there may be some negotiations to try to adjust your current framework to try to get compensated by — for the high level of inflation that there is right now. I was wondering how those negotiations are progressing, what would be on your wish list, and what would be the reasonable time horizon for that to take place, if this is likely.
The second point — the second question, my understanding is that there is a cash flow sweep rule on the Prairie assets applicable to Tallgrass. I was wondering if you could walk us through how these rules work and what can it mean for cash flow generation or debt at the Enagas level? Thank you very much
Arturo Gonzalo
Thank you very much for your questions, Arthur. Regarding our discussions with the regulator on how to take into account the inflation effect in our costs, this will be included in the next regulatory period because the current period goes up to 2026, and we don’t expect any significant — any material change of the remuneration framework for this period. What will hopefully happen is that this will be taken into account for the next regulatory period ’27 to ’32.
What we are doing in this regulatory period, Arthur, is optimizing the efficiency plan in Enagas, reducing, as much as possible, the impact of inflation in our costs. I think this is something the market can rely upon because we are, I think, already delivering very significant results. We have restructured our executive team producing significant cost reductions.
And we can say that for 2023, our personnel costs, which represent almost 40% of our costs exposed to inflation, as I was saying, in 2023, our personnel costs will follow what has been projected in our strategic plan. So I can say very clearly that we are not going to have any unexpected costs increase by that side. We only have exposed to inflation around 30% of our costs without any protection.
And going to higher inflation rates, say, similar to the ones that we are seeing in Spain or Europe now, would represent a very limited impact in our costs of around EUR4 million a year. So we can say very clearly that inflation is being controlled in Enagas with our efficiency measures, and this is a line of action in which we will continue to look for opportunities to optimize our costs. So we will continue this conversation with the regulator definitely. But for the market, we are going to commit with what we can do, reducing the manageable costs in the company.
And second, talking about the cash sweep in Prairie, this cash sweep refers to the dividends distributed to the shareholders. Since we are not distributing dividends until 2026, this cash sweep is not having any significant impact during these coming years.
Unidentified Company Representative
Thank you very much Arthur, we are ready for the next question.
Operator
There are no more questions in English. I give the floor back to the management team.
Unidentified Company Representative
Thank you very much, ladies and gentlemen. There will be no further questions. We, therefore, close this conference call. The Investor Relations department will be delighted to take any other questions, should there be any. Thank you very much.
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