Madrilea Red de Gas FY 2014 Annual Results September 2014 Table of - - PowerPoint PPT Presentation

Madrileña Red de Gas

FY 2014 Annual Results

September 2014

Table of Contents

Executive Summary Operating Overview Financial Overview 3 6 9 17 Regulatory Overview Final Remarks 13

2

Executive Summary

This presentation provides a summary of MRG’s FY2014 financial results, with total revenues of €180,8m and EBITDA of €149,2m, up 2% and 1,9% versus FY2013 The company operates a natural gas distribution network c.5.500 km long, serving c.839.000 connection points , up 0.5% versus FY2013, distributed over 59 municipalities in the Region of Madrid Natural gas distribution initiated in two new municipalities within MRG territory during 2014: El Molar and Pedrezuela Two additional distribution licenses have been granted to MRG in FY2014 for the municipalities of Los Molinos and Soto del Real MRG successfully completed its bank debt refinancing process in December 2013, with the issuance of two series of

3

MRG successfully completed its bank debt refinancing process in December 2013, with the issuance of two series of unsecured notes for an aggregated issuance of €775m off its listed EMTN programme MRG completed its corporate reorganization in December 2013 with the upstream merger of MRG II into MRG The company has been granted with OHSAS 18001 and ISO 14001 registration endorsing its compliance with best practices in health and safety and environmental management, respectively MRG maintains its commitment towards the development of natural gas in the Region of Madrid: renewal of fleet with CNG (compressed natural gas) powered vehicles, several agreements with industry associations and Comunidad de Madrid The new regulatory framework for natural gas regulated activities was enforced by Ministry of Industry, Energy and Tourism (MINETUR) on July 5 2014 aiming to ensure the economic sustainability of the gas system and incentivise growth

MRG Corporate Overview

MRG completed the full refinancing of its bank debt in December 2013 with the issuance of two series of notes and a revolving credit facility for an aggregate of €825m: – €500m due September 2018 – €275m due December 2023 – €50m RCF maturing on July 2018 The upstream merger of MRG II into MRG, completed in December 2013, constituted the last step in the corporate reorganization process of the Group

Key Corporate events Key Figures 2012-2014

176,8 177,3 180,8 82% 83% 83% 20% 40% 60% 80% 100% 50 100 150 200 250 300 FY2012 FY2013 FY2014

€m YE 30 June

reorganization process of the Group Legal Structure

Revenue Breakdown (FY2014)

Revenues EBITDA Margin

€m YE 30 June 4

153,4 22,9 4,5 180,8 50 100 150 200 Regulated Remuneration Other Regulated Revenues Non-Regulated Revenues Total FY2014

Development of Connection Points (2011-2014)

822 830 835 839 300 500 700 2011 2012 2013 2014

’000 YE 30 June

Source: MRG Source: MRG Source: MRG

Table of Contents

Executive Summary Operating Overview Financial Overview 3 6 9 17 Regulatory Overview Final Remarks 13

5

Operating Overview

Key Operating Data Units FY2013 FY2014 Change % Connection points # 835.427 839.248 0,5%

< 4 bar 835.327 839.148 0,5% > 4 bar 100 100 0,0%

Gas distributed GWh 10.164 9.222 (9,3%)

< 4 bar 9.386 8.438 (10,1%) > 4 bar 778 783 0,7%

Network length km 5.347 5.466 2,2% Municipalities (total) # 57 59 3,5%

6

Commentary

• MRG operates over 839.000 connection points as of closing of FY2014, with a net growth of 0,5% versus

past fiscal year

• Network length grew by 2,2% up to c. 5.500 km over the existing 57 municipalities, including 2 in which

the network was extended for the first time over recent years

• Lower volume of gas distributed during the fiscal year has been driven by warmer temperatures,

particularly during the first half of 2014

• Comunidad de Madrid has granted to MRG two new distribution licenses for the municipalities of Los

Molinos and Soto del Real, both in the North of the region of Madrid and adjacent to existing MRG territory

Source: MRG

Municipalities (total) # 57 59 3,5% New municipalities with active CPs # 7 7

MRG Key Initiatives

• MRG has initiated in 2014, after the completion of the

construction works to extend its network, the distribution of natural gas in two new municipalities within its territory: El Molar and Pedrezuela

• Comunidad de Madrid granted in 2014 to MRG two new

administrative authorizations for the distribution of natural gas in the municipalities of Los Molinos and Soto del Real, both located in the northern section of the region and adjacent to current MRG territory

• The company initiated in 2014 the process of renewing its

fleet with CNG (compressed natural gas) powered vehicles

MRG Committed to the Development of Natural Gas

7

fleet with CNG (compressed natural gas) powered vehicles

• It is expected that by 2016 100% of MRG fleet will be

powered with CNG

• Beside inherent savings in cost of fuel, CNG allows for

significant reductions in particles, Nox and CO2

• MRG maintains its cooperation agreement with Comunidad

de Madrid to incentive the replacement programme (Plan Renove de Calderas) of old natural gas boilers, thus enhancing safety and energy efficiency

• MRG maintains its close cooperation with Asefosam, the

regional association of gas installers, one of the key commercial channels for natural gas expansion, in order to facilitate the access to natural gas to potential new customers in Madrid

Table of Contents

Executive Summary Operating Overview Financial Overview 3 6 9 17 Regulatory Overview Final Remarks 13

8

Key Financials

Income Statement - €MM Commentary

• Total revenues of €181m in FY2014 grew by 2% versus prior

year, on the back of regulated remuneration (1% growth) and Other revenues

• Growth in Other regulated revenues was primarily driven by

volume of periodical inspections to MRG base of connection points, and meters rental

• Non regulated revenues capture reconnection and other

ancillary services rendered to connection points holders

• Overhead costs have remained broadly flat versus prior year

and in line with MRG efficient operational platform

• Interest expense of c.€100m capture a number of non

recurring items related to the bank debt refinancing process

12 month period ending 30 Jun

2013 2014 Remuneration 152,0 153,4 Other regulated revenues 21,9 22,9 Non-regulated revenues 3,4 4,5 Variable costs (12,5) (13,0) Overhead costs (18,4) (18,6) EBITDA 146,4 149,2 Margin 82,6% 82,5% EBIT 111,0 114,7 Margin 62,6% 63,5% Interest expense (1) (67,1) (99,8) Income tax expense (13,2) (4,5) 9

Commentary Cash Flow Statement - €MM

recurring items related to the bank debt refinancing process completed in December 2013; normalised Net income (i.e. excluding the post tax impact of one off interest expense) would have been of c.€59m

(1) Please refer to Normalisation Analysis on page 11

• MRG generated €98m of cash flow available for debt service

in FY2014; Income tax paid and changes in working capital (inclusive of non recurring costs) are the causes of the reduction in cash flow versus prior year

• Income tax reflects the temporary tax measures in place until

FY2016 limiting, among other, the deductibility of Goodwill and Network licenses

• Increased tariff deficit, normalised accounts receivable and

payable in FY2014, lower tolls billing in Q2 2014 and non recurring cost (largely one-off fees and expenses incurred in connection with the debt refinancing process) drove change in Working capital

Income tax expense (13,2) (4,5) Net Income 30,7 10,3

12 month period ending 30 Jun

2013 2014 EBITDA 146,4 149,2 Income tax paid (9,2) (14,7) Working capital 2,0 (19,8) Capex (21,1) (17,1) Cash Flow Available for Debt Service 118,2 97,6

Source: MRG Source: MRG

Key Financials

• Upon

the completion

• f

the bank debt refinancing process in December 2013 the long term debt balance of MRG captures the

• n-loan

agreements with MRG Finance BV (issuer of outstanding unsecured notes):

• €500m 3,779% due September 2018
• €275m 4,500% due December 2023
• The balance of Subordinated shareholders loans was

Commentary Balance Sheet - €MM

12 month period ending 30 Jun

2013 2014 Gas distribution licences 713,4 713,4 Net tangible fixed assets 389,3 377,2 Total Network Fixed Assets 1.102,7 1.090,5 Goodwill 57,4 57,4 Deferred Tax Asset 23,1 8,0 Other Non-Current Assets 2,0 1,3 Current Assets 38,6 40,3 Cash and cash equivalents 10

fully converted into equity as of September 11, 2013

• Deferred tax liability balance in FY2014 reflects the

cancellation of the former interest rate swap hedging floating rate bank debt

Cash and cash equivalents 33,4 55,4 Total Assets 1.257,1 1.252,9 Equity 230,5 436,7 Subordinated Shareholders Loan 194,0 0,0 Total Shareholders Equity 424,5 436,7 Long Term Debt 784,0 769,0 Deferred Tax Liabilities 15,9 3,5 Other Non-Current liabilities 1,9 2,2 Current Liabilities 30,9 41,4 Total Liabilities & Shareholders’ Equity 1.257,1 1.252,9

Source: MRG

Key Financials

Interest Expense Normalisation Analysis - €MM

12 month period ending 30 Jun

2013 2014 Reported Interest Expense (67,1) (99,8) One off - swaps unwind cost 50,6 One off - accrued fees 15,1 One off - other 3,6 Normalized Interest expense (67,1) (30,5)

Source: MRG

11

• Reported interest expense in FY2014 is highly impacted by the completion of the bank debt refinancing process
• Normalized interest expense, once adjusted for the one off/non recurring interest expense items is c.€30m
• The one off costs incurred during the year related to the following items:
• Cancellation cost of the outstanding mark to market value of interest rate swap relative to the former floating

rate bank debt as of the respective prepayment dates

• Non-cash, write off of unamortized upfront fees relative to the former bank debt facilities
• Accrued interest expense on Subordinated shareholders loan as of the capitalization date on September 2013

Commentary

Table of Contents

Executive Summary Operating Overview Financial Overview 3 6 9 17 Regulatory Overview Final Remarks 13

12

Regulatory Update

• After having carried out a regulatory review of the Electricity regulation, the Ministry of Industry, Energy and

Tourism (MINETUR) has conducted a review of the regulatory framework applicable to the natural gas sector, aiming to remove the incipient tariff deficit, ensure the economic sustainability of the system and incentive penetration of natural gas

• Royal Decree Law (RDL) 8/2014 of July 4 enforced, among other initiatives to enhance competitiveness and

efficiency across various sectors, a number of measures around the regulated activities within the natural gas sector:

• Adjustment of remunerations to regulated activities for an aggregate of €238m
• Remunerations of all regulated activities (and not only Distribution, as has been the case under the previous

regulatory framework) will be aligned with the evolution of the gas demand

13

regulatory framework) will be aligned with the evolution of the gas demand

• Establishment of incentives towards low pressure demand growth and increase of natural gas penetration,

specially in currently non gasified municipalities

• Establishment of mechanisms to prevent tariff deficit beyond certain thresholds through automatic tariff

increases

• Recognition of tariff deficit accruing through December 2014, to be settled along a 15 year period with interest

at market rates

• The outcome of the reform is viewed as broadly favourable as it ensures the economic sustainability of the

sector, enhances the penetration of natural gas in Spain and provides for long term regulatory stability

Changes to Framework of Distribution

• Adjustment to remunerations across Distribution companies
• f €110m p.a. or 7,3% applicable as of July 5 2014
• Removal of inflation update (IPH) in line with the measure

adopted for the rest of regulated activities

• Remuneration of Distribution companies will keep being

determined by a parametric formula considering three revenue blocks: (i) previous year remuneration, (ii) incremental connection points on pressure below 4 bar, and (iii) incremental gas demand both under and above 4 bar

• As an incentive to enhance natural gas penetration, new

connection points captured in currently non gasified areas will

Key Aspects Impact on MRG

• MRG base remuneration has been adjusted, on an annual basis, by

€10,9m or 7%, from €153.7m to €142.8m; this adjustment is in line with the overall reduction to Distribution sector

• The adjustment to MRG remuneration is applicable as of July 5 2014

and has no impact whatsoever on past remunerations recognized to MRG (including the corresponding to recently closed FY2014)

• The impact from the remuneration adjustment in FY2015 versus prior

year shall be of c.€6,4m after taxes; this excludes potential earnings upsides derived from incremental connection points and associated demand, as well as from cost efficiencies that might be generated throughout the year

• Revised marginal unitary values, and particularly those associated to

1.867 2.589 2.609 10,3% 50,3% 2,3% 22,1% 1.500 1.700 1.900 2.100 2.300 2.500 2.700 €/CP Previous formula Gasified areas Non gasified areas 99 122 302 74 128 353 94 148 373

• 50

100 150 200 250 300 350 400 3.1 3.2 3.3 3.4 Tariff Group (% relative to MRG demand mix in 2013)

14

connection points captured in currently non gasified areas will be remunerated above rest of new incremental customers

• Gas demand associated to connection points on pressure

below 4 will receive a higher remuneration versus that of prior framework, specially in the case of residential customers

MRG average remuneration per connection point Customer Segment

€ CP €/MWh € CP €/MWh € CP €/MWh

Industrial Customers N/A 1,75 1,25 1,25 Household < 50 MWh p.a. 89,36 3,15 50,00 7,50 70,00 7,50 Household > 50 MWh p.a. 89,36 3,15 50,00 4,50 70,00 4,50 Marginal Unitary Values Previous Formula Current Formula

Gasified Areas

Current Formula

Non Gasified Areas

Marginal unitary values

• Revised marginal unitary values, and particularly those associated to

incremental demand, combined with specific MRG features (lower relative temperatures in its area of distribution, favourable tariff mix towards high consumption customers segment) shall provide revenue upside versus prior framework

Source: Royal Decree – Law 8/2014 Source: MRG

Corporate Income Tax Reform

• A bill of law was proposed to Parliament by the Ministry of Tax on June 23, in order to undertake a broad tax
• reform. A parliament discussion shall follow during remainder of 2014, before expected enforcement on January

1, 2015

• The key elements of the new draft corporate income tax law impacting MRG tax position are the following:

i. Income tax rate shall be gradually reduced from current 30% to 25% in 2016 ii. Goodwill and Network Licenses tax amortisation rate (currently at 1% and 2% respectively) shall be set at 5% as from 2016 iii. Deductibility cap to fixed assets amortization temporarily set at 70% of accounting value will no longer applicable iv. Deductibility cap to interest expense is maintained at 30% of EBITDA

• The below chart sets out the relevant changes for each of the following MRG fiscal years, should the current bill

15

• The below chart sets out the relevant changes for each of the following MRG fiscal years, should the current bill
• f law is passed as drafted:

Source: Draft bill of law, Corporate Income Tax, of June 23, 2014

Fiscal Year FY2015 FY2016 FY2017 (1) Beginning on 01/07/2014 01/07/2015 01/07/2016 Ending on 30/06/2015 30/06/2016 30/06/2017 Income Tax Rate 30% 28% 25% Goodwill - Tax amortization rate (2) 1% 1% 5% Gas Distribution Licenses - Tax amortization rate (3) 2% 2% 5% Interest expense deductibility cap (4) 30% 30% 30%

(1 ) And onwards (2) Applicable to balance of Goodwill arised from acquisitions of M RG and M RG II in 201 0 and 201 1 , respectively (3) Applied to balance of Gas Distribution Licenses arised from acquisitions of M RG and M RG II in 201 0 and 201 1 , respectively (4) As a % of EBITDA

Key Changes in Corporate Income Tax - Draft Bill of Law of June 23, 2014

Table of Contents

Executive Summary Operating Overview Financial Overview 3 6 9 17 Regulatory Overview Final Remarks 13

16

Final Remarks

Revenues and EBITDA up 2% in FY2014, EBITDA margin of 83% Network expansion on track, servicing c.840.000 connection points in 57municipalities New licenses awarded to MRG for new municipalities: Los Molinos and Soto del Real

17

Key corporate initiatives (debt refinancing, merger of MRG and MRG II) successfully completed Revised regulatory framework incentives gas penetration and provides for stability

Disclaimer

This presentation has been prepared by Madrileña Red de Gas, S.A.U. (the “Company”). Certain statements in this presentation are forward-looking statements. By their nature, forward-looking statements involve a number of risks, uncertainties and assumptions that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. These risks, uncertainties and assumptions could adversely affect the outcome and financial effects of the plans and events described in this presentation. Forward-looking statements contained in this presentation that refer to past trends or activities should not be taken as a representation that such trends or activities will necessarily continue in the future. The Company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should not place undue reliance on forward-looking statements, which speak only as at the date of this presentation. It should be noted that the Company’s auditors have not reviewed the information in this presentation. This presentation (and its contents) are being made available on the basis that the information contained herein may not be reproduced, disclosed, redistributed

• r passed on, directly or indirectly, to any other person (unless he or she is affiliated with the recipient and has agreed to comply with these restrictions on

redistribution) or published, in whole or in part, for any purpose without the prior written consent of the Company. The distribution of this document in certain jurisdictions may be restricted by law and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. 18