Enagas SA

MAD:ENG

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, ladies and gentlemen, welcome to the First Half of the Year Results presentation here at Enagás. Results have been presented this morning before market opening, and they are available on our website, enagas.es.

Arturo Gonzalo, the CEO of Enagás, will lead the conference. We expect it to last for about 15 minutes, and then we will open the floor to questions, and we'll try to answer them as fully as possible. Thank you.

And I give the floor to Mr. Gonzalo.

[Arturo Gonzalo, CEO]

Good morning, ladies and gentlemen, and thank you very much for your participation. I welcome you to this results presentation for the first half of the year 2023, where I will be joined by Luis Romero, our CFO; the General Secretary and Board Secretary, Diego Trillo; the General Manager of Communications and Institutional Investor Relations, Felisa Martín; Cesar Garcia, who is the Director of Investor Relations; and Natalia Morajel, Director of Management Control and Business Analysis.

I will divide my speech into five points. I will begin by taking a brief look at the latest National and European developments in energy. Secondly, I will look at the extent of the implementation of our strategic plan with a special focus on the milestones achieved in the second quarter. Third, I'll go through the key indicators of the financial results for the semester. Fourth, I will look at some of the milestones in ESG, and I will wrap up my presentation with a recap of our objectives for 2023.

Since the European Commission published REPowerEU in March 2022, with the aim of accelerating the energy transition in the face of Ukraine's innovation, Europe has achieved results that would have been hard to believe a year ago. First, it has achieved a significant reduction in energy dependence on Russia. Russian gas imports to Europe have been slashed by 62% between May 2022 and May 2023.

Measures such as the expansion of regasification capacity by 35 BCMs with eight new terminals in Europe have been essential in achieving this goal. 20% of this new additional capacity has been generated by Enagás through the launch of the El Musel plant.

Besides the European target to filling underground gas storage facilities to 90% of their capacity by November was also progressing well and currently stands at over 80%. The level in Spain is already at 98%, an all-time record.

Additionally, we've seen an acceleration in all regulatory developments planned to stimulate decarbonization and particularly the deployment of renewable hydrogen. An agreement is already in place for the new REDIII directive, which has increased the target for renewable energy consumption in 2030 from 32% to 42.5%. It has also introduced green hydrogen consumption quotas for the industry, 42% by 2030 and 60% by 2035 and for transport, 1% by 2030 via non-biological renewable fuels. The target for the later sector is 5.5%, including advanced biofuels.

Of this, in addition to the creation of the European Hydrogen Bank to promote a domestic European market for green hydrogen. Further progress will be made in the second half of the year when Europe adopts the directive in regulation and decarbonization of the hydrogen and gas markets. Spain has also seen significant progress and continues to lead the way in contributing to security of supply and decarbonization.

On June 28th, the Ministry for Ecological Transition and Demographic Challenge sent its draft to the European Commission, a draft in the National Integrated Energy and Climate Plan, PNIEC for 2023, 2030 and has started the public consultation stage. This is on line with the scenarios and objectives set out in REPowerEU and Fitfor55. It also represents a strong endorsement of Enagás proposals. This plan adds impetus to the push for renewable gases, raising the target set for 2030.

As for green hydrogen, planned electrolyzer capacity has been increased from 4 gigawatts to 11 gigawatts. Furthermore, 74% of the hydrogen consumed in the manufacturing sector will need to come from renewable sources, representing a threefold increase vis-a-vis the previous plan. And regarding biogas, the production target increases from 10.4 to 20 terawatts.

Through this plan, Spain is also strengthening the security of supply role provided by the gas systems infrastructures in line with the plus energy security plan, this is done by making the most of both the storage capacity of the systems LNG plant, which is being increased, thanks to El Musel and increase in interconnection capacity with Europe.

Additionally, in order for Spain to take full advantage of the opportunity to establish itself, as the world's leading renewable hydrogen hub, the PNIEC plan is adding a specific measure for the Iberian hydrogen corridor, the H2MED, which will include the first two access of the national backbone network.

And by the way, in its national plan, Portugal is also highlighting the importance of H2MED, forecasting an electrolyzer capacity of 5.5 gigawatts for hydrogen production and which will have surplus for export.

To sum up, both Europe and Spain have given strong backing to the hydrogen infrastructure projects that we announced earlier this year at Hydrogen Day and which we submitted to the call for European call for PCI. This also represents a renewed confirmation of the foundations supporting our strategic plan.

Now we presented this plan a year ago, and the implementation is advancing ahead of schedule. Let me remind you that there are three main lines of action. First, an investment plan focused on the security of supply in Spain and Europe; second, decarbonization using hydrogen, as a key vector; and third, operational and financial cost control, which I will go into more detail when we look at the result figures.

Regarding the first of these three pillars, the presentation provides details on the main milestones achieved since we announced our strategic plan, which are familiar to all of you. Today, I am going to focus on three of them that have taken place in the last three months, and which are particularly noteworthy.

The first in Spain is the launch of the El Musel regasification plant. This is wonderful news because of what it means for the Spanish gas system and for Europe's security of supply. Following a highly successful capacity allocation process and open season, which has attracted a great deal of interest. And within this, having been awarded the final contract for its commercial use, El Musel will begin commercial operations, as a logistics center on July 31st.

As you know, another of the milestones of our strategic plan was the agreement reached with Reganosa through which they gain a 25% stake in El Musel plant and Enagás acquires the transportation network. We expect this operation to be completed in the second half of the year.

The second major milestone in the last three months is Enagás presence in Germany. We've joined the Hanseatic Energy Hub consortium with a 10% stake. The consortium will operate the future liquefied natural gas terminal in Stade. Enagás will be the industrial partner in the project and will hold a majority stake in the planned future operating company. This important step fits perfectly into the objective of positioning Europe, as a priority geographical focus and will help deliver on Europe's security of supply and decarbonization goals.

And the third, which took place just yesterday is the completion of the increase of our shareholding in TAP. As you are aware, last January 27th, we reached an agreement to acquire an additional 4% stake in Trans Adriatic Pipeline for €168 million, bringing our total shareholding to 20%. TAP will contribute some €70 million in dividends to Enagás in 2023. This infrastructure is included in the European hydrogen backbone network map and can be adapted in the future for green hydrogen transport, thereby helping to meet Europe's decarbonization targets.

We've made significant progress during these six months in the second axis of the strategic plan, which includes the development of a hydrogen market is an essential vector for decarbonization. The H2MED corridor and the associated Spanish hydrogen backbone network are making positive progress towards achieving the project of common European interest or PCI status.

TSOs from Portugal, France and Spain, met with Energy Commissioner, Kadri Simson and European Commission Vice President, Maros Sefcovic in Brussels on July 4th, and both expressed their explicit support for these projects. Europe is fully aware that the H2MED corridor and the backbone networks in the different countries that make it possible are essential for achieving the objectives set in REPowerEU.

Here at Enagás, we continue to develop the road map presented to you in January during our Hydrogen Day in line with Europe. Today, we are announcing the launch date for the non-binding calls for interest for the first axis of the backbone network. We will launch the process and present it in detail with an information session on September 14th. The whole system will be available on September 22nd for the call for interest, which will also include a specific consultation on ammonia and CO2.

This call for interest will enable progress to be made in identifying projects and real needs, giving a more accurate picture of the potential supply and demand for green hydrogen in our country. Primarily, the development of a backbone network will allow us to satisfy demand in Spain and backed up by the PNIEC data, we will also be able to export to Europe.

With 11 gigawatts of production set out in the PNIEC by 2030, our country will be able to produce between 1 million tons and 1.7 million tons of hydrogen per year. And Portugal, according to its national plan expects to be able to receive up to 750,000 tons with a forecast consumption in Spain of 500,000 tons.

More green hydrogen may come from off-grid production and in the future from the north of Africa. I would also like to share with you that we will hold an H2MED presentation session after the summer in Berlin, in cooperation with the other TSOs and German companies, as Germany is the main market for hydrogen imports going forward.

Before we move on to the key financial figures for the first half of the year, I would like to offer you some data that highlights the sound performance of the Spanish gas system and how it is operating in 2023 with optimal reliability. The system has been 100% available and continues to feature its extremely high flexibility.

So far in 2023, it has been supplied with natural gas LNG from 16 different origins. Thanks to this, Spain now plays a key role in Europe security of supply and has increased its total gas exports by 55%. Vessel refueling has increased by 67% with Italy remaining one of their primary destinations.

In line with figures for the whole of Europe, the total amount transported by the Spanish gas system was 4.6% lower, reflecting the fall in conventional demand and electricity generation. This decrease can be put down to a combination of milder temperatures last winter, increased energy efficiency, energy-saving measures and the decline in industrial consumption due to the war in Ukraine. Nevertheless, we are already seeing a turnaround with industrial demand in July, up by close to 10% compared to the same month in 2022.

I will now move on to the highlights of our financial results for the first six months of the year. These results are on track to meet the annual targets set out in our strategic plan. Profit after tax reached €176.8 million. As you very well know, the variance compared to the first half of the previous year, is mainly attributable to the adjustment of the book value of our stake in Tallgrass Energy by €133.8 million in 2022.

And this is also due to the fact that 2023 profit includes €42.2 million in net capital gains from the completion of the sale of the Morelos gas pipeline. If both these one-off items were excluded, net profit for the period would have been down by 17.9%, mainly because our regulated earnings decreased by €27.4 million, mainly because of the implementation of the '21-'26 regulatory framework. I will highlight the relevant factors that account for this positive trend in results and give us confidence that we will reach all our goals in 2023.

Recurrent operating expenses have been kept in line with those of the first half of 2022. This shows the effectiveness of the cost efficiency plan that the company has adopted to minimize the impact of inflation. Furthermore, the June inflation figure for Spain points to a positive trend. We are one of the few European countries already showing year-on-year rates below 2%.

Our subsidiaries continue to perform well, achieving forecasted results for the year and contributing €89.4 million to the income statement and €108.8 million to cash flow. It should be noted when looking at our affiliates results in the first half of this year, that the report for the first half of 2022 included €11.9 million from GNL Quintero. As you know, this asset was sold in 2022 and no longer contributes to our results.

We have a solid financial structure and maintain a sound liquidity position. Our fixed rate debt is over 80%, which protects us in the current interest rate environment, helping us to maintain our target financial result for year-end. And the financial cost of debt is 2.6% with an average maturity of 4.4 years.

Looking at cash flow and balance sheet development, both our cash flows and net debt have been developing as expected. Net debt has been reduced by €303 million since December 2022, which is a very positive news and aligned with our annual target. And our leverage ratios are consistent with a BBB credit rating.

Turning to the performance of our affiliates. Tallgrass Energy is progressing in line with the business plan with a forecasted adjusted EBITDA for 2023 at between $775 million and $815 million. That is 9% higher than in 2022. The U.S. company continues to advance towards its strategic focus of developing decarbonization projects.

Just yesterday in the meeting of the Board of Directors, we approved the investment decision to move forward with the Trailblazer CO2 pipeline conversion project. This is a groundbreaking project in the United States and a key part of Tallgrass growth plan announced through the period 2022-2026. It is expected to be implemented in 2025 and will enable Tallgrass to advance in all of its strategic growth objectives.

This project is in addition to others, such as the development of approximately 60 megawatts of emissions-free power across all Tallgrass assets by harnessing residual heat to generate power with investment decision having been already approved. The financing of these projects will not require any additional capital contributions from Tallgrass Energy shareholders.

The presentation also features other innovation and decarbonization projects that the U.S. company is also working on. It is working on some very strategic matters such as renewable fuels for the airplane industry and others. As for the GSP arbitration award, as we communicated to the CNMV, our legal advisers expect to have a ruling from September onwards.

Turning to our ESG positioning and performance. We continue to make progress towards our main commitment, which is to be a carbon-neutral company by 2020 -- 2040. Let me mention just two specific initiatives.

We have signed the new Pact for Biodiversity and Natural Capital led by the Spanish Business and Biodiversity Initiative, which coordinates -- which is coordinated by the Biodiversity Foundation of the Ministry for Ecological Transition and the Demographic Challenge. With this, we strengthen our commitment to biodiversity, as a priority for Enagás. We are reviewing all our ESG risk management procedures for supply chain and affiliates.

As you can see from the presentation, we remain among the leaders in the world's top sustainability indices, thanks to our progress in all three ESG areas environmental, social and governance and also because we do so with the utmost transparency.

With the results of the first half of the year, I can confirm that we are well on track to meet the targets set out for the year, as a whole, which are as follows first, achieving a profit after tax between €310 million and €320 million, achieving an EBITDA of €770 million, receiving a total dividend from our subsidiaries of between €190 million and €200 million, undertaking a net investment of around €250 million, closing the year with a net debt of around €3.7 billion, containing our recurrent operating expenses in line with those of 2022 and delivering a financial result associated with net debt of around €110 million, maintaining our FFO to net debt ratio above 14%, that's consistent with our BBB credit rating, and finally, complying with our dividend policy, which in 2023 means remunerating our shareholders with €1.74 per share.

Let me wrap up with seven conclusions. We maintain a high level of delivery of the 2022-2030 strategic plan. In the last quarter, we've launched El Musel, which is now beginning commercial operations. And we have entered the Germany, where we will contribute our leadership in LNG expertise, as partners in the Stade plant.

The Spanish gas system is operating in 2023 with maximum robustness, contributing both to the security of supply in Spain and Europe and to achieving the European decarbonization objectives.

Enagás performance in the first six months of 2023 is on track to attain the targets set for the full year. Our efficiency plan continues to deliver results, recurrent operating expenses in this semester. And financial expenses in this semester are consistent with our announced objective to keep them under control during the fiscal year. ESG criteria are a well-established pillar of our strategy, and Enagás holds leading positions in the world's main indices.

2023 is the year of hydrogen. This is backed up by the data included in the draft PNIEC and confirms that both the H2MED corridor and the Spanish hydrogen backbone network are making significant headway in acquiring the PCI status.

Next quarter, hydrogen will continue to be in the spotlight. On September the 14th, we will launch the call for interest process for the backbone network, preceding the binding open seasons.

We are receiving explicit support from producers, distributors, large consumers, industries and all relevant stakeholders in the hydrogen value chain to set this process in motion. This first market test will enable us to gain a very complete picture of what the future of hydrogen will be and help us continue working as quickly as possible to take advantage of a unique opportunity for Spain.

Thank you for your attention, and we are now available to answer any questions you may have.

[Operator]

Thank you very much. [Operator Instructions] The first question comes from Javier Suarez from Mediobanca. Please go ahead and ask your question.

[Javier Suarez, Mediobanca]

Hi, good morning to everyone, and thank you very much for the presentation. I have two or three questions. First, on Page 11 of your presentation, you give details of your progress on the hydrogen infrastructure that you are trying to develop. I was surprised by the timing for the construction and commissioning of these assets, bearing in mind that the construction will start in 2026. I would like to know if you could give us your latest information on your view on CapEx that the infrastructure's construction could intel for Enagás?

Also bearing in mind that the CapEx should start in 2026, I would like to know if you believe that the company will need to reach 2026 with a restructuring of its asset situation. I'm saying so because the company has a very pro-European strategy, and it has other assets outside of Europe and maybe it's reasonable to think that in order to prepare for that CapEx, we will need to make significant changes before the construction stage starts to make sure that the company does the strategic repositionings homework that it needs to. And that is, I hope, a legitimate question?

With regard to who's going to pay for those infrastructures. During the presentation, you mentioned that if I understood right, over 2/3 of the hydrogen volume that will go through Spain will not be for Spain's consumption that opens up a legitimate debate of who has to pay for the infrastructure.

So the question that I have for you is in your conversations with the European Commission and with the Spanish government, how should the process take place in order to build a European services infrastructure knowing that most of the volumes will actually not be consumed by Spanish industries or consumers rather by European consumers?

And the last question has to do with the subsidiaries. For the Tallgrass, you have -- Tallgrass has announced additional investment for a total of €200 million for what you call decarbonized project.

So this is an important investment for a company that's highly leveraged. I would like to know if you could give us any insight into the debt situation of Tallgrass and how that is compatible with the company's situation and if the company should start paying out dividends at the end of the business plan. I believe that you had said that you expect to receive dividends from Tallgrass from 2026 onwards. Could you please confirm that and see if this is compatible with the new CapEx. Thank you.

[Arturo Gonzalo, CEO]

Thank you for your questions. With regards to the first one, that has to do with this -- the CapEx for this hydrogen infrastructure -- on the Hydrogen Day, we gave some insights into a first estimate of the cost of this infrastructure, especially those that had to do with interconnection infrastructures at the time we just spoke about €2.1 billion for the hydro pipeline Mallorca and about €450 million for the interconnection with Portugal. This first estimate is the one that we are still working on. Whilst we wait for the technical analysis in detail, as well as the engineering analysis and the final route that the project would take.

The next milestone, which is key in our opinion and that Enagás needs to be aware of in order to be able to answer the questions you are making is the final conclusion or inclusion of these projects in the project of common interest list and on the final infrastructure plan for the EU. This process will continue to move forward.

As you know, we presented our projects with other TSOs on the 15th of December. Initially, this was a project supported by the Spanish, French and Portuguese governments with the support of the European Commission. Subsequently, Germany has also shown interest in joining this project.

This backbone projects for hydrogen interconnections in Europe are advancing even though this is a process that is considered to be confidential. Some international media have shown that these projects have gone over the cost benefit analysis. And so, they are advancing appropriately towards the final approval that should take place with a delegated act by the European Commission taking place in November. If everything goes as expected, and as we foresee in our projects in the end will be included in the European infrastructure plans and in the PCI.

So if that is the case, then we will need to update our strategic plan and to inform the market about what measures we consider are needed in order to face the subsequent investment cycle. We believe that would happen in the first half of next year, and that will be the time to update our forecast. We believe that doing so now will be premature, but without a doubt, the company is monitoring the advancement of those projects always knowing that the investment would not start to be relevant until 2026 and the following years.

Secondly, Javier, who is going to pay for the infrastructure? Well, infrastructure should be paid by those, who benefit from them. Bearing in mind also that these are infrastructures that are considered to be strategic for an internal energy market in Europe, and therefore, they would have public subsidies. And that should be the case of the large hydrogen infrastructures.

Once they are included in the European list of PCIs, then they will be eligible to opt -- to funding from the large European investment facility for public funds for these infrastructures, which is the Connecting Europe Facility. Normally, it is estimated at between 30% and 50% of the CapEx, could be received as funds that will not be recovered. And obviously, they will be received by the final beneficiaries.

And given our international network, the final beneficiaries will be the large green hydrogen consumers from the European's core. And basically, that would be mainly the German industry. That's why we are giving these projects a strong momentum in Germany. That's why we're going to present our project in Berlin in October during an event in which we will have a large presence and participation of the different players in Germany from the hydrogen chain, including the German government, who -- which is actually promoting this project.

Once the European directive for decarbonization of the gas and hydrogen plants, hydrogen will be considered to be a regulated energy vector in Europe and we will be able to receive transnational cross-border cost allocation. And we also believe that we will need to have a formula to meet supply and demand that will end in an open season. This is something that hasn't been done with hydrogen in Europe, but it has been done with gas, with Trans Adriatic Pipeline that we know very well because as you know, we are shareholders.

And in order to encourage that meet of supply and demand in Europe, we are asking for help from the European Commission, the European Hydrogen Bank, which is under Simson's umbrella, also the aggregate EU under the responsibility of Vice President, Sefcovic. And that is one of the reasons why we have met with them in July. And in both cases, in both meetings, we have received a clear support from the European Commission. Therefore, public subsidies, funding from the beneficiaries and mechanism of capacity.

With regard to the -- to the affiliates, Tallgrass has announced projects to generate electricity using the residual heat in the compression stations. These are also using the compression peaks or what they call the step down in those plants. These are processes that are very well known by Enagás because we have been producing green energy in many of our plants for many years now. Those projects are very robust from a financial aspect means that they can be fund without resorting to more funds from the shareholders. And in this first preliminary estimate, we do not believe that there is a need to change our forecast for future dividends.

If when implementing the project and carrying out the financial plans for those, we see that there's a need to update them. Then in those cases, we'll do a strategic review in the first half of next year, and it will be then when we would consider it within a larger framework of adjustment of our forecast.

[Javier Suarez, Mediobanca]

That's all. Thank you.

[Felisa Martín, Public Affairs and IR GM]

Thank you very much, Javier, for your question. We are ready to listen to the next question.

[Operator]

The next question comes from Fernando Lafuente from Alantra. Please go ahead and ask your question.

[Fernando Lafuente, Alantra]

Hi. Good morning to everyone. I have three questions for you. First, about El Musel. I would like to know the potential impact that this asset could have in our P&L, not only this year but recurrently over the next few years. The second question is about regulation. On the one hand, Arturo, I would like to understand, who would decide on hydrogen regulation? Should it be a European directive then transposed by the CNMC here in Spain? Or what should be the mechanism for the regulation. And then the regulation review for the current assets, I guess, it hasn't been initiated yet, but I don't know whether you have had any contacts because Electrica, for instance have said that they are in conversations to talk into the standards of those regulated assets. So any update on that would be great?

And the final question has to do with Peru. I know that the award will have to follow its course, but I would like to know if you have any contact with the government of Peru, the fact that they want to be part of the OECD means that we may reach other agreements with them. So I don't know what is your opinion on the award? Thank you.

[Arturo Gonzalo, CEO]

Thank you so much for your questions, Fernando, and let me answer them. First of all, with regard to El Musel, with the results of the open season in terms of capacity and with the plant already commissioned, in fact, we have already unloaded two tankers for the cold start of the tanks, and that is an operation that I believe can be considered exemplary.

In terms of contribution, EBITDA contribution when the plant was in hibernation, it was contributed by [€20 million] per year in 2022, that was the figure. Now with the plant in hybrid operation regulated plus logistics operation that started on the 30th of July, we believe that we will have an annual contribution that will be identical to a regulated plant in full operation, which is €30 million. So we will have a different contribution by about €10 million versus the previous years. In terms of profit after tax, when we look at the 2026 horizon, it could account for €8 million per year.

In terms of regulation, the truth is that -- as of today, everything really is depending on the European directive on gas and hydrogen market, decarbonized gas and hydrogen market, that will set down the rules for those rules of the game, and it will have to be transposed in the different governments with the appropriate legislative act.

In our case, there will have to be a new law in Spain to reform the current hydro fuels regulation, and that will allocate duties to the future operators of the hydrogen network and also to the CNMC currently in current legal framework, it has no jurisdiction of hydrogen, as the CNMC has stated previously.

Obviously, we will take for granted that either we will have those responsibilities in the future, and we are convinced that Enagás, as the Spanish gas TSO will play a role, as the HNO operator of the future hydrogen pipeline in Spain.

So first of all, it's Europe. Europe is negotiating the final version of the directive that will be approved, and therefore, is European Commission and the European Council, led by Spain in this semester and also the European Parliament that will decide on that in a process that I believe is very mature.

And then subsequently, the Spanish Parliament will have to make a decision by carrying out a bill led by the government incorporating the new regulatory view from Europe regarding and transposing it to the Spanish legal system.

There is a process that has connections with this, but it will happen simultaneously, which is the definition of the next regulatory period. Once the current regulatory period concludes for gas in 2026, there will be connection points, I believe, because we believe in the next regulatory period, hydrogen will be a reality. But the definition of the new gas regulatory period from 2027 onwards will follow its due course.

We are in constant and permanent contact at all levels with the regulators, and the regulator, the CNMC knows in detail, the situation in which Enagás is. Also, we compare it to the TSOs of neighboring countries faced with the regulatory model that does not include remuneration reviews in our case because of inflation or the increase of interest rates. I think the CNMC is clearly aware of that.

We conveyed to the regulator our view that the large European TSOs need to have similar rules for the game or comparable rules. And we tried to give reasoning to our technical and legal arguments, and we also want to do our homework with an efficiency plan for OpEx and financial limitation, which is unprecedented in Europe.

And with all of this, we are creating a context in Europe of joint work with the legislator, the government and the regulator, so that in the next regulatory period, we'll be able to overcome some of the circumstances that we currently have.

With regards to Peru, Fernando, we have kept contact with the new Peruvian government. We believe that the new government in Peru is proving to have a desire without a doubt, in order to move forward in what they considered to be litigations from the past.

The new government in Peru, and [Dina Boluarte] has clearly stated that it is a priority to join as a full member in the OECD and the government of Peru has expressed in different fora, its desire to move clear of those litigations to conclude those disputes in order to become a full member of the OECD.

So we have obviously established contacts with the Peruvian government. Normally, obviously, making the most of the [Prime Minister] visits to Spain, as well as the Peru's Chancellor. And we believe that we will be able to create a communication channel that will be more transparent or based on mutual trust because I think that's in the interest of all of us. We all want to move forward and to convey messages of legal and economic certainty in Peru.

[Fernando Lafuente, Alantra]

Thank you.

[Felisa Martín, Public Affairs and IR GM]

Thank you very much, Fernando, for your question. We are ready to take the next question.

[Operator]

The next question comes from Javier Garrido from JPMorgan. Please go ahead and ask your question, please.

[Javier Garrido, JPMorgan]

Hi. Good morning. I have three questions. First, if you could give more details into the hydrogen investments and how they will be financed? And when we look into the Spanish backbone because if I'm not wrong, your comments focused on the interconnections, but if I'm not wrong, you forecasted gross investments of €4.6 billion on the Spanish backbone up to 2030 in order to be able to feed those interconnections.

So I have two questions. First, the €4.6 billion that you mentioned, do you think they may be reduced due to greater reuse of existing gas pipelines and we're moving them into hydrogen pipelines, would they be able to reduce the figure? And also, is the figures that you mentioned are funded between 30% and 50% is that included as European PCIs, whether that would also affect the Spanish backbone?

The second question has to do with Tallgrass. You have given insight into the position of Trailblazer in order to transport CO2. And I would like to know if you have already any visibility into the contracts for that pipeline or expressions of interest, just so that we know whether there's new use of the pipeline will be -- will have interest. And briefly also, what's your expectation for the financial cost for that Group by -- for 2023?

[Arturo Gonzalo, CEO]

Thank you very much, Javier, for your questions. The first question, it is true that before in my presentation, I focused on the financing of the international interconnections for hydrogen. But without a doubt, it's also very relevant to talk about the funding of the Spanish backbone, which we estimate will have a CapEx like as you have said, €4.6 million.

With regard to the cost benefit analysis process for PCI candidates, the Spanish backbone is included as part of the hydrogen corridor that as we have -- it has received first positive assessment. So if the process concludes with that result, the Spanish backbone will also be eligible to receive funds from the European Connected Facility.

If we are conservative and cautious because I think it is our obligation to do so, we may think that if there are limited resources for a set of projects, the European institutions will do what they've done in the past, we believe, which is given greater support to the international interconnections and lower support to the domestic infrastructures, even if they are part of a European corridor. So we need for the process to move -- advance a bit more, but I think the message is important here.

We believe that the Spanish backbone will be eligible to receive funding from the Connecting Europe Facility. Even though, we do not know whether we will be able to have a financing range between 30% and 50%, which is what's most normally applied to international interconnections. So there are many possibilities, but when we present an update of our financial forecasts in the first half of next year, we will be able to have a realistic and conservative view regarding this -- the future European funding.

It is also true that the Spanish backbone will surely have a regulated nature. The regulation and remuneration models that are being made public in Europe share that nature. The national networks are considered regulated even if they have EU funding, the international interconnections can have a regulated element, but also can have commercial visibility like similar to the Trans Adriatic Pipeline.

In the case of the Spanish backbone, it has to be a regulated infrastructure funded with the uses tools, even though there can be some mechanisms to advance or anticipate the funding, as we can see in other EU countries that also have a national public support right from the beginning until they reach commercial operation.

We believe that this figure €4.6 billion, it's an initial estimate. Without a doubt, it could be less also because we may increase the reusing of the current infrastructure percentage. And so, it will be key to know in detail, the structure of the CCGTs that will continue to be in operation in the next decade.

It's very important to know that if the gas CCGTs, they are considered to be backup infrastructures for the electricity network in the next decade, then we will continue -- need to still have gas infrastructures or gas pipelines in order to feed the CCGTs. So this is something that we will continue looking into in the future, not so much because the gas pipelines are not -- cannot be used for hydrogen. They will be used for hydrogen, but we may need to continue supplying those gas infrastructures, especially to feed backup systems for the electricity sector. So this adds complexity.

I think we'll be able to go more in depth about it when we have the European list of PCIs. Also when we finalize -- or the government finalizes the review of the National Integrated Energy and Climate Plan and the review proposal is a proposal that has been presented to open consultation and is open to the information by the European bodies. But -- so it will be a few months before we have the final national plan, but we'll be able to answer those questions in more detail in the first half of 2024.

Regarding Trailblazer, the company Tallgrass in itself over the next few months will give more comprehensive information about volumes, financial figures, funding. We must also bear in mind that Enagás is a shareholder and is present in the Board of Directors, but we are not a majority shareholder. So we'll try to provide more information, but it will be mainly given by the company.

The company is, I would say, finalizing the commercial commitments that could ensure its feasibility. Some of those commercial agreements have already been announced. Others haven't. For instance, one of those that were announced was an expression of interest with ADM. And in the same manner, we are reaching agreements with others, especially with ethanol producers, food stuff producers, also from the agricultural and food sector in the U.S. Midwest, but that will be explained in more detail over the next few months.

Regarding the OpEx for the company will be 2.6%. We have already captured in the first semester or the first half of the year, some compared to the 2.7% that we had forecasted initially.

[Felisa Martín, Public Affairs and IR GM]

Thank you very much, Javier, for your question. We are ready for the next question.

[Operator]

Thank you so much. There are no further questions in the Spanish channel. We'll now take the questions in the -- from the English channel. Thank you.

Our first question today is from Arthur Sitbon from Morgan Stanley. Arthur, please go ahead. Your line is open.

[Arthur Sitbon, Morgan Stanley]

Hello. Thank you for taking my questions. I have two. The first one is on the Spanish hydrogen backbone investments. I think you were budgeting them at €690 million in your plan by 2030, and you were talking about a premium to regulated return of 150 bps to 200 bps. I was wondering if this is still in line with what you expect. But also, I was wondering if you expect the return on those investments to be known by midyear 2024 as well because you talk about that data as being critical for your capital allocation decisions. I was wondering if by then you will actually know the return you will be eligible to or if this will come later. And basically, the whole regulated framework around Spanish hydrogen backbone investment and hydrogen networks, will it be known before or after mid-2024. So that's the first question.

The second one is, I can't have noticing that you seem to be talking about a more and more integrated energy network system with obviously more hydrogen. So it would just -- it would not be just about gas, more hydrogen, you also talk about the decision of your future investment depending on the future of CCGTs, which are directly linked to the electricity system. Yet there are two TSO, one for electricity, one for gas, both seem to be pushing for higher CapEx, both in electricity and in gas. I'm wondering is this optimal to have two decision makers? And what is the work being done to harmonize the decision-making process between the electricity TSO and the gas TSO in terms of total amount spent in the future and help to optimize that for the total cost for the customer? Thank you.

[Arturo Gonzalo, CEO]

Thank you for your questions, Arthur. Regarding the first one, we maintain our estimates until we have all the elements to update them, and that will happen in the first semester of next year. I think that, generally speaking, our strategic plan is going very much in accordance to what we have announced. So it is still a valid reference of how the company sees the future.

Those elements that can change that picture are going to be better known in the coming months, especially associated to the European decision-making process, and then we will update them in the first semester of next year. But until then, the strategic plan is a valid assumption of how Enagás sees the future. We maintain our expectation that the hydrogen infrastructure projects will have a premium around 150 basis points or 200 basis points is more or less how the preliminary remuneration schemes that are being put in place in Europe is aiming at. And so, we think it's a very valid assumption, as of today.

I cannot be sure that we will know -- we will know the detailed returns of the hydrogen infrastructure by mid-2024. I think that probably we will have to wait a little bit more, to be honest. But definitely, I think this is going to be a priority once the directive is transposed in Spain. And once a new regulatory framework is approved in Spain, you know that it will be -- this will happen in two steps.

First, we need the Spanish regulatory framework, transponding the directive and then the details of the regulatory and remuneration scheme will be developed by the regulator. So I think it will take a little bit longer than mid-2024. But I think that we will be gaining clarity very much along next year.

You were suggesting, Arthur, that since we are moving towards a higher integration of the energy system between electricity, gas and hydrogen that could require, as a means of optimization, integrating in some extent, the electricity and gas TSOs. Well, that's not really what is being a widespread opinion in the different member states.

The different member states are -- in Europe are maintaining different TSOs for electricity and gas that allows for having a focus on each of the segments of the energy value chain. And so far, there isn't a trend in Europe to integrate the different TSOs.

I would say that there is a very widespread model in which electricity TSOs maintain their autonomy and gas TSOs are evolving to become gas and hydrogen TSOs and HNOs, but there is no trend to integrate both. What we need is an integrated planning exercise or an integrated energy planning process, and that's what the directive is aiming at.

The directive is creating the concept of an integrated energy planning process. It should be done regularly. But who is leading that exercise is going to be mainly the member state governments. Of course, the regulators will have their role and the TSOs will have their role.

But we are not seeing that trend of integrating the different TSOs, as you suggested, and we are -- well, we are convinced that those optimizations can be captured with the current scheme of separated electricity and gas TSOs, although in the future under the umbrella of an integrated energy system planning.

[Felisa Martín, Public Affairs and IR GM]

Thank you very much, Arthur, for your questions. Go ahead with the next analyst, please.

[Operator]

Our next question is from James Brand from Deutsche Bank. James, please go ahead. Your line is open.

[James Brand, Deutsche Bank]

Hi, good morning. Thank you for taking my questions, and thank you for the -- all the detail in the presentation. That's really appreciated. So I just had two questions. Firstly, you said you'll update the assumptions in your strategic plan in the first semester next year when you've got more detail on your kind of hydrogen projects. Should we also see the dividend as something that's up for consideration when you go through that process? Obviously, you said that the CapEx isn't going to really start to ramp up until 2026. So maybe there's no need to reconsider the dividend, so will that -- will that be on the table? That's the first question.

And then secondly, obviously, you had the election in Spain, but with maybe some uncertainty in terms of kind of what follows on from that. Do you -- are you in kind of regular dialogue with the main -- both the main kind of political parties? And do you think that the plans for hydrogen have cross-party support?

[Arturo Gonzalo, CEO]

Thank you very much, James. Your first question was related to our dividend policy and if it could be subject to reconsideration in our strategic update. I think that the main point here is that when we presented our strategic plan one year ago, actually, it was in July '22, we explained how we can maintain our credit rating commitment, how we can finance our CapEx and how we can maintain our dividend policy commitment, and everything has happened like that. And we are in the same position to maintain the three commitments at the same time. I think this is the first message. So there is no change in that respect. And even I could say that we are in an even more solid position than one year ago to maintain these triple commitment.

However, when the big investment cycle that we are going to have in front of us is better known, we will monitor the optimum capital structure of the company along the way, and we will be shedding that monitoring exercise with the market in due time. But as I said, as of today and for the foreseeable months, we see ourselves in the same robust position that was the fundamental of our strategic plan one year ago.

Concerning the elections, as you suggested, James, hydrogen, I think, is an area of coincidence more than an area of controversy between the two mainstream political parties in Spain, both parties have shown a very strong support for green hydrogen and a very strong support for Spain, as an international green hydrogen hub. So we don't see any concern in that regard. And of course, we will maintain always an open dialogue with the mainstream political parties in Spain.

But I would like to stress something else that is even more relevant now than ever is that the main decisions that are going to be made in the coming months are going to happen in the European arena, not in the Spanish national arena.

We are expecting to have approved the decarbonized gas and hydrogen markets directive that will be a European decision with a prominent role of the Spanish presidency, that's correct, but an European decision. We are going to see approved the PCI list, including, hopefully, our hydrogen infrastructure projects in it, and this will be an European decision as well.

We are going to see the first auctions of the European Hydrogen Bank. We are going to see advancing our LNG project in Stade in Germany with an FID being taken for this very important project. So we are going to work mainly in this European context in the coming months, being sure that we will have the support of the Spanish main political parties because we are talking about Spanish national, flagship projects. And I think that everyone sees them, as a huge opportunity for Spain, and I think that we will see a lot of bipartisan, let's say, agreement in that.

So thank you very much, James.

[Felisa Martín, Public Affairs and IR GM]

Thank you, James. We are ready for taking the next questions.

[Operator]

Thank you. We have no further questions. So, I'd like to hand back to the management team.

[Felisa Martín, Public Affairs and IR GM]

Thank you very much for joining this conference. The IR team is always available to discuss anything you want. Good morning, everyone.