Wed. Dec 11th, 2019

Naturgy and Enagás maintain strategic plans despite the cut to their networks | Companies

In spite of the cuts that hover over their regulated assets, Naturgy and Enagás, the most affected by the adjustments, will reiterate their commitment to meet "the main goals" of their strategic plans, according to market sources. This will force them "to optimize and carry out operational efforts, as well as additional sacrifices," the same sources add.

In its strategic vision 2018-2022, which represented the letter of presentation of Francisco Reynés as president, Naturgy committed a year ago to distribute 6.900 million in five years: in 2018 the remuneration increased by 30% (up to 1.3 euros per share) and for subsequent years a minimum annual increase of 5% was set to reach 1.59 euros per share in 2022. In addition, the objective was set for that year an EBITDA of 5,000 million and a profit of 1,800 million.

Also the strategic plan of the system manager and transporter, Enagás, between 2019 and 2023, includes the promise to raise the dividend by 5% per year until 2020 and 1% between this year and 2023.

Of the 1,420 million that the gas distributors receive via a tariff, about one billion euros correspond to Naturgy, which would assume 70% of the cuts derived from the CNMC compensation method proposals for a period of six years: in total , 452 million with a cut of 30%. On the other hand, of the 1,243 million received by the regasification plants and the trunk network of gas pipelines, the vast majority (1,060 million) went to Enagás. The company, therefore, would support the bulk of the planned cut to 2026, 325 million or 40% (see chart).

Why despite the proposals of the CNMC, which have shocked gas companies, the two most affected feel capable of keeping their dividend promise? Fundamentally, because the cut to the gas networks would begin to be applied in 2021 of progressive and ascending form: more reduced at the beginning (barely two million euros for the distribution in that year) and much higher in 2026, end of the regulatory period.

The companies do not want to remove iron to a situation that they consider very serious and that will demand hard measures. They hope that their allegations will help the CNMC to soften its proposal, which has generated regulatory uncertainty among the funds they have as shareholders. In the gas sector, on the other hand, it is considered that the role it can play in the energy transition is not being evaluated, given the closure of nuclear and coal.

To meet the objectives, in the case of Naturgy, other areas (business and countries) will be used to absorb the impact that their regulated assets would suffer, indicate sectorial sources. 21% of Naturgy's ebitda in Spain is provided by its gas networks (which it operates through Nedgia) and another 15% by electricity (to which, although less, another cut of almost 7% is expected). For its part, the EBITDA of business in Spain represents almost 60% of the total group, which last year amounted to 2,976 million. Two other investors, CPPIB and Allianz, participate in Nedgia, which bought Naturgy 20% of the capital last year for 1,500 million euros. They have shown their great concern for the measures of the CNMC.

Enagás, for its part, will maintain its objectives thanks to its financial strength, its operational efficiency among the most outstanding in Europe and its consolidated international activity, according to market sources, although the company has a greater concentration of risk than Naturgy in the regulated business.

Less problems arise investments, that Enagás did not quantify in its strategic plan and that Naturgy linked to profitability. As these are regulated assets, investments in networks must be included in energy planning, which has not been reviewed for a decade. In fact, current investments are the fringes of such planning (which is indicative and voluntary for companies). Despite the announcement of some companies that paralyze new investments in networks, these are minimal.

Another issue is the harmful effect that the announcement of future cuts may have on the financial situation of companies, especially on the cost of financing your debt. So far, Naturgy and Enagás have lost 17% and 7.4%, respectively, on the stock market this month, and rating agencies have put their rating under review. Enagás has the advantage of not having debt maturities until 2022, but other smaller companies in the sector may have serious problems.

The companies have declined to comment and refer to the presentation of their semi-annual results. In the case of Naturgy, this Wednesday, day 24, and in the case of Enagás, on July 30. In any case, taking into account that the proposals are in the period of public consultation and, therefore, the final outcome is unknown, the companies will not yet make quantitative assessments.

A slight extension of the deadline

The companies and all those affected have until August 9 to present claims to the seven circular of methodologies of compensation developed by the CNMC. In the case of gas companies, through their Sedigás association, they have requested the regulatory body to extend the term of the consultation, since, compared to the new remuneration of the electricity grids, which should enter into force in 2020, those of gas will not do so in 2021.

It is unlikely that the CNMC will accept this extension, perhaps a few weeks, since the law requires it to approve all methodologies (whether gas or light and those related to system operators) before the end of the year. In addition, after the public consultation the normative circulars must receive the approval of the State Council.

Everything indicates that, as a consequence of the allegations, the adjustments could be smoothed. The Ministry for the Ecological Transition will also participate in the consultation, but it does not seem likely that it will raise a legal battle against the CNMC.

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