2 BUSINESS OUTLOOK AND STRATEGY

Transcription

1 2 BUSINESS OUTLOOK AND STRATEGY Operating context_ 19 Managing opportunities in the natural gas sector_ 21 Enagás' strategy_ 23 Risk management_ 26 18

2 ANNUAL REPORT 2015 Operating context Global trends At a macroeconomic level, global growth prospects were tempered with respect to previous years; the latest growth figures published by the IMF for 2015 point to +3.1%, that is, 0.3 points lower than for The current macroeconomic environment can be summarised into three main lines: Disparity in the performance of the different regions Uncertainty surrounding the evolution of China Widespread fall in commodity prices While advanced economies recorded slight upturns in their growth rates, emerging markets experienced a slowdown for the fifth year in a row. Major structural change is expected in China towards a production model focused on domestic consumption, thereby boosting the services sector and high-valueadded manufacturing. This transformation is expected to be accompanied by more moderate growth rates, leaving behind the double-digit levels of the past. However, the country will continue to grow at rates that could be double those forecast for advanced economies. Oil prices dropped to $30 a barrel, which represents a fall of around 45% compared to the price in early This is due to an abundance of supply and to the reappearance of Iran; a country with a high potential for crude oil production that will foreseeably increase the volume of exports. Fluctuations in certain currencies also had an impact, such as the appreciation of the US dollar and the depreciation of the yuan). Metals also traded at low prices, largely affected by a fall in demand in China (the main importer, with 50% of the worldwide share). To this macroeconomic context, we can add the huge challenge of climate change. As a result of the historic agreement to combat climate change that was reached at the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change (COP21), the energy sectors have taken on a leading role in the national plans announced by the different countries (the so-called Intended Nationally Determined Contributions). Enagás supports firm, coordinated action to deal with a global problem that requires a global solution. Gas must be a major part of that solution. In this regard, Enagás' strategy incorporates sustainability as one of the core drivers. [G4-EC2] More information: See the Climate Change and Energy Efficiency section. 19

3 Natural gas market In 2015, a low price environment for natural gas was consolidated. Market trends point to an abundant supply being maintained in the short and medium term, in a context of moderate growth in demand which, combined with the falling price of crude oil and its knock-on effect on the price of indexed gas contracts, further adds to the downwards pressure on prices. Such a setting increases the relative competitiveness of natural gas while introducing greater liquidity and optionality in the market, thereby improving its efficiency. In Spain, the demand for natural gas increased in 2015 by 4.5% over the previous year, the largest rise since It is worth highlighting the strong growth in the use of gas within the electricity sector (+18%), following several consecutive years of falling demand in this segment. In addition, sustained growth in future demand of around 3.5% is expected, mainly due to an improved macro context in Spain, a recovery of the gas-based power generation segment and greater penetration of gas among end users. Last year, the Iberian gas market, MIBGAS, was launched. This market, combined with the major supply capacity, both pipeline and LNG, the availability of a robust, developed network of gas infrastructures and the boost from interconnections with Portugal and France, will facilitate the creation of a price reference for the Iberian Peninsula. Demand for natural gas in Spain Forecasts on gas demand in Spain e (TWh) CAGR~ +3.5% 302 TWh +4.5% 315 TWh 315 TWh +4.0% 326 TWh + 7% CAGR TWh 61 TWh + 18% 61 TWh 62 TWh 250 TWh 254 TWh + 1.7% 254 TWh 264 TWh + 2% CAGR e 2020e Source: Enagás GTS Conventional demand Demand from power industry Source: Enagás GTS CAGR: Compound Annual Growth Rate Conventional demand Demand from power industry 20

4 ANNUAL REPORT 2015 Managing opportunities in the natural gas sector [G4-2] European market In 2015, the demand for gas in the EU rose by approximately 7% following a five-year slump. Domestic production continued to fall, thus increasing reliance on imports. The European Union therefore made market integration (development of interconnections) and greater diversification of supply sources a top priority. Enagás is heavily involved in this, driving the development of strategic EU projects such as MIDCAT, which will enable us to export to Europe the benefits of our Gas System's huge capacity to import LNG, and TAP, which will create a new supply route between Europe and the gas fields in Azerbaijan. Growth markets Enagás is now present in some of the most robust markets in Latin America, such as Peru, Mexico and Chile. Despite the economic slowdown seen in Latin America as a whole, these countries maintain good macroeconomic growth prospects and they are expected to increase their use of natural gas, leading to the development of new gas infrastructures. This will mean new short-term growth and consolidation opportunities for Enagás. Peru In the case of Peru, the 2025 National Energy Plan envisages a 35% contribution by gas to the final energy mix (currently 13%). Enagás has positioned itself as the leading gas infrastructure operator in the country, being involved in the two main gas transmission infrastructures: Transportadora de Gas del Perú (TGP), which carries gas and liquids from the Camisea production fields to the country's main consumption centres, as well as to Peru's LNG export plant; and Gasoducto Sur Peruano (GSP), an infrastructure under construction that will carry natural gas to the south of the country and which is, in terms of investment volume, one of the largest infrastructures currently being developed in Latin America. Mexico Mexico has launched its new five-year plan ( ) which includes an estimated $10bn investment into gas transmission infrastructures. Enagás is already present in the country through its shares in the Altamira (TLA) regasification plant, the Morelos pipeline and the Soto la Marina compressor station (now operational). Expected GDP growth rate in 2016 (%) 3.3% 2.6% 2.5% -0.3% PERU MEXICO CHILE LATAM AND CARIBBEAN Source: IMF-Mexico and LATAM and the Caribbean: World Economic Outlook Update January 2016 Chile and Peru: World Economic Outlook Update October 2015 Chile In Chile, the new Energy Agenda was passed in mid It establishes promoting the use of LNG in power generation as a top priority, along with industrial and residential use. Actions to be promoted include maximising the use of the capacity of existing terminals and expanding the capacity of the Quintero LNG regasification terminal, where Enagás is present. 21

5 Liquefied natural gas [G4-DMA] Over the coming years, the global LNG market will see a heavy increase in capacity thanks to the arrival of new liquefaction projects that will increase the availability of this fuel at competitive prices in all catchment areas. This market reveals emerging trends whereby Liquefaction capacity under construction ( ) 38% Australia U. S. Other models evolve towards approaches based on greater flexibility, relying on the availability of smaller scale, modular solutions such as floating technologies or small scale terminals. At the same time, growing environmental demands in sea transport segment give LNG a huge potential for development in this segment. In this context, the role of midstream infrastructure developers and operators is key to facilitate the entry of LNG in economies that need to import natural gas. Enagás, as an operator with over 45 years' experience, is a world leader in the field of LNG and is well positioned to leverage this market's opportunities for growth. 18% 44% Source: Prepared by the authors based on BG, IGU, IHS data and public information on promotors 22

6 ANNUAL REPORT 2015 Enagás' strategy [G4-DMA] In February 2015, Enagás presented an update of its Strategic Plan , which continues the approach that the company has been using. Last year, we continued developing our activity in line with the established drivers and strategic criteria, focusing on the three identified pillars of growth. Once again we have achieved our targets: investments (both in Spain and worldwide), increased profits and shareholder remuneration, and debt: PILLARS OF GROWTH MATURE, COMPETITIVE MARKET - EU Participate in the integration of the European natural gas market Enagás seeks to become a key European player with increasing importance in the Internal Energy Market GROWTH MARKET Develop natural gas infrastructures in growth markets Lay the foundations for rolling out Enagás' model as an independent TSO in countries with high growth potential GLOBAL MARKET - LNG Leverage opportunities to interconnect markets worldwide, with Enagás maintaining its position as leader in LNG Strengthen Enagás' position as global LNG expert 23

7 [G4-DMA] STRATEGIC DRIVERS Efforts in operating efficiency Realistic/profitable investment plan Focus on international growth Sustainability as a framework for developing Enagás' STRATEGIC CRITERIA SUSTAINABILITY AS A STRATEGIC DRIVER Transmission and storage of natural gas, Liquefied Natural Gas infrastructures, logistical solutions and related activities Long-term contracts and reputable offtakers Role as industrial partner with veto powers, Enagás managers in key positions and participation in working groups Partnerships with local companies/companies with complementary capabilities. Reputable partners Enagás upholds the COP21 Global Agreement to keep temperature rises below 2 ºC and proactively helps to achieve this by offering sustainable energy solutions. Gas infrastructures ensure a cleaner and more affordable energy supply to fuel the growing economy and promote social wellbeing, while facilitating the introduction of renewable energy and biogas. One of Enagás' strategic priorities is to replace carbonintensive fossil fuels with natural gas: Developing infrastructures that allow a highly efficient use of natural gas in the power generation, industrial, commercial and residential markets, thus replacing highly polluting fuels. Contributing towards reduced emissions in the transport sector and reducing local contamination by fostering the use of LNG regasification terminals for bunkering (sea transport) as well as developing small-scale LNG solutions (road transport). Enabling the penetration of biogas in our transmission infrastructures. This strategic commitment is reflected in our Climate Change Management Model with specific results: Enagás has been acknowledged as a leading company in sustainability. Stable and predictable flows 24

8 ANNUAL REPORT 2015 Such strategy fulfilment is linked annually to employees' variable remuneration by setting the four strategic drivers as company targets. Variable remuneration of the Chairman and CEO depends on these targets. Therefore, remuneration is linked to economic, environmental and social targets. [G4-51] DIVIDEND PER SHARE 1.32 Capex 430Mn (~50% international investment) Growth in net profit +1.5% NET DEBT COST OF DEBT 4.237Bn ~2.7% More information: See the Financial and Operational Excellence section. Strategic drivers Company objectives Indicator Level of attainment Operational efficiency Improve the company's financial results Net profit growth (+0.5% over 2014). 100% Investment plan Consolidate regulated revenues Undertake regulatory and remuneration actions that ensure company revenue (GTS remuneration, etc.). Ensure proper introduction of efficiency measures to consolidate the remuneration framework. Develop the logistics-sales plan, to help increase revenue for the system and for Enagás % International growth Launch of the company's Strategic Plan Develop the company's Business Expansion Plan in accordance with the established strategic and profitability criteria. Implement the actions identified in the 2015 Strategic Resources Plan, which guarantee the resources and cultural change required in the organisation to undertake the new strategic lines. 100% Sustainability Help the development of the company through sustainability and good governance Implement the new risk management model in order to provide senior management with key information for making decisions. Bolster Enagás' positioning vis-á-vis institutional investors and socially-responsible investors (SRIs). Improve energy efficiency and reduce CO 2 emissions. 100% 25

9 Risk management [G4-2, G4-14] Throughout 2015, there was a downwards trend in the company's risk profile The Risk Control And Management Model implemented at the company ensures coordination of a series of strategic, operational activities that enable the company to ensure that objectives will be met with a certain degree of certainty. For the Enagás Group, risk management represents a competitive edge in development. It has therefore carried out a project to review and redesign the risk function in order to turn the risk function into a tool that creates value, and set up a risk information system that is extendible to and useful for decision-making. Throughout 2015, the corporate governance framework in Spain was strengthened (Corporate Enterprise Act and Good Governance Code of Listed Companies), which had major implications for risk function. Specifically, the minimum content of the Risk Control and Management Policy was established, as well as specific responsibilities in the corporate risk management unit for its ordinary and strategic activities. Throughout 2015, there was a downwards trend in the company's risk profile, partly arising from the implementation of corporate risk control and management systems. This allowed certain risks to be eliminated from the company's inventory, without their having any negative impact. They included: > Regulatory developments that allowed certain issues pending regulatory reform to be finally concluded. > Increased demand for gas transmission, regasification and storage infrastructures, in line with provisions, with no negative effects on the corresponding remuneration. > In the ambit of international : i) administrative authorisations were obtained, thereby avoiding costoverruns due to project delays, ii) disciplinary files with penalties were favourably resolved and iii) construction projects were completed. RESPONSIBILITIES IN RISK IDENTIFICATION AND MANAGEMENT Risk identification and measurement Reporting the company's risk level (Risk Map) Determination of risk appetite (risk limits) Risk management and control Heads of each Division (owners of the risks) Heads of each Division (owners of the risks) Corporate risk management Corporate risk management Corporate risk management Corporate risk management Risk Committee Risk Committee Risk Committee Management Committee Audit and Compliance Committee Audit and Compliance Committee Board of Directors [G4-45, G4-46, G4-47] 26

10 ANNUAL REPORT 2015 Likewise, the level of certain inventory risks was reduced, including: > Favourable rulings in legal disputes arising from varying interpretations of port taxes. > Reduced own consumption by regasification plants through the implementation of energy efficiency measures that cut operating cost-overruns. [G4-EC2] The update of the company's risk map includes the following impacts arising from both the socio-economic context and our own actions, as shown in the 2015 Enagás Group Risk Map. For the Enagás Group, risk management represents a competitive edge in development MAIN RISKS FOR THE ENAGÁS GROUP [G4-14, G4-2] 1. Changes to the remuneration model for transmission, regasification and underground storage in Spain Exposure - level of risk Low Medium Moderate High Low Medium Moderate High Probability Acceptable Substantial Manageable Critical Note: Risks were classified by nature in a single map with different scales 2. Lower demand than expected, affecting remuneration in Spain 3. Acknowledgement of remuneration for investments made over previous years with regulatory discrepancies 4. Delays in obtaining administrative authorisations to develop new projects 5. Long-term non-utilisation of dormant assets. Indefinite extension of non-utilisation of assets (Spain). 6. Loss of legal disputes in Spain 7. Cost of repairs to transmission infrastructures 8. Cost-overruns when purchasing emission rights deficit 9. Performance in shrinkage that was greater than acknowledged 10. Assets under construction in planned investment projects in Spain 11. Performance in efficiency factors regarding provision of information 12. Commercial risk arising from variations in demand and negotiating industrial customers' tariffs (international). 13. Cost-overruns due to construction delays (international) 14. Cost-overruns due to delays in administrative processes (international) 15. Delays in project financing (international) 16. Incidents, unavailability and interruption in infrastructures 17. Fraud or unauthorised activities and cybersecurity 18. Reputational risks 19. Credit and counterparty risks 20. Financial (liquidity, interest rate and exchange rate) and tax risks 27

11 THE ENAGÁS GROUP'S MAIN RISKS [G4-14, G4-2] Risks Type of risk Mitigating controls and actions defined 1. Changes to the remuneration model for transmission, regasification and underground storage in Spain. Ongoing working relationship with domestic and European regulatory bodies and government bodies. Regulatory development proposals made in relation to changes in the remuneration system. Active participation in gas sector agent associations. Internal procedures related to these events. 2. Lower demand than expected, affecting remuneration in Spain. Participation in both national and European projects to promote natural gas as a fuel. Dialogue with other companies in the sector to promote the use of natural gas. Internal procedures encompassing the criteria and process for studying the evolution of demand, gas system capacity, sensitivity analysis, etc. 3. Acknowledgement of remuneration for investments made over previous years with regulatory discrepancies. 4. Delays in obtaining administrative authorisations to develop new projects. Ongoing working relationship with regulatory bodies and government bodies. Regular monitoring of the status of ongoing judicial procedures. Internal procedures related to these events. Ongoing working relationship with regulatory bodies and government bodies. Regular monitoring of the status of the authorisation handling process. Internal procedures for handling administrative authorisations. 5. Long-term non-utilisation of dormant assets. Indefinite extension of non-utilisation of assets (Spain). Negotiations with government bodies and regulatory bodies. Seeking alternative uses. Internal procedures for the accounting treatment of asset impairment. 6. Loss of legal disputes in Spain. Management and regular monitoring of the status of ongoing disputes. Monitoring of existing situation with corresponding administrative authorities. Negotiations with shippers to reach out-of-court settlements. 7. Cost of repairs to transmission infrastructures. Negotiations with counterparty to consider the incident as their responsibility. Contracts limiting Enagás' extent of liability and harmonisation of insurance programmes. 8. Cost-overruns when purchasing emission rights deficit. [G4-EC2] Energy efficiency initiatives adopted at regasification plants. Strategy for covering deficit through the purchase of CERs and EUAs, based on expectations of price developments. 9. Performance in shrinkage that was greater than acknowledged. Actions on measuring equipment for calibration thereof. Regulatory treatment of standard acknowledged shrinkage. 10. Assets under construction in planned investment projects in Spain. 11. Performance in efficiency factors regarding provision of information. Periodic review of the status of material in storage and projects in order to post potential losses. Allocation of material to other projects. Specific regulatory treatment for delayed projects (annual extensions or communications for specific projects). Implementation of adjustments that will be required in the SLM system. Analysis of possible effects and consequent actions. 12. Commercial risk arising from variations in demand and negotiating industrial customers' tariffs (international). Strategic and Negotiation of more flexible tariffs to meet customers' needs. Development of a plan with a customer overview within a regulatory framework. Development of new projects to increase the demand for gas. 28

12 ANNUAL REPORT 2015 [G4-2, G4-14] Risks Type of risk Mitigating controls and actions defined 13. Cost-overruns due to construction delays (international). Setting up of a local working group in order to resolve disputes between stakeholders, as well as improving those related to administration. Adjustment of construction plans to reflect potential delays. 14. Cost-overruns due to delays in administrative processes (international). Holding top-level meetings to address the issue. Ensure legal and technical resources tasked with preparation of the defence. Legal interventions to defend the validation of administrative processes. Promotion plan with local authorities. Defence plan with key international players. 15. Delays in project financing (international). 16. Incidents, unavailability and interruption in infrastructures. 17. Fraud or unauthorised activities and 'cybersecurity'. Operational and technological Operational and technological Incorporation of a new strategic partner. Ongoing relationship and negotiations with financial institutions. Staff training and qualifications. Application of policies and procedures. Implementation of maintenance plans and constant improvement thereof, and definition and monitoring of quality indicators. Control systems and alarms to guarantee continuity and quality of service. Control of physical access to facilities, buildings and plants. Quality, prevention and environmental certifications (ISO 9001, OHSAS 18001, ISO and ISO 9001:2008). Analysis of the desirability of making gas measuring and quality equipment redundant. Verification of the design, selection and execution of works or facilities and technical specifications for services, equipment and systems. Existence of emergency plans. Code of Ethics, Ethics Channel and reporting to the Ethical Compliance Committee. Enagás Group's Crime Prevention Model. System for Internal Control over Financial Reporting and Monitoring of Compliance with Laws and Regulations (Personal Data Protection Act). Centralisation of the Security Function of Information Systems. Conducting of internal audits (AI, ICFR, Forensic, Personal Data Protection Act, etc.). Control of access to systems and data (user access and profiles). Establishment of limits and authorisations. 18. Reputational risks. Reputational General Regulations for Communication in Crisis Situations (GRCCS), defining the communication flows and those responsible for them. Delivery of training in the application of the GRCCS. Likewise, publication of the GRCCS on the Enagás Intranet. Monthly tracking of information that is damaging and/or potentially damaging to the company (press clipping and online reputation on social media, blogs, etc.). Cross-referencing of negative news items and reputational risks that are most critical to the company as a whole. Issuing of press releases. Fluent, direct communication with stakeholders. 19. Credit and counterparty risks. Credit and counterparty Diversification policy among high rating entities, maintaining a balance between credit and debt positions. The company is in the process of agreeing a reciprocal netting clause with most of its banks to reinforce its position in the event of breaches by these institutions. 20. Financial (liquidity, interest rate and exchange rate) and tax risks. Financial and tax-related Liquidity policy reviewed regularly by the Board of Directors. Periodic sensitivity and what-if analysis of interest rate movements on the company's financing costs and their impact on the interest cover ratios. Analysis of the company's optimum financing structure and arrangement of appropriate hedges. Engagement of tax advisors. Internal financial and tax procedures. 29