Earnings Call: Q4 2016

Feb 23, 2017

Good morning, ladies and gentlemen, and welcome to Red Eléctrica. Thank you very much for giving us the opportunity to report to you on our year-end 2016 financial results and informing you about the progress of our 2014-2019 strategic plan. I would like to thank those of you here in person, as well as those of you joining us by webcast, for attending. Joining me is Teresa Quirós. She is the CFO of the company. To avoid any interruptions as we move through the presentation, we will answer any questions you may have at the end. First of all, we would like to comment on our achievements until 2016, then we will discuss the year's results and conclude the presentation with a view of the horizon until 2019. As you know, that is the year our strategic plan finishes. Let me start off by briefly commenting on the progress of the strategic plan over the last three years. Teresa then will focus on the results, our earnings for 2016 financial year. We are currently halfway through our 2014 to 2019 strategic plan, and the progress we have made so far and over the last few years certainly indicates that we are on the right track to comply with the plan presented to the market. Half of the investment plan in consolidated activities, which includes investments in the domestic transmission network and fiber optic networks, have been completed. In addition, progress is being made, as expected, in the investment in the new system operation tool storage, which will be concentrated at the end of the period, and in new electricity transmission opportunities in stable markets that do offer the appropriate returns for us. In this respect, we have already progressed more than 30% towards the target, although if you take into account the investments committed to storage, the concessions acquired in Peru, and the project underway in Chile, that progress would certainly be well above 60% already. We have also achieved significant efficiency gains at an operational level following the review of the operation maintenance policies in the company and the supplies and construction criteria. The greater demands with regard to operating and maintenance unit costs approved in late 2015 have required greater efforts and endeavors on the part of the company to review the aforementioned policies, but while always maintaining our quality standards in construction operation, of course. These accomplishments were achieved by maintaining a net debt to EBITDA solvency ratio, which is roughly 3.5 times. That means that we have retained our credit rating above the sovereign rating, which, as you know, is absolutely key for a company whose remuneration is linked to the performance of Spanish tenure bonds. In addition, over the last three years, our earnings per share growth trajectory has exceeded 6% on average, and we have fulfilled on the commitment made to the market to distribute a dividend per share that is growing 7% year on year during the period. Financial year 2016 has been an intense year, a very intense year. We have accomplished major milestones that certainly indicate that the company is on the right track. We will be able to reach the 2019 targets, as Teresa will explain to you. After reviewing the results of the financial year 2016 and all of the major events that have taken place, I'd like to give you some more detail about the delivery of our strategic plan objectives. Teresa Quirós, our CFO, will now give you a summary of those events in 2016. Good morning, and thank you very much, Juan, for your introduction. Good morning, and welcome to you. Let me now review the key financials in our 2016 financial year report and the most significant events that took place over the course of the year. I'd like to begin by pointing out that our level of investment totaled around EUR 640 million during the period. We have made some major investments, but I'd like to point out particularly a number of relevant projects. The commissioning of the Mallorca-Ibiza cable, that was last June, which became operational and is now the longest underwater AC cable in the world. Additionally, over the course of the year, major strategic investments were made in the international area. Their intention was to expand the company's business base. In January 2016, we acquired 50% of the Chilean company TEN. Let me remind you what TEN does. TEN is the construction and commercial operation for the very first interconnection between Chile's northern and central electrical subsystems, which is expected to become commercially operational this very year. Furthermore, early on this year, 2017, we acquired 50% of the shares in Redesur. This was from an infrastructure investment fund managed by AC Capitales. With this operation, the group is now acquiring the entire share capital of the company. There are three different concessionary companies here making up the electricity system in Peru. One of the cornerstones of our strategy is, of course, efficiency. We reached an EBITDA margin, which was higher than 76%. And why? Because of the active focus that we have made on the review of policies for operations, maintenance, construction, and supplies. Net profit totals EUR 637 million in the year, up 5.1% compared to the previous year. The board of directors has made a proposal to the general shareholders meeting to approve a dividend of EUR 0.8587 per share. That's 7% up compared to the dividend of the previous year. So we fulfill our commitment to profitability and returns to our shareholders. Turning now to the financial structure. As of 2016 year-end, net financial debt totaled EUR 4,949 million with high solvency ratios in 2016. Fitch and Standard & Poor's, the rating agencies, issued favorable reports on our company. Fitch upgraded its rating for Red Eléctrica from A- to A with a stable outlook. And at the end of the year, Standard & Poor's maintained its A-minus rating for the company, but also with a stable outlook. As for our financing activities, let me tell you that we made a highly competitive bond issue in April. We also finalized the Chilean project with project finance, and we dispersed a part of the 25-year, EUR 200 million EIB tranche that we have. Very competitive cost, 1.40%. In the area of good corporate governance, you remember that at the last general shareholders meeting that was held on 15th of April last year, José Folgado was re-elected as a board member. Since then, he has continued to serve as a non-executive chairman of the board of directors. Now that completes the process of separation of the executive powers corresponding to the CEO and the control and supervisory functions corresponding to the Chairman. That same general shareholders meeting also approved the splitting of the number of shares of the Red Eléctrica Corporación by reducing the nominal value from EUR 2 to EUR 0.50 per share. The company's new shares began trading on the 11th of July. In addition, we are very, very pleased to be able to report to you that in January, the company received an award. It was the Ethical Boardroom Corporate Governance Award. That award was given to us in recognition of the company's best practices in corporate governance. Given the importance of sustainable development for the company, we are delighted too, to have received the Silver Class distinction from the RobecoSAM Sustainability Agency. Red Eléctrica also obtained 90 points in the RobecoSAM's last corporate sustainability assessment. In fact, we are the only company in the sector for the second year running that has ratified its permanence in the family of indices, the Europe and the World DJSI index. The company's also renewed its presence on the Euronext Vigeo indices, and it's also been featured on the A-list of the Carbon Disclosure Project. That recognizes leading companies for the efforts that they make and the actions that they take to combat climate change. The regulatory issue is, as you would expect, very important for us. Major endeavors have taken place over recent years to ensure the stable regulatory environment that we operate in today. The regulatory reform is now complete, and as it is complete, the company will now focus its initiatives on obtaining the maximum residual life extension for its pre-1998 assets by revamping, upgrading, improving them in order to reach an additional extension of one to five years. That was laid down in the Royal Decree 1074/2015, and we will also be advocating in a future strategy to ensure that we can continue to upgrade and improve on our assets. The European Union has recently published its winter package. This is a proposal to ensure transition to clean energy in the E.U., whereby at least 27% of the E.U.'s final energy will come from renewable sources. That will be by 2030. It also includes measures to promote flexibility, decarbonization, and innovation in the European energy sector. All of these measures reinforce the role that we will be playing in facilitating delivery of those targets. Also, in 2016, the ENTSO-E published the Ten-Year Network Development Plan for the next 10 years. That plan reflects the need for an interconnected European system. Specifically to Spain, it would include interconnections with France, further development in the Levante region, and interconnections with Portugal, amongst other initiatives. Another very important activity for us is, of course, system operation. In 2016, Red Eléctrica continued to collaborate with TSOs at a European level. Red Eléctrica, RTE, and REN, that is the TSOs of Spain, France, and Portugal, we carried out together a coordinated power restoration exercise after a widespread blackout that was simulated in the Iberian Peninsula and part of Southern France. The outcome, the results were very, very good. Renewable energies have also accounted for a significant part of the coverage of peninsular demand, 40.8%. That is up 3.9% compared to 2015. Wind energy has also contributed in a major part of that coverage, 90%. CO2 emissions from electricity generation have also fallen thanks to this greater use of renewable energy sources. Now, let me talk you through the key figures on our income statement for you. Revenues totaled EUR 1,932 million. That is slightly below the figure from 2015. This figure includes remuneration, of course, from transmission activity in Spain, including the assets commissioned in 2015. This figure includes revenues associated with the provision of telecom services. That is EUR 86 million. Regulated income related to system operation, EUR 56 million. Earnings from transmission activity abroad totaling almost EUR 20 million. Our gross operating income figure, EBITDA, totaled EUR 1,486 million, almost 2% up from the previous year. This EBITDA performance was certainly affected by our operating costs, specifically supply costs and other operating expenses that recorded a fall of 3% in 2016 and continued to reflect the drive towards efficiency that is being put in place by the Red Eléctrica group throughout the year. Annual profits total EUR 637 million, up 5.1% from the previous financial year. In addition, I would like to emphasize that we invested EUR 643 million, almost 400 to be allocated to the development of the national transmission network, and 200 million corresponds to payment made in January to acquire 30% of TEN. Turning our attention now to the balance sheet. Net debt at 31st of December 2016 stood at EUR 4,949 million. As I mentioned before, strong cash flow generation in the company was mainly attributable to improved earnings and enabled the company to meet investment payments totaling over EUR 614 million and to pay 333 million in dividends, whilst maintaining the group's financial debt at levels very similar to those of the previous year. Working capital and others recorded a negative variation of EUR 114 million, contrasting with the positive variation, 173 million from the previous year. Essentially, though, what happened was that the variation in 2015 was to do with the fact that there was no extraordinary items such as the VAT refund. The average cost of our debt fell to 2.94% from 3.20 in the previous year. The average term to maturity is 5.5 years. 84% of financial debt is at a fixed rate to maturity, with the preponderance of the euro over other currencies, only 3% of the debt in dollars at year-end. Our conservative financial policy and our strong liquidity position certainly provide us with a solid platform from which to achieve our targets. From the standpoint of company solvency, our EBITDA interest rate ratio is now 9.4 times. It is notably improved. The variable debt performance also results in a net debt to EBITDA coverage ratio, which is 3.3 times now. Turning now to our debt structure by instruments. You can certainly see that our debt is well diversified. I would also like to highlight the fact that Red Eléctrica's long-term debt maturity schedule of the coming years mean that the amounts to be paid over the next three years are covered by liquidity sources amounting to more than EUR 2.2 billion. As I said earlier, on 7th of April, Red Eléctrica completed a bond issue on the EUR market for EUR 300 million, 10-year maturity and a cost of 1.042%. Very well received, oversubscribed, almost 10 times oversubscribed. This will certainly add value to the company in both the current and subsequent regulatory periods. In addition, last December, the TEN company project was completed. We concluded project finance activities through the funding there. The funding totaled roughly $856 million, with final maturity coming in 2034 and 2042, which is very much in the long term. We also had an EIB 25-year tranche that was drawn down, as I mentioned before. All in all, we have a capital structure totally in accordance with the financial information of our strategic plan. Well, thank you very much, Teresa. Let's now look at the next three years, our plans for the next three years. We'll try to briefly summarize the previous three years, and then I will give you some clues regarding the next three years in our strategic plan. Before we examine the steps in the next three years to achieve the strategic plan targets, I would like to mention that in the initial stage of the strategic plan, we've laid the foundations to progress as planned and to deliver on the plan, and the solid foundations will make further progress possible in the second regulatory period. The new remuneration framework for transmission activities is based on a transparent, stable, and predictable methodology that generates regulatory stability in our business, defines mechanisms to ensure sustainability of the system, and establishes incentives for efficiency. The regulator is aware of the fact that the renewal and improvement of existing assets is beneficial for the system and has a positive impact on the quality and security of supply. It's therefore advisable to have a system that encourages this activity. The regulator may decide not to increase the useful life over the 10 years of residual life agreed in 2013 for all pre-1998 assets. It does acknowledge that upgrading the assets improves the useful life and provides a process to invest in the upgrading of those assets. We continue to advocate for the need to increase the useful life of pre-1988 assets because it's beneficial for the system and for security of supply. You all know that we are very much on top of this. In the first stage, energy planning for the development of the transmission network has been approved for the period 2015, 2020, with investments totaling EUR 4.55 billion. In addition, for the first time, it incorporates additional investments to be made in the next regulatory period, thus providing the necessary certainty for the company's investment plan to be met. During this period and beyond 2019. In late 2014, we completed the process of acquisition of the Adif fiber optic network for a 20-year period. So we're now the benchmark neutral operator of fiber optic networks in Spain, and we guarantee access to all operators. As a result of this, the cable business has contributed more than EUR 85 million every year to the company's revenues. As such, it's now a long-term priority for the Red Eléctrica group. We've also taken major steps in the new energy storage activity in the Canary Islands. We were given the ownership of the pumping facilities aimed at managing the island and non-mainland systems. These facilities would therefore be used as system operator tools to guarantee supply, and what's most important, to integrate renewable sources. Finally, the company continues with its internationalization process based on our know-how as network manager. In this initial stage, we took a firm step towards establishing our footprint in the development of Chile's backbone network and strengthening our position in Peru. For Red Eléctrica, international business' development is an organic approach to growth. At present, with the companies building 244 kilometers of new network after being awarded the tenders for Azángaro, Juliaca Puno, 220 kilowatts, and Montalvo, Los Héroes 220 kilometers in 2015. These are expected to be operational in late 2019 and 2019, respectively. In Chile, the interconnection process to connect the northern and central electrical grids is now underway. It's under construction and scheduled for completion in late 2017. We're talking about investments totaling EUR 500 million. Our investment in Chile in TEN now covers 80% of the project. We now have 3,000 people, no more, no less, involved in the project. As you can see, during this period, Red Eléctrica has laid the foundations for the development of a domestic transmission network, but also for its business as telecom network manager to prosper. The company will continue to make major steps in this area, and will remain vigilant as to take advantage of opportunities as they arise. Growth in the upcoming years will be based on a balanced investment plan. In 2017, we expect investments in Spain transmission networks to be similar to those in 2016, with the remaining investment concentrated in 2018 and 2019. After the delay that postponed approval of the national infrastructures plan, investment in the Chira-Soria reversible hydroelectric power plant will be an effective tool in ensuring energy supply, the security of the system, and the integration of renewables in Gran Canaria. The 200-megawatt power plant includes the construction of a seawater desalination plant and associated marine works, in addition to connecting the plant to the recently opened Santa Águeda substation through a 20-kilometer, 220-kilovolt electrical line. In the period of the strategic plan, 60% of total investments will be concentrated mainly in 2016 and 2019. The total investment will total EUR 320 million, and it is expected to be commissioned in 2022, or rather 2023. Currently, the project has been made public. Investments in transmission activity in other markets will be concentrated largely in Latin America, where, as you know, we've been present in Peru since 1919 and in Chile since January 2016. In the upcoming years, we'll pay close attention to calls for tenders in Chile for the expansion of the backbone transmission system, which could be around EUR 300 million-EUR 400 million. Bids in Peru concerning the 2015/2024 transmission plan projects that are estimated to require roughly USD 500 million-USD 600 million, or rather dollars. Our entire strategy is based on ongoing management efficiency gains. As you already know, we have to continue to enhance efficiency whilst maintaining adequate or the right quality levels. Our main priorities are the following: efficiency in engineering and construction processes for facilities by optimizing design, managing supplies, and meeting new demands in terms of quality, always trying to identify efficiencies through the entire process. We're also trying to minimize structural costs based on basic criteria, austerity, and assigning the right priority to expenses. These practices, in combination with other criteria such as sustainability and efficiency in developing other activities or linking wages to meeting the company's objectives, enabled us to achieve an EBITDA margin of 66.9% last year. We aim at maintaining these efficiencies by meeting our goals of improving the EBITDA margin by at least 200 basis points year on year. A sound financial management that optimizes capital costs, taking full advantage of current interest rates and a flexible financial structure, will make it possible for the company to secure additional increases in targets, in profits. All of this will contribute to a compound annual growth rate of 5%-6% during the period, as we mentioned earlier. To conclude, in an effort to consolidate our strategy and offering the best combination of corporate growth and remuneration policy, we would like to mention our dividend policy, which is intended to be transparent, sustainable, and highly visible. We are committed to a dividend per share compound annual growth rate of 7% for the period, with two dividend payments, interim and final payments in January and July respectively. As you can see, our dividend policy offers a very attractive growth for the whole of the period. Before I end this presentation, I would like to refer to our investments beyond 2019. This is based on the 2030 framework adopted by the European Union, which reflects the European Union's objectives towards a competitive low-carbon economy and towards stable investments in a secure supply within the single market. Renewable energies will play a key role in this new framework for the transition to a competitive, secure, and sustainable energy system. The latest auctions of solar and wind energy on a large scale are characterized by sound competitiveness. I mean, a clear competitiveness of these energies in countries with large solar and wind resources, including Spain. It will be important to replace some energy sources with others with lower emissions, and to replace consumption of oil and other oil products with an electrification of demand and the use of energy vectors with lower emissions. This means increasing the penetration of electric vehicles and making a model shift from heavy transport, 95% in 2015, to electric rail. To intensify the shift to energy carriers with lower emissions in residential, industrial, and service areas through electrification in the transition to the new energy model. The development of international interconnections will play an essential role, as well as the digitization of the sector. I'm sure most of you know the winter package I mentioned before. The most important project to increase the electricity exchange capacity between Spain and France up to 8,000 megawatts after 2020 are listed now. The Bay of Biscay project, which is included on the list of common interest projects to connect Spain's Bay of Biscay to Southern France, with costs currently estimated at EUR 1.9 billion. This project is in the technical study stage. Two new projects that cross the Pyrenees should bring interconnection levels between Spain and France to around 8,000 megawatts. On a final basis, an initial project would be undertaken by Cantabria and Navarre or the Basque country, and the second one by Marseille and Aragon, with costs for each currently estimated at EUR 901 million and EUR 1.2 billion. You might have read that the recent summit meeting between the Spanish and the French government have firmly expressed a firm support to these projects. With regard to the island systems, major projects will be developed in this period, 2021-2030, in the Canary Islands, the Gran Canaria-Fuerteventura link, and the Balearic Islands, a second Mallorca-peninsula link, and a third Mallorca-Ibiza link. Additional to the one we've laid down this year. These links would be justified because they would reduce variable generation costs and ensure supply to isolated systems, not so much linked to demand increases. We're often asked the same question: Why are you building so much transmission network when considering that demand is not growing that much? Because transmission networks sometimes are built to increase the efficiency of the whole system, not to meet demand. Another portion of our investments in 2020, 2030 will be allocated to ensuring security of supply. Take it into account that 55%-60% of demand will have to be covered with renewable energies to meet the 2030 targets. We'll be developing new storage facilities in the Canary Islands. Research into reversible hydroelectric power plants in other places like Tenerife is currently underway. Additionally, a key element will be to determine the replacement investment in pre-1998 assets and the regulatory treatment of these assets. Some of these investments are already included in Annex 2 of the current infrastructures plan. But the new plan will have to be approved for them to be authorized and to start the construction process. The new plan has made an important progress because in the past, we had to wait a long time between approval and construction. Annex 2 makes it possible to minimize that intermediate process and to speed things up. Regarding our international activities, we'll focus our investment efforts in low-risk environments, trying to find adequate rates of return, preferably with majority stakes and active participation in the management of these projects, with special emphasis on establishing our footprint in those areas where we are currently present, and also on potential projects such as the possible interconnection between Peru and Chile. In closing, I would like to mention that the competitiveness of renewable energies and the gradual reduction of debt incurred from previous shortfalls will provide the system with sufficient financial margins and also investments in the transmission network beyond 2019 will be an essential tool for the decarbonization of the economy. To conclude, and by way of a summary, I'd like to mention the targets set for the 2014, 2019 period investment plan will total EUR 4.57 billion, 78% of which will be dedicated to investments in consolidated activities. The remaining portion will focus on the development of new system operator tools, storage, and international expansion. Optimization in the performance of our activities will improve the EBITDA margin by at least 200 basis points during the period. We will maintain a solvency ratio of roughly 3.5 times on average. We expect to see a cumulative growth rate of the EPS between 5% and 6% from 2014 to 2019. As to our dividend policy, we will have a 7% growth in dividends year on year, starting from a dividend of EUR 0.75 per share in 2014 after the split. Of course, estimated based after the split. In 2016, Red Eléctrica will continue to focus on creating value for its shareholders and will move towards a sustainable future, promoting the decarbonization of our economy in the most cost-efficient way. With this, we bring this presentation to a close. Thank you very much for your time. Now I believe the floor is open for questions, starting with the floor, and then we'll address the questions received via webcast. Good morning, Santiago Cordona from BPI. I have 2 questions. The first one has to do with your international expansion. You mentioned that you would like to explore non-organic growth opportunities in some countries. You've specially mentioned Peru and Chile. Will you be limiting your activities to those regions, or would it be possible for you to invest in other countries? My second question has to do with some recent reports we've read in the press that the Securities and Exchange Commission may be analyzing Enagás and Red Eléctrica's international investments. I mean that there is some uncertainty regarding those investments. So what can you tell me about that? Another question that has to do with the long term, I know that the next regulatory period, it's a long way down the road, but do you have any cues or ideas regarding the new regulation? Will it remain stable? Will it include significant changes? Yes. Well, thank you very much, Santiago, for the question, or those questions. There were 2 questions there. I think there were 3 questions, but never mind. First of all, international expansion and organic or non-organic growth, the question there. Yes, of course, we're analyzing both kinds of expansion, both in Chile and Peru. As I mentioned before, there are some major tenders ongoing in areas that are not necessarily near the areas where we're operating. So that is the organic growth for us. Inorganic, non-organic growth, well, of course, there are assets that are constantly being talked about out there in the market, and we're very much vigilant with regard to all of them. You always look at these possible assets. Sometimes the size isn't right, sometimes the transfer, people don't want to transfer to you under the conditions that we're interested in. It may depend, of course, on its majority stake or not a majority stake. Of course, we're not interested in just getting into a financial stake. We, of course, want to make sure that we can add value and contribute value as the major controlling stake. Maybe on an ad hoc basis, we could go in as a financial investor. I'm sure our financial investors can do that better than us. Only Chile and Peru was the question. No, of course not. We're looking further afield at other countries, but it's true to say that whenever you do enter a new country, the conditions are not the same, and it also depends on the size as well. If you're moving into a new country, a country such as Mexico, Brazil, big countries with major projects, you probably have to be an entrant in a different way. You may have to go into those countries with partners who have experience in operations and maintenance or construction. For instance, in Peru, we're basically constructing on our own there. In Chile, we'll be learning more and more. In other countries, we'll perhaps go in with different criteria. Yes, we are looking at other countries beyond Peru and Chile. That question you added on, tacked on to that point about CNMC, about the regulator. I think this was actually all sorted out back a long time ago, in 2007 or 2006, and Red Eléctrica did have a problem. I think since 2007, the regulated and the listed company have been the same company. It may have been understood at some point in time that there was perhaps some sort of conflict of interest between the regulated company and the listed company. As you know, for years now, that has not been the case. There was a separation, there was an unbundling, very similar to what other electricity companies did, so that the listed company, Red Eléctrica Corporación, the Corporación, is not the regulated company. It belongs to the shareholders, and the shareholders, of course, sovereign to decide what to do with their money, what decisions they should take, et cetera. Under that, there's 100% owned company by the Corporación, which is a regulated company. Now, yes, there are a number of constraints with regard to that company, because that company cannot go out there and make international investments, but we have never Made any investment through that company since 2007. We do it through other companies. To what extent may the regulators take a decision? Could it back decision with regard to the regulated company that has an option? Not the Corporación, not the listed company. The listed company is sovereign to do what the owners decide it wants to do. Up to now, there has been nothing done. It has not said anything. But you're saying maybe it should actually look at whether or not the leverage is correct, whether it has sufficient funds to make investments. Well, that might happen, of course, but the regulator should really focus on the regulated activity and make sure that there is good returns from those assets. That is the main function there, that there is reasonable, adequate returns on the regulated asset. What the holding company does or what the parent company does, that's a different matter. Unless, of course, the regulated company that is under that holding company, for some reason does not comply with or cannot deliver on a regulated activity. But I think that has all been sorted out. I think that has all been dealt with and a long time ago. You were asking about the long term, weren't you? About the next regulatory period. Well, the ground rules for the regulatory period, the next one, they've already been laid down, haven't they? You know that. However, there is a principle underpinning those rules that goes beyond them, which is that you have to provide this reasonable profitability, which matches the regulated activity. Now, if rules did not allow that to happen on a permanent basis, well, that would be a different matter. But I do think that we haven't yet kicked off that period. We haven't actually started off the period where you're actually setting out the basic returns for the period. Once that happens, there will have to be decisions taken with regard to the spread that you should be able to make on certain investments. That's not just for transmission, though. It's also for renewable energy and transmission distribution. We'll see that, of course, once we get to that point. Nevertheless, I think the regulators, what it is obsessed about is to make sure that there's adequate, reasonable returns. As you know, things were not always like that in the past, and that is what we would expect to see in the future. We're starting to hold talks with the people who have taken up their new positions in the ministry, in the Secretariat of State for Energy there. I'm an optimist myself. New people, new opportunities, new dialogue, I think, and always very interesting conversations. That's the point we're at right now. Thank you very much. Good morning. Danielle Ortega from BBVA. I have three or four questions for you. The first ones are about regulatory issues. I think it's the same old question every year. The extension of the life of the pre-1998 assets. You remember last year, we had a much more of a technical dialogue. Had you capitalized your costs, and if you hadn't capitalized the costs, how could you possibly put into your books the CapEx? I would like to know where are we at, what point we're at in that process. Do you have any news for us about that? The second one, the Tribunal Supremo ruling about municipal authorities' taxes. Could you give us some idea what impact that might have and how you would calendar the Opex from those new taxes as part of your remuneration? Then a couple of questions about investments. The first one, your international assets. I know there was interest by both the French and Spanish governments to really push forward with the interconnection process between the countries. Do you think that will have an impact on you with regard to investments as we move through the period? The second question, which is more technical in slant. Your investment plan, which of those investments will not make a contribution during the last part of the plan? You may find that even you will be making investment, there will be an impact more on EBITDA and profits later on. Could you repeat that last part of the question? Yes. Let me go back to the question there. Your international investments in your plan and with regard to interconnections, I understand that some of those investments may be made between 2016, 2019, but may not have an impact, and they may have impact subsequent to the period. Could you tell us about those? Regarding pre-1998 assets and their upgrading, the situation as it is today regarding these assets, we have filed an appeal with the ministry, at the Secretariat of State for Energy, an appeal that the previous Secretariat of State for Energy didn't actually contemplate. It was basically a technical decision, as we told you before. But 2016 has been a very difficult year, politically speaking, and I understand that it would have been difficult for the Secretariat of State for Energy to make any decisions during this period. The appeal hasn't yet been contemplated. We are now in contact with the new people at the Secretariat of State for Energy. We wanted the new Secretariat of State for Energy to be aware of the situation, and now some time is needed for this new officer to study the matter and to make a decision. As I was telling you before, it's new people, new professionals, new opportunities at the ministry. We'll have to wait some time. Your second question had to do with municipal taxes. This is not a new thing. We've been paying taxes for a number of years, and we've filed challenges or appeals against them in previous years because we don't believe that we have to pay different taxes according to the municipality. It's been quite arbitrary, the tax rates. That's why we've filed some appeals against those taxes. How much money are we talking about? This only covers public land, 33% of our lines. We're talking about lines, not circuits. When we talk about kilometers, we're referring to lines plus circuits. This would cover 3,000 to 4,000 kilometers of lines covering public land or public domain. If it's EUR 6,000 per kilometer, if this is the applicable figure, this would total some EUR 20-something million. Of course, if this were the case, that would be a necessary amount of money to manage transmission assets, and therefore it should be included as part of maintenance costs. According to what period would this figure be attributed? From 2019 onwards. On the other hand, this is a pending issue. We don't really know what's actually going to happen. We have the feeling that transmission includes this item. In the tax base, 1.5% was the tax rate applicable. Distribution revenues have been included, meaning that the rate was already paid. If this were the case, that rate, which is being now paid by distribution, should be split differently. Up until now, the rate based on the turnover of distributors was based on the turnover of each distributor in the municipality. We should have a different type of split now based on that criterion and the number of kilometers going through public domain in those municipalities. It wouldn't be an additional payment. In case an additional payment is imposed, it should be automatically included and incorporated into the standards. It would just be a passthrough. We don't anticipate a relevant increase in this area, a huge amount of money. Regarding your third question, international interconnections, both governments are trying to push forward these investments and projects. Of course, looking at the details of these major projects, we won't be seeing any relevant investments before 2019. We won't be seeing any significant amounts before 2019. What's most important is to speed up the permitting process. We've made significant progress with the Vizcaya project. We've filed and presented all the relevant documents. RTE is in the process, the French TSO is in the process of filing these and presenting these documents. They should be doing this before 2017 because, of course, there are some funding windows to be taken into account. Both governments are clearly supporting these investments and these projects. Thank you very much, Daniel. Good morning. My name is Cesar Gonzalez from GB Capital. My first question has to do with your international expansion plans and capital investments. You've told us that you may contemplate organic and non-organic growth abroad. What about your leverage ratio, 3.5 times? Will it be possible to exceed it? Are you contemplating any changes in this net EBITDA ratio? According to the latest news, we heard that the regulator, the CNMC, was analyzing a possible excess remuneration amounting to some EUR 45 million. Yes. No, of course, this is not a red line at all that we wouldn't cross. If some magnificent opportunity came up, we would go for it, and we would explain why. Of course, you have to actually work at a strategy and try and remain within the parameters of that strategy, but then life changes. We would never have thought we would have gone into an operation, a deal in Chile with 50/50. If we'd gone in with 51, then I think we would actually achieved our international target over the whole period. You do have to adapt to what's happening. It was a perfect project for us. It was the right thing to do in that country with a perfect partner, even though we didn't get that majority stake, which tends to be our basic criteria. It was such a good project, we said, "Let's go for it. Let's go ahead with it." That could happen again. It will happen again, both in international operations and other kinds of deals. If we saw some storage project in the Canary Islands that we hadn't expected to see, and it suddenly moved forwards, like the one in Tenerife. Or if there was a major telecoms project opportunity out there. We would sit down and analyze it, we would put it on the table, and we would report to you on it with the full transparency that we have always used when we talk to you. Just let me remind you about the Adif operation. With hindsight, as time has gone by, I really do like this plan, this project, more and more. It was never there in our strategic plan, but when we saw that it was the right thing to do for our strategy in Red Eléctrica, we went for it, but it wasn't there. That type of expansion wasn't there in our strategy plan at the time, and I think you have to adapt. It's not a red line. However, we would like to abide by that threshold if we could. But if, as happened to us in the past, I remember that year we bought assets in November. Our net debt to EBITDA ratio that year was dreadful. Why? Because we had these two months of EBITDA, that's all, but we'd paid the full debt on the deal, and people said, "Oh, you've gone way beyond that 3.5 times red line for your net debt to EBITDA ratio." Yes, we'd like to keep under that, we'd like to keep to that threshold, but if an opportunity came up, then we'd go beyond that and we would talk about it and we report to you about it as we always tend to do. Teresa, perhaps you'd like to add something there. Yes. Well, the news, yes, the news is a little confusing. The word that is used is investigational inquiry, and the CNMC is saying it's using the data given to it by the ministry for the tariff. The estimated data that have been used for 2016, proposed by CNMC, you're talking about EUR 1.7 billion, which is not such a different figure from the figure that we have. I really am not able to say where this figure's come from. You see, the ministry has even gone to the regulator, CNMC, and said, "Please give me further clarification," because the ministry's not even very sure about this. Are there any further questions here in the room in Madrid? If not, let's move on to the webcast question. No, there is a question. No, there are no further questions here in the room here. We're going to read through the questions that have come through the webcast. To simplify the process, some of the questions that we have had come through the webcast have already been asked in the room. We wouldn't like to repeat them. We will try and summarize the questions that have come through. But of course, if we have left any of your questions out, we will get back to you at a later point. But we're doing our very best to include all the questions here. Javier Soler from Mediobanca asked the following question: Could we indicate any regulatory risk opportunity between now and 2019? The other question is, what changes do we feel would have to be made to improve regulation in the second regulatory periods? What amendments would have to be made to it? Javier is also asking us what our estimate is for RAP as for 2016. He's also asking for more color on the investments in Chile and Peru and our IRR for Chile, the project there. Thank you very much, Javier, for these questions. Risk and opportunities in the regulation during this period. Quite frankly, I have not identified that many risks, and there is an important opportunity, the residual life of pre-1998 assets. We are on top of that. Our whole plan and estimates are based on conservative estimates that none of those assets will be recognized, but there is an opportunity there. There is another opportunity in this period to see a future increase of the REPECs. Some efforts have been made to extend the life of these assets, but this could be extended further in the future because there is life beyond 2033. Up until 2033, renewal of those assets have been acknowledged. But of course, there is life beyond 2033, but these things will have an impact on the first period. What are the potential improvements in the second regulatory period? Firstly, to minimize that period between the different plans, the inter-plan period, to see a plan before the end of 2020. Of course, our strategic plan covers from 2014 to 2019, and the plan does not coincide with those years exactly. Of course, planning has greatly improved with Annex 2, but the process has still some room for improvement. What about possible improvements in the second regulatory period? To fine-tune the rate mechanism, those 200 points plus 300 points for renewables. This, in my opinion, should be fine-tuned because the mechanism works, and it should work very smoothly. But there is an overriding principle, the right rate of return which will have an impact, I am sure. In Portugal, we saw two very different periods. The rate of the bond was very high, so the rate of return for investments in Portugal should have been very high, but the government has set it at a lower level. Is this good or bad? I mean, the yield rate, if we had a 12% rate. If it is just an individual yield in a facility, the cash flow would be so high that the whole thing would not work. The same applies when the yield rate is way too low. So that principle of what is reasonable returns would override other rules. We would see perhaps a floor and a cap set for bond yields. We do not really know what is going to be the final development. We are in contact with those responsible at the ministry, and I am sure other stakeholders are also on top of this. As to the estimation of the RAP for 2016, of course, according to some analysts and investments, in the past, we used to say that market estimates were reasonable, but now this is increasingly difficult. Considering that we do not really know what is going to happen with the pre-1998 assets. We do not really know the chunk or percentage of the investments we are making now that will impact on the RAP, especially after 2020. In this situation, it is very difficult for us to tell you anything about this rate. Trying to provide you with some guidance, that is why we have looked at changes in revenues rather. Of course, some people use the RAP to estimate revenues, but in our opinion, revenues are much more interesting for guidance than RAP. Regarding the IRR in Chile, in our international investments, we always try to increase by at least 100 basis points the CapEx for each project. Occasionally, in a highly strategic investment, we could perhaps accept a lower rate. We could perhaps go below 100 points. Regarding the internal rate of return in Chile, I am not very much in favor of providing the competition with this information. What can I tell you about the rate of return in Chile? It's way above those 100 basis points above the cost of capital. The next questions are asked by Fernando Lafuente from Alantra Equities. What about, he asks, about exposure of the cost and infringement or breach of the cost basis of the company? What will happen if inflation goes up in the future? Regarding renewables, do we believe that the network is prepared to incorporate 10 additional gigawatts? What investments would be needed? His first question also related to auctions in the future. What about the leeway you have to bring costs down? Let me take that first question about the exposure to inflation. Basically, it's personnel cost and other operating cost, O&M cost. Our collective bargaining agreement for a number of years has been indexed to inflation. Our salaries, our wages, actually go up in line with the IPC inflation rate, the consumer price index rate. So there is no real impact of inflation here on the cost base. As for the other costs, everything to do with O&M tasks, all of that work tends to be linked to long-term agreements that we sign with our suppliers. in 2016, for instance, those costs didn't go up, and actually they came down, because if you look at the mix of the agreements that we reached. In the future, if inflation were to have an impact, although it's difficult, it's unlikely it will happen because it's a complicated cost base. I would remind you that our investment costs and our O&M costs are revised every six years. Now, if that happened, we would have to perhaps look at the standards for the next regulatory period and incorporate possibly the inflation impact then. With regard to renewables auction, Spain right now. Then in Spain, not just in Red Eléctrica, but Spain, of course, has a very sound, robust electricity grid. Generation dispatch takes place reasonably. It's not just about the winter package, is it? Or the new trends that we're seeing internationally in the mid and long term. It's not just about that with regard to renewables trends. But this is all about additional support for the current transmission network. In fact, the annex to the infrastructure plan incorporates investment for the second period as of 2020. Very similar figures to the first period. There will be continuous strengthening of the transmission network in that way. As for the impact on cost, at least 200 basis points is our commitment to increasing our EBITDA. We have delivered on that. Of course, it is more and more difficult, but there is certainly leeway for us to do that. On the renewable side, I would add the 6,000 megawatts of renewables. If they came up in a part of the country where the network is weaker, you would have to improve on that. We tend to talk about the network separately. In the Canary Islands, for instance, there is a wind power generation plan which may be offset because of the lack of network. The EUR 3.1 billion, approximately, that we are investing there, about 95% would be in the Canary Islands. If any of that were to be jeopardized, then maybe the wind plan would not be able to be fully developed. I think the Canary Islands is perhaps the one question mark there, but all of the projects have already been kicked off. You know there have been a couple of hitches there. You have probably read in the press, but we are absolutely confident things will be sorted out. We love to be on the solution side of things rather than the problem side of things. The next question comes from Luis Diaz from UBS Warburg. He is asking whether we believe that, looking ahead to the possible regulatory changes in the second regulatory period, that perhaps there would be this possibility of the cost base being increased depending on the inflation. There is also a question about possible regulatory actions are we expecting, have we calendared them in for the next few years? Inflation, I do not believe it is going to be taken into account for the asset base. It is somehow recognized or accounted for. If there is inflation, of course, the company's costs will go up, and they will be accounted for, but not in the same period. There would be a time gap. Depending on when inflation goes up, they could be accounted for in one period or another. Directly applying inflation to the asset base, I do not believe it is going to happen in the next few years, because the regulator has an obsession regarding inflation, that inflation in public prices. If I recognize, if I account for inflation, this will increase inflation. Some measures have been taken to prevent it in our economy. I do not see inflation being recognized in the asset base, but of course, it is taken into account in O&M costs, and new standards, of course, should account for this inflation. As to the calendar and the visibility of the new regulation, in May, we see the beginnings of the period where the bond is defined, and after that period, we will start looking at the spread and possible adjustments that could be applied, if any. However, we are expecting some new developments in this effort to speed up the planning period. It is a lengthy, complicated process where different stakeholders are involved, the ministry, the regional ministries, and authorities. I believe that before the end of this regulatory period, we will see some new developments providing further visibility for the second regulatory period. The second question is asked by Claudia Adones from Morgan Stanley, and this question has been asked by different analysts. What about CapEx beyond 2020? What would be more or less the level there? Well, if we look at Annex 2 and the level of projects in Annex 2, I think that's the most reliable source we have to look at investments post-2020 period. If we look at that, we're talking about investments more or less in the line similar to the figures late 2018, start of 2019, which will be close to EUR 600 million, EUR 650 million, if, of course, we deliver on all those projects. Now, with regard to planning, maybe some of those projects will fall out of the planning, and others will come in to replace them. Of course, we're trying to make sure that we never have surplus network, but at the same time, the autonomous regional governments are trying to actually pull in lots and lots of new projects. So there has to be a sort of plus or minus equation there. Things are added in, other things are taken out to work out the balance. Let's see how things work out. I would say that we will see at least EUR 600 million, EUR 650 million average in the next regulatory period. Maurice Joyce from Royal Bank of Canada has sent in the next question, which is, the current cost of debt is 2.9%. Do we believe that we can bring that level down? To what level we could bring it down to? Well, according to our estimates by the end of the period, it will go down to 2%-2.2%, more or less. There's another question from Nelson Bernardino from Heightone. His question is the following, regarding interconnection with France through the Bay of Biscay. We've read in the press some reports indicating that the European Union wishes that these projects would be based on competitive auctions. Would it be the case for this project in the Bay of Biscay? Yes. Well, thank you very much for that question. It's a very interesting question, actually, because there is a certain amount of confusion about this, and I will end up answering very specifically the question, but let me spend a couple of moments on the explanation behind it. People talk about whether or not this will be allowed. There'll be new players coming into transmission, yes or no. The supply chain in the E.U. is decided on by each country. It's not something that is imposed by the directive. However, what the directive does say is that the international interconnectors, CC, have to allow for that competition. Although here in Spain, it's the TSO. It's the single transmission network operator that has to do it, but that's our case because there's one of us. But we have to, of course, comply with what is said in the directive. However, there is an underlying philosophical discussion about this. This is the most interesting part about it. When you talk to authorities and you listen to people in the Commission, I don't want to name names here, it's quite interesting to hear what they say. What does it mean when you say you'd like to bring in new agents, new players into interconnectors? Are we talking about the operation of the interconnect itself? Are we talking about that? It's not very clear, but just imagine that you're talking about the new player, which would be you'd have your constructor, your builder, your operator, as well as the owner of that connection. What does that mean? It would mean that you'd have players that would be able to actually take advantage of the congestion between the countries. Red Eléctrica doesn't actually benefit from that. It's split half and half between the countries, France and Spain, of course. But of course, if you have a player that is actually going to benefit from that congestion revenue and it's not neutral, then maybe they're not that keen on actually bringing down the congestion revenue at all. So you may find that the interconnect would actually be working against the interest of consumers in Spain. If the TSOs, and TSOs such as Red Eléctrica or the French TSO, were the ones that were actually operating the interconnects, and 100% of that congestion revenue was going to be passed through back to consumers, and there were other players that were able to benefit from that, well, that would be a very different model to the one that we've been talking about, because things could go even further than that. We're all very clear about the fact that Red Eléctrica is transparent. It's a neutral player. Who would be the owner of those interconnects at that time? Surely you couldn't have, as the owner, the generator and distributor, because there would be conflict of interest there in that interconnector. When you take people down that road and explain the rationale there, people say, "Wow. Yes, you're right. I'm trying to actually promote competition, but now I'm realizing from your explanation that I may actually be working against the interest of consumers and the electricity market in the countries themselves." Spain has said, yes, we will abide by the directive, but of course, in a reciprocal way to all other countries, of course, the Bay of Biscay interconnect, of course, this is Red Eléctrica. We're the ones behind that. We'll be operating that. We're the developer there. Knowing the interest of the E.U., the commission in promoting competition and making sure the cheapest and most efficient and low-cost energy is available for all consumers, I would doubt very much that they might actually work against that objective. I am sorry for taking so long over the answer there. To finish off, Virginia Saint from Deutsche Bank is asking us whether it makes sense to have a deleveraged balance sheet structure. Are we thinking about increasing the payout in the company in the future? Well, this is a usual question. A question that is asked very frequently, and I will give you a very similar answer. When we developed the payout structure of the company and the balance sheet structure, of course, we want it to be aligned with our strategic goals. We want to have a flexible structure offering our shareholders the sound combination between growth and profitability. The payout policy has been analyzed in depth. Considering investment challenges in Spain and other countries, this is actually a key element to finalize the plan. This is a proposal we presented to the board and the proposal that the board approved, very much in line with our strategic plans for the future. We do not have any further questions from the website. If there is anything left out, of course, we will get back to you. I would like to thank you all for your attention, and we can now break for coffee. If you want, we can go and have a coffee. Thank you very much.