Q3 2011 Gas Natural Sdg SA Earnings Conference Call

Thomson Reuters StreetEvents Event Transcript
E D I T E D   V E R S I O N

GAS.MC - Gas Natural SDG SA
Q3 2011 Gas Natural Sdg SA Earnings Conference Call
Nov 08, 2011 / 11:00AM GMT 

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Corporate Participants
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   *  Rafael Villaseca
      Gas Natural Fenosa - CEO
   *  Carlos Alvarez
      Gas Natural Fenosa - CFO

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Conference Call Participants
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   *  Jorge Alonso
      Societe Generale - Analyst
   *  Pablo Cuadrado
      Bank of America Merrill Lynch - Analyst
   *  Javier Garrido
      JPMorgan - Analyst
   *  Alejandro Vigil
      Cygnus Asset Management - Analyst
   *  Antonio Cruz
      Banesto - Analyst
   *  Bruno Silva
      BPI - Analyst
   *  Javier Suarez
      Nomura - Analyst
   *  Jose Javier Rui
      Exane - Analyst

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Presentation
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Operator   [1]
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 Hello, good morning. Welcome to the presentation of results of Gas Natural Fenosa for the third quarter of 2011 presented by Mr. Rafael Villaseca who is here with the Financial Director, Carlos Alvarez, and the General Manager for Strategy and Development, Mr. Antonio Basolas. Once we finish, we'll open up a debate and we'll begin with the people in the room and then we will go to those who have followed this remotely over the phone or webcast. And then without further ado, I'll pass the floor to our Managing Director and CEO, Mr. Villaseca.

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [2]
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 Good morning. Good morning to all of you in the room and everywhere else, over the Internet and the phone. We're going to explain the five points on the order of the day, the agenda. We're going to start with the main magnitude of this year. We're going to talk about the strong points of our current strong financial situation, consolidated results for the period, the first nine months, and we will continue analyzing the different business lines. And then we'll have some conclusions, and then we'll go to debate.

 If we begin with the first point, main magnitudes, these are up on this slide that you can see here, and I would like to underline. I would like to say that the first nine months, these data are of the first nine months, the recurring net income was or the net income was EUR1,114 million. But if we look at the recurring net income, that is the profit after adding and taking away the disinvestment operations, the -- there has been a growth of 11.6%. So an 11.6% growth in recurring net income or EUR896 million. In the same period, EBITDA -- the EBITDA, consolidated EBITDA is EUR3,539 million, growth of 0.5% in spite of disinvestments. And in terms of investments, it's gone down, they've gone down by 9%, EUR832 million, in line with the rationalization plan that we'll explain later. As a result of all this, our net debt as of the 30th of September is EUR17.3 billion, that's a reduction of 12.5% over the figure of last year.

 If we look at the second point, I'd like to underline the stronger capital structure of our Company with the following arguments. First of all, we see here that the disinvestment program, the divestment program has finished. It has been a success and we've collected more than EUR5 billion which is in contrast with the EUR3 billion that we had as our aim, and we've obviously exceeded that. Those EUR5 billion, we just need to collect EUR38 million that are pending for sale of gas customers in Madrid, and the rest is collected, and it includes compliance of the commitment we had as regards competition.

 And that has exceeded the financial economic plan in two aspects, in the amount and the term, the period. We've completed the program one year ahead of schedule. But at the same time, we've done it with added value, and that should be underlined because there is a certain kind -- well, there is a significant contradiction because on the one hand the Company has a value on the market, on the stock exchange, which is lower than its accounting value. But when we disinvest, we do it with added value, with surplus value so that from our point of view we are not valued at our true worth.

 We've also got to say that in accordance with what we had decided to do, our CapEx discipline is very strong and the investment figure has to do with three things. We've got rigorous criteria in terms of investment. We want to maximize return and shorten the periods of investment, but with two other things. The first one is that we -- there has been a drop, a reduction in the growth of gas and electricity supply points, so there is less need for investment.

 And the second thing is that in accordance with the synergies that we had programmed, we're reducing our annual investment by more than EUR200 million as a result of the savings that we have in recurring investments in CapEx basically of the disinvestment -- sorry, distribution activities and also generation maintenance activities. So altogether, this has produced this very significant series of savings.

 Third point, the securitization of tariff deficit. This year that's been significant. We had at the end of the previous year a debt, pending debt of EUR1.8 billion. Throughout this year, we have collected as a result of securitization more than EUR1 billion. It's true that that's going to increase due to the deficit by EUR400 million. And what's now pending at the Company including what we're going to accumulate this year is EUR1.27 billion (sic -- see slide 9). But it's gone down by more than EUR600 million, and we hope that before -- we expect to collect additional amounts before the end of the year and bring this debt down even further.

 We've also strengthened our shareholders' equity by two operations. The first one is the scrip dividend that was completed with an unprecedented 96.4% success ratio, which gave us an increase of resources and a lower cash outflow of about EUR400 million. But as you know, this summer we increased our capital by EUR515 million as a result of the Sonatrach operation. That improved our own resources and our liquidity by more than EUR900 million.

 Altogether, that's meant a very substantial reduction in debt as you can see on this graph. In fact, if we compare this with what we had at the end of last year, we've reduced it by more than EUR2.1 billion. And we are now, we have a coverage of 3.9 times our debt -- net debt over EBITDA. So our debt is now at EUR17.3 billion versus EUR19.4 billion last year as a result of sales of -- sale of assets, collection of accumulated tariff deficit and the cash flow growth. So our net debt over EBITDA ratio is 3.9 times. And if we had collected our pending securitization, it would be 3.6. So we are on the road as planned in our strategy and we're complying with our aims.

 If we look at our debt breakdown, the breakdown of our financing sources, clearly shows that the risk profile is very well balanced. I want to underline that 71% of our debt is fixed and very competitive. 82% of the debt is euros. 53% of the debt is on the capital markets that exceed bank loans, which is 37% of our debt.

 And if we go into the cost of debt, as you can see we are at a complete cost of 4.3% annually, which is one-tenth more than we had last year. So we got an average cost that is very competitive and clearly lower than that of other companies in the sector that are being given a higher rating than we are. So our situation is very good in terms of debt in spite of the fact that that 4.3% includes the debt in Latin American currency, which is financed basically through local currency and with a face value, higher face value rates of interest. But our 4.3% cost of debt shows how competent we are.

 The good perception of risk of Gas Natural Fenosa was made clear when EUR8 billion were issued in instruments in capital markets since June 2009 with an average coupon of 4.77% and average life of 7.1 years. So EUR8 billion issues in capital markets since June 2009, and this is really a truly enviable situation. And we've, despite this -- despite higher volatilities and spreads we've maintained good stability throughout the year.

 You can also see what the profile is in terms of maturity schedule of our debt. You've followed this in other presentations. It's extremely comfortable for our Company. We've got -- an average life of your debt is about five years, which means that we have practically covered all our needs up to 2013 included -- inclusive. And we will have to focus on 2015. And after that, we'll then -- after 2015, there will be the maturing of almost 70% of our debt. So we have a program of -- as regards to our debt which is really very manageable.

 And now we've also got to add the very good liquidity we have. We have at this time enough liquidity available to cover needs for at least the next 24 months. We're talking about EUR7 billion. This is broken down into EUR2.7 billion in cash and EUR4.2 billion in loans, available loans. And also we've got to tell you that the European Investment Bank has just given us a loan for EUR500 million, a 15-year loan in good conditions. And those EUR500 million would be added to what we've -- to the EUR7 billion we've already told you about. And we've also got available capacity of another EUR4 billion available in euro programs and LatAm programs, Mexico, Argentina and Panama.

 Very important to point out here, and this is literally on the screen, on the slide, it's very important to quote Standard & Poor's statement which says GNF's liquidity is strong based on its proactive financing and healthy cash flow generation. It also says that GNF's proven access to the debt capital markets both in Spain and Mexico, its ability to dispose of assets, its sound bank relationships and its prudent financial discipline further support our assessment of the strong liquidity position. This has a -- this is a literal quote from S&P -- S&P's report. We have to talk about our ratings and underline, we're BBB according to the Standard & Poor classification. But there is a slight lack of consistency as regards other utility companies which have -- which have got better ratings than we have, we have when their situation is not so good. We hope this irons out these differences in the future. The coverage of net debt and the cost of net debt are really evolving very, very well if we compare this to last year, the coverage ratios are 20.5% as regards to the debt and almost 6 times financial cost. That gives us a sound risk profile, as I've already said, because our business profile is sound with 70% of activities that are regulated or quasi-regulated and an integrated management of liberalized businesses which gives us great flexibility and stability in terms of our results as we've shown quarter after quarter.

 We've also got limited exposure to other European risks and lower than other utilities, other companies as regards to risk like the nuclear risk or the take-or-pay clauses in the gas supply contracts. And we have proven expertise in emerging markets, not just these business but these businesses in emerging markets. And to top it all up, we have strong liquidity which is being qualified as such and a lack of refinancing risk as you've just seen.

 Now we're going to go to the summary of results of the period. I'd like to underline a few things we've already said, our gross margin is going up, has gone up by 1.4%, EBITDA 0.5%, EBITDA is EUR3.5 billion, all of this within a very hard, demanding scenario as a result of our balance, our well-balanced situation. We're growing internationally, there is no doubt. One of the elements that we should underline is also that.

 And this has allowed to make -- allowed us to make up for the EBITDA that we've lost as a result of disinvestments in 2010-'11. If we homogenized this factor, if we spread all this out, our EBITDA would have gone up by 3%, amortizations have gone up 5%, provisions gone down 8%, and there are less added value levels or surplus value levels because of what I've already explained. Financial results are 11% better, lower than last year, and all that leads to a profit before tax of EUR1.1 billion and -- that's the net income, EUR1.4 billion, which is practically the same last year although after taking -- if we took away from that the surplus value taxes to make it consistent, our income would go up almost 12% as regard to last year.

 If we look at the breakdown of EBITDA when we compare it to last year, you'll see that every chapter distribution, electricity, gas and Latin America, there are four very important points that come up. Electric distribution in Europe, we have to underline, electric distribution 23%, basically as a result of Spain, but there are technical and accounting reasons that have to do with this.

 As regard to electricity, there is a drop of 22.8% basically in Spain. As regards to the gas business, it's gone up 37% in terms of supply. And in Spanish America, there is a drop in 25% of the electric distribution business. All this has its reasons which I'm going to explain to you.

 The EBITDA, however, has increased by 0.5% in spite of the disinvestments that took place in 2010 and '11. As regards -- we'll go back to that in a minute. As regards consolidated investments, the drop is 12%. I want to remind you that the implementation of synergies means that we're talking about an amount of about EUR200 million. And this has to do with the end of the combined-cycle plant program which finished in Mexico in Durango. And the efforts we've made in distribution, especially in Spain there has been a drop in demand. By sectors, distribution in Europe accounts for most of distribution, followed by regulated businesses in Spanish America.

 Now if we go into the analysis of our operations, and we begin with distribution in Europe, electricity specifically, we have to say that investments as regards to the previous year have dropped -- have grown, sorry, by 15.3%, and the TIEPI has improved significantly as has the -- have the sales. Europe -- electricity distribution in Europe, Europe sales got by 2%, EBITDA EUR556 million, which is an increase of 23%. However, a lot -- this has a lot to do with the fact that last year the adjustment was made at the end of the year. So until the end of this year we won't be able to compare figures consistently because they will reflect an update on 2010 in accordance with the law that was published on the 29th of December 2010 which set the tariff of distribution, the current tariff.

 So until we close the year, we don't have definite -- we haven't got figures. But I think it will be comparable by this fourth quarter. Increase of investments has had to do with the slight growth, even in supply points that still exists. And I would like to say that the TIEPI of the Company is the best in the whole Spanish market with a record value of 30 minutes, that goes down -- that is 30% less than last year. There is no doubt that we are the Spanish company with the best TIEPI in Spain.

 If we go to gas, there's been a slight increase of investments. There's also, in spite of the recession, been an increase of the connection points. This is important, these figures are adjusted, we're not bearing in mind disinvestments in terms of supply points that we carried out because of regulatory issues. So bearing that in mind, the supply points have increased by more than 80,000, which is obviously quite far removed from the good years, but it's a positive figure, and it's really good. And we're talking about the worst real estate crisis that's ever been known in this country. Sales have gone down by 1.3% because of the residential market conditions, weather conditions very much more benign, less cold, less gas being used in the winter, was used in the winter.

 But the industrial markets recovered, we'll go back to that. And as I've said, growth of the supply points and for all this and because of all this, there's been an investment effort which is not the same as other previous years, but it's quite significant due to the fact that the network has to continue to grow in order to have more connection points because the low level of gas penetration in Spain gives room for quite a lot of growth in our country still.

 If we go into energy markets, here we have four graphs to show you what the situation is. I'm sure you know it. The scenario is quite complicated. All these figures seem to shoot off into percentages of more than 40%. Brent's gone up by 45%. Spot market has gone up by 47%. The thermal -- the increase of the pool, the Spanish pool, electric pool has gone up by 41%. And the price of coal, API 2, has gone up by 43%, nothing to do -- no relation with what we had 12 months ago. Energy markets clearly are -- the prices are increasing, and we think that they're going to continue to do so in the medium- and long-term future.

 In terms of demand in Spain, general view is that demand, conventional gas demand in Spain has gone up by 0.6% in spite of the decrease in residential demand, and that is due to the strong increase of industrial demand as regard to the preceding year. So there's a contrast with other estimates in calculations for the gas market or the economic market in Spain, but the truth of the matter is that the residential market went down by almost 18% due strictly to weather conditions. But the industrial market, the large consumption market in Spain went up by about 6%, almost 6% in the period, that's the preceding nine months. That's led to a growth of 0.6% in conventional demand.

 As regards electric demand in Spain, it's gone down by 1%. We should underline here that our portfolio, commercial business portfolio has been flexible enough and commercially minded enough to stabilize our economic financial results.

 We must now talk about the situation of the tariff deficit. Unfortunately, as regards the situation for the last quarter, there's been a 12% reduction in access charges for the fourth quarter, and this is a step back in the reduction of the tariff deficit. That will add an additional deficit of EUR800 million in 2012. So the financial mismatch for the industry in 2011 will be EUR3.1 billion. If no measures are taken, it will be difficult to achieve the tariff deficit target for 2012. Urgent measures need to be implemented to cut the tariff deficit in order to keep things -- to curb the tariff deficit and to keep the balance. It's urgent. And we are not alone in demanding this. Urgent measures need to be implemented and taken to, as I've said, to curb the tariff deficit. Especially as regards renewable energies, higher cost renewable energies, we need true reasons to justify what we need.

 And we need a moratorium so that the problem doesn't get worse, especially as regards to technologies that are completely outside of the market in terms of what they cost. It's absolutely vital that the CO2 revenues or rights be auctioned and measures be taken for the payment of the renewables bill. And we think that allocating CO2 revenues for the payment of the renewables bill is very important.

 And finally, we have to urgently not only decrease -- not decrease but increase access charges for energy. These are urgent measures. And we hope that they'll be addressed as soon as possible.

 In terms of the regulatory situation, another thing is that there is an absolute need for capacity payments to be made. Often people talk about the externalities, as they say, the external negative -- external circumstances associated with traditional forms of energy. But the same applies and is often even worse as regards to renewable energies which is subsidized very significantly to cover up lack of capacity when there's no wind or no sun, which are circumstances that come up quite regularly. So the backup of the system requires an excess cost, and we hope that soon that will be addressed by the government.

 In fact, it seems imminent that they're going to setup some kind of measure to palliate this or do something about this mismatch and this tremendous disadjust. And renewable energies are very costly, and they need constant backup by -- with conventional energy sources. So it's urgent that all this be taken care of.

 If we go into further detail and talk about production of electricity in Spain, as I told you, the sector, the industry in general has had a decrease in generation of 2.3%. But in spite of this, generation production in Grupo Gas Natural Fenosa has not been reduced but has increased by 2%. And here I'd like to underscore that there has been less rainfall and together with the lower wind intensity, thermal generation in the Group has grown more than 8% compared to the previous year. Our own generation pool in combined cycle has decreased by 2% due to the disposal of [Ruble] and planned event. For different reasons, for competition reasons we have to divest.

 But the rest of thermal technologies, coal and fuel, have increased by more than 6 times due to the different measures adopted by the government that have promoted the use of coal. So all in all our Group has grown by 2%, whereas in the rest of the country the decrease was about 5%.

 Business margins have been lower due to the increase in pool. This phenomenon explains why we've seeing a substantial reduction of EBITDA because pool costs have increased but our client portfolio due to the fact that they have one, one-and-a-half year of maturity while it takes a while for electrical power to catch up.

 So that is why we're now in a situation where the increase of raw material cost takes a while to be transferred to the market. That is why our electricity generation business has had a decrease in EBITDA compared to the previous year. But we're convinced that commercial management of the portfolio will compensate for this fact in the next few quarters.

 Now, when it comes to the special regime, we're growing. We have a growing presence in this business, especially in wind and mini-hydro which is -- which are the two technologies that we have greatest hopes in. And here we have acquired almost 3 megas from ACS -- sorry 96 megawatts from ACS.

 And the production of renewables, in spite of this, has decreased by 3% due to hydro and wind reasons. But co-generation increased by 3%, and that is why our EBITDA is close to EUR100 million with a 10% increase. All in all, Gas Natural Fenosa has consolidated itself as the significant operator in renewables, thanks to the development of those technologies that I just spoke about.

 Now for the gas business, commercialization of gas reached almost 180 megawatts hour an year, which means a drop of 1% in the Spanish market. But this was compensated by a substantial increase in our foreign operations. So total demand has remained stable even though in the domestic Spanish market there's been a drop of 1%. The reasons are sales to the residential segment which decreased due to temperatures and also some of the divestments that we had to make. And also we sold less gas for generation. This decrease was about 6%. That is why all in all in the Spanish market we've had this 1% drop, but our sales in the international market went up by almost 20%. So this compensated for the rest of the portfolio.

 I have to insist on the good behavior of sales to the industrial segment, both nationally and of Gas Natural Fenosa. In the case of Gas Natural Fenosa, our sales to this segment, to the industrial segment have increased by 8%.

 As I told you, internationally we have grown quite spectacularly. But I'd like to say that these are not trading transactions, no. We're talking about stable permanent operations with stable contracts made in long-term contracts with stable clients. That is why we've had a 19% increase with good margins which are compensating for the ups and downs and tensions that we've had in some markets.

 Our presence in Europe is very strong. We're opening more and more commercial offices in order to attract stable clients. This together with our methane carrier fleet, the flexibility of our portfolios' provisioning contracts has allowed us to expand our activities to new markets such as South Cone and the Far East amongst others.

 I want to say that this is not an opportunistic thing. No, quite the contrary. The idea is to place our provisioning portfolio in the best possible terms and conditions.

 Now, if we talk about Union Fenosa Gas, the Company that we own 50% of together with ENI, well, the sales have remained more or less the same in Spain, although internationally there's been a decrease in business. In spite of this, EBITDA during this period has grown by 23%, thanks to higher margins.

 Now, when it comes to infrastructures, the liquefaction plant has had 34% more volume. And the Sagunto regasification plant has produced 16% less than last year.

 Now, talking about Spanish retail business, our idea is to maintain it as a factor to compensate for other risk. And the number of contracts has increased by 2% in spite of a crisis. And what's more striking is that the number of maintenance contracts has grown by a 100%, electricity and gas maintenance contracts, which are a good way to lock-in our clients. This will allow us to maximize the value of our customer portfolio and keep them stable at such volatile periods like this.

 When it comes to Latin America, I've already told you the situation in distribution, how EBITDA has come down in distribution. One of the reasons is currency disparity. As you can see, the evolution of this currency vis-a-vis the euro has been toward depreciation. Dollar, Colombian peso and Mexican pesos, all of them have been depreciated.

 In the next chart you'll be able to see what's happened with EBITDA in Latin America. EBITDA in Latin America last year during the first nine months reached to an amount of EUR958 million. Divestments in combined cycle in Mexico and Guatemala has had -- have had a negative impact on us. That is why we have to deduct EUR51 million. And here we should also note that there has been a non-recurring tax measure in Colombia which had a negative impact of EUR55 million (sic -- see slide 35). That is why in comparative terms we're talking about EUR851 million of EBITDA for last year.

 Now, for exchange rate reasons we have EUR25 million less. And in the region, there has been an increase in activity of EUR38 million, a 1.5% increase. And this together with the above-mentioned factors, the special rate in Colombia, disposal of assets and exchange rates, that is why we have this negative number that I mentioned before and which is the one that you can see in the balance sheet. At any rate, we're still optimistic with regards to our investments in Latin America. We're fully convinced of the stability and fairness of our businesses in the Latin American area.

 And now when we talk about distribution in Latin America, which is regulated both for gas and electricity, we can see that it has grown continuously. We are now at 5.8 million points of supply and a joint EBITDA for the business of EUR681 million. We're talking about a regulated business in gas and we're talking also about improved service quality in the case of electricity. We see a high potential of growth especially in gas in the Latin American area, particularly in areas like Mexico.

 Now, when it comes to electricity generation, we have commissioned a plant in Durango as a PPA, a 25-year PPA. This was commissioned in August 2010 and send its -- sells, sorry, its output to the Mexican CFE. We can see that this has been a very interesting move.

 Here I'd like to mention our asset work. We have continued to build higher-efficiency combined-cycle plants. That is why we have had an EBITDA of EUR183 million which is almost the same as that of the previous period.

 And now having said this, let me move on to conclusions. We're quite happy with what we believe are good results in a very complex environment, in a very difficult period. EBITDA, in spite of everything, has grown by 0.5%. Recurrent net profit has grown by almost 12%. And our financial structure has become stronger with a 13% reduction of our net debt.

 All of this shows and proves the soundness of our business model which has strike on the right balance between regulated and deregulated gas and electricity businesses. We continue to be involved and we continue to focus our efforts on the achievement of the strategic plan 2010-2014 with very important landmark for the year 2012. You can see these landmarks on the slide. And we're fully committed to achieving these targets. We want to achieve an EBITDA greater than EUR5 billion, a net profit of about EUR1.5 billion, a net debt between EUR15 billion and EUR16 billion and the net debt ratio over EBITDA will be 3 times, all of this with very attractive shareholder retribution, maintaining our dividend policy.

 That is all I wanted to tell you. And now if you have any questions or comments.



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Questions and Answers
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Unidentified Company Representative   [1]
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 Very well then. We will start now taking questions. We will start with questions from the floor. Whoever takes the floor please mention your name and the institution that you come from.

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 Jorge Alonso,  Societe Generale - Analyst   [2]
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 My name is Jorge Alonso from Societe Generale. I have several questions. One is about gas commercialization or sales. Could you tell us more details about margin evolution in for the Iberian Peninsula and the rest of the world where there has been a strong increase in volumes? And also what do you expect is going to happen with margins in Iberian -- what do you think is going to happen with volumes in those other markets?

 The next question is about wind plants, wind power plants. I saw what your opinion is about the new plants, and I'd like to know how your investment plans could change.

 And the other question is about dividend policy. Again you said you're going to maintain your dividend policy, but I'd like to know whether there's a delay in securitization of deficit. Will you maintain the same dividend policy? Will you increase your payout? Will there be a change in CapEx?

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Unidentified Company Representative   [3]
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 Well, when it comes to the evolution of a gas market and its margins, well, yes, it's true that in 2010 we had very low margins in the Spanish market. Margins have improved, but they're still not as good as they should be and we expect them to be in the near future. So we hope next year we'll have better results, better margins.

 At any rate, the truth is that in the Spanish market, the different players have learned to operate in the Spanish market. So past surplus supply is something of the past. Now the different players have learned to take that supply to other markets. So we no longer have excess supply.

 Markets outside of Spain are very much influenced by the different things that have happened throughout the year like the nuclear crisis in Japan, et cetera. But all in all we believe that we can expect an improvement in margins in both markets, an improvement in energy in general and in natural gas particularly, both in Spain and outside of Spain.

 When it comes to volumes, it would be reasonable to see an increase in residential markets because the climate conditions of last year were exceptionally negative, and we don't expect them to be the same this year. Now, the Spanish market has grown by 6%. We've seen this growth for more than 12 months although we started from a very low basis, but we believe things are going to get better. And when it comes to gas for electricity, we don't think there are going to be huge increases. Probably the situation will remain the same. This year the decision of the government to give priority to the national coal has had a negative impact, and I think next year things will get better.

 Now talking about wind plants, wind power plants, well, here I'd like to share with you my surprise because of some contradictory policies which I'm sure will generate changes in the way the industry is regulated. On the one hand, they're working on some plans that will reduce retribution to the wind sector, but on the other hand the renewable energy plan will increase solar generation.

 And I'm unable to understand this contradiction. Wind power, which is a renewable energy, has a cost two times less than solar power. So it seems a contradiction. In view of the financial situation of the industry, it seems a contradiction to promote solar power which costs so much and with the current problem of tariff deficit and at the same time give reverse or negative incentives to wind power which is so much cheaper in terms of cost.

 So this contradiction we believe will be noticed sooner or later, and I'm sure that the government will reconsider those premia and will give less emphasis to solar power because we're having a bumble here. And these additional costs are having a huge impact on tariff deficit and on tariffs themselves. So we believe that this is a situation that the government is going to have to face because it's a contradiction. It doesn't help achieve our goals of climate policy, but it doesn't help stabilize the systems through effective tariffs.

 We believe this cannot continue like this, and I'm sure there will be a more sensible regulation, not only from an environmental point of view but also for the economic and financial sustainability of the system.

 When it comes to the dividend policy, our goal is to maintain our policy and continue with our commitment with a 10% increase in absolute terms. This is our commitment and we maintain it from now until the year 2014. So we're going to work with all the instruments we have available, I mentioned some of them, as many instruments that we need to use to comply with our dividend policy.

 If the debt is now at 17, we are talking about EUR1 billion more or less. Without taking into account the tariff deficit, our debt is more or less at that level. So we don't think we're going to have to do anything else.

 Any further questions from the floor?

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 Pablo Cuadrado,  Bank of America Merrill Lynch - Analyst   [4]
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 Good morning. I'm Pablo Cuadrado from Bank of America Merrill Lynch, and I have several questions. The first one, going back to the dividend issue you already mentioned, could you tell us whether you have made any decision to maintain the scrip dividend? I'm sure you haven't discussed this yet, but could you give us some indication?

 And another technical question about tariff deficit. You said that you expect to end the year with about EUR3.1 billion for the whole of the system. I would like for you to clarify whether you are aware that in order to reach the EUR3.1 billion, capacity payments will be transferred to the companies and will not make deficit smaller.

 I also have a question about the balance sheet or cash flow rather. I saw some working capital moves, pretty strong moves in working capital. Could you tell us something about it?

 And finally, when it comes to renewables and tariff deficit, et cetera, could you give us more details about what could be the amount of money that the industry could get by auctioning those CO2 emission rights? And thanks to that, how much deficit can be eliminated in that way?

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Unidentified Company Representative   [5]
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 Very well. As far as your first two questions, we haven't made any decisions on scrip dividends. Usually in November we decide at the Board what's going to be the dividend to be paid, and at the end of the year the final decision is made. But there's no -- we haven't done any analysis or had any discussions to date.

 Now, talking about tariff deficits, the ministry expected to pay on the basis of capacity. We've heard that the draft is now being processed. So probably quite soon we will understand what the impact is going to be. Those amounts were already contemplated in this EUR3 billion, EUR3.1 billion, EUR3.2 billion deficit number. So there should be no change.

 When it comes to the other two, my colleagues will help me now.

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Unidentified Company Representative   [6]
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 Yes, when it comes to cash flow, let me remind you that in August we reached an agreement with Sonatrach and paid the amounts. Well, until now we have talked about provisions. Well, now we have to make some payment. So basically this is -- well, the main move is the -- well, that's the number compared to the working capital movement that we had before.

 It's true that we have to see what are the CO2 rights available to auction. I wouldn't be able now to tell you what the volume is. Do you have any idea? 1,000? But please, it's a very random number, but we have to see what's going to be the distribution, the allocation and what's the capacity of the government to act upon that.

 Next question from the floor.

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 Javier Garrido,  JPMorgan - Analyst   [7]
------------------------------
 Good morning. My name is Javier Garrido from JPMorgan. To continue with Pablo's question about cash flow, could you say something about where you're going to be able reconcile CapEx with payment to suppliers? I know this is a seasonal item, but this year there is significant increase, and I'd like to know what is included there and why is such divergence vis-a-vis the evolution of CapEx and whether you could give us some idea for next year.

 Well, the second question is about Colombia. It's true that you've included different taxes here, but in spite of everything the evolution of Colombia and distribution of gas and electricity from my point of view is surprisingly small. So I'd like to know whether there has been any element that has brought about some change and whether the decree that was adopted for winter measures has had any impact. Could you tell us something about margins in Colombia in the future?

 And then a third question about the gas commercialization business. Could you please tell us whether you expect to reverse the provisions that were made due to the agreement with Sonatrach? Will these provisions be the necessary ones or will they be revised?

------------------------------
Unidentified Company Representative   [8]
------------------------------
 When it comes to the cash flow, there is nothing ordinary there. We'll give you some more information.

 The most relevant thing that might be happening here is that because of the financing where payments can be included, well, there is nothing extraordinary there. What's going to happen throughout the rest of the year? Well, the last quarter usually is low in payments, high in investments and low in payments, and somehow this should reflect, at least this year, it should -- well, but nonetheless I will send you a quotation, but it will just show that last year we paid such and such and so that's all I can do. But there is nothing extraordinary that can tell us that we're paying earlier, nothing like that.

 When it comes to the third one about provisions, we mentioned this last year. When we made a provision, an ordinary provision, this is the agreement that we reached. So at that time provisions were the ones expected and the ones that include the agreement with Sonatrach. So we don't expect to have neither a positive nor negative impact. So that's all.

 Now, as far as the situation in Colombia, we are as optimistic and as happy as we were before with some new answers. There has been a problem with volumes because of the climate here, because of the El Nino and La Nina which also affects the gas business. But Colombia is still growing. In terms of gasification of the Bogota area and with the exception of climate irregularities, there is no other problem.

 We believe that, well, the area of the Caribbean is the one that is recording the highest increase in activity, and we hope that next year we will again take higher speed and will grow more in the Caribbean area. But there is no substantial problem there. It has to do with sales and seasonality. Last year there was some El Nino, La Nina storm.

 The extraordinary year was the previous one, and this -- and as far as electricity there is another phenomenon, the disaster in the electrical sector gave rise to a series of transactions being stopped or halted. The disaster in the Caribbean area was huge. I never know whether it is El Nino or La Nina, but it caused some consumption problems, but no substantial ones.

 Any further questions from the floor?

------------------------------
 Alejandro Vigil,  Cygnus Asset Management - Analyst   [9]
------------------------------
 Good morning, I'm Alejandro from Cygnus Asset Management. I have a couple of questions about CapEx and acquisitions. What's your forecast for CapEx for 2012? And seeing that you are achieving your targets in terms of de-leveraging and debt, what are your targets in those two areas?

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Unidentified Company Representative   [10]
------------------------------
 Well, Carlos will give you more information about CapEx. But in our strategic plan we mention two things. First the financial situation should be the right one, and secondly, there should be opportunities. If the financial situation was the right one, we could take advantage of some opportunities and invest more. We're now focused on achieving our target for 2012 which did not include any special growth investments.

 As of 2012, if in our markets we see a situation of growth, sustainable growth which justifies an investment, we will look at that opportunity. But we're not going to do anything until that happens. We -- our goal is still to comply with the strategic plan for 2012. And once we see that our financial situation is stable enough we will invest and we will make decisions as we go.

------------------------------
 Carlos Alvarez,  Gas Natural Fenosa - CFO   [11]
------------------------------
 Now to reply what you asked, strategic plan for 2010 to 2012 without those additional investments, we were going to invest 1.8 per year. In 2010 it was slightly below. 2012 we were clearly below, would be about -- be quite a bit below the third quarter. There is more, always more investment until it's paid the last year, but that's where the level will be. And for 2012 I think that will be at around average. What we won or made, we're not going to invest everything. The excess in 2012, in 2012 it's going to be around the average value.

 Another question?

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 Antonio Cruz,  Banesto - Analyst   [12]
------------------------------
 Yes, good morning. My name is Antonio Cruz, from Banesto. I wanted to ask you, I've looked at the programs, the electoral programs on the table right now, and it surprised me to see the popular conservative party program talks about making Spain a natural gas reference market in the Mediterranean. Have you had the chance to figure out what that means?

------------------------------
Unidentified Company Representative   [13]
------------------------------
 Well, no, but it makes sense in the sense that the south of the Europe, Mediterranean in general, Spain in particular, is the high traffic, gas traffic and gas consumption area, has pipelines, it has the greatest re-gasification possibilities in Europe. There the market is still growing. And except for storage facilities we've got everything in the south of Europe. There is no strong market. And the Iberian Peninsula, because of the geographic position and its consumption, could be that strong market.

 There is ideas of setting up a harbor, secondary market, and also promoting the connections with France thorough the west and eastern and access connection, these are valid ideas, and we hope that they are -- they bear fruit in the next few months.

------------------------------
 Antonio Cruz,  Banesto - Analyst   [14]
------------------------------
 Could the -- we've also got -- when we think about -- we'd like to know about your perception as regards energy infrastructures 2012 to 2020. What do you think about the program that we had at the end of August, beginning of September, whether we can use that as a reference that draft plan, or do you think that if there's a change of government there might be significant changes in that respect?

------------------------------
Unidentified Company Representative   [15]
------------------------------
 Well, I was referring to that before. As regards planning for the electrical sector -- electric sector, I think that we're going to need significant changes if the energy, renewable energy plan is simply approved which the ministry had prepared as a result that there'll be investment in sun energy basically of such magnitude that subsidies needed for covering the tariff deficit -- for covering the tariff deficit and other problems are not sustainable. So I'm completely convinced that given the real, the actual situation and perspectives, it's going to be indispensable while maintaining the Brussels objectives to act in different ways more efficiently economically.

 Our opinion is that we need to be sustainable environmentally, but the current system is not economically sustainable. We'll have to work along both lines, and that's possible. For instance, instead of incentivating energies that cost 10, 12 times what conventional energy costs, we could incentivize wind energy without having these tremendous costs with much cheaper technologies.

 Another thing is I'm convinced that we'll have to look at this more in depth. And not just because it's a matter of opinion, political opinion, no, it's nothing to do with that. The economic aspects are so important that we're going to have to take measures. And we think that we can and we should, must and we should take these decisions without forgetting about environmental aims.

 Any other questions in the room?

 No questions in the room. Well, then we'll go to the questions sent in or made by telephone. We'll start with the Spanish questions.

------------------------------
Operator   [16]
------------------------------
 Bruno Silva, BPI.

------------------------------
 Bruno Silva,  BPI - Analyst   [17]
------------------------------
 Thank you for allowing me to ask this question. It's a follow-up to Alexandro Vigil's question. Could you give us more details, more specific details in strategic terms about what's happening in Spanish America, Brazil, some information that -- there's news that there are attempts to consolidate the market non-regulated activities. Does it make sense, would it make sense for you to look for greater integration on that market and participate in that strategy with some other player?

 And secondly, could you comment, could you tell us what you think about the renewable energy business, whether it makes sense to you to integrate the capacity that you have today within greater initiative, larger scale initiative? Thank you.

------------------------------
Unidentified Company Representative   [18]
------------------------------
 I understand that you're referring to the consolidation in electric distribution more than the part that has to do with gas distribution. We must remember that today in Brazil we are present in gas distribution and some sales of GNL, liquid gas -- natural liquefied gas. We're looking at the market to see whether there might be opportunities in electric -- electricity generation, but we haven't yet participated.

 I would say that we have projects about -- for renewable energies. We don't require financing today to increase our scale and finance the projects that we have ready. We got projects in Mexico and Australia which we hope to get going in the next few years.

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Unidentified Company Representative   [19]
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 Good. Next question.

------------------------------
Operator   [20]
------------------------------
 Javier Suarez, Nomura.

------------------------------
 Javier Suarez,  Nomura - Analyst   [21]
------------------------------
 I have three questions. One is about CapEx, what you said about -- we've seen in the result the CapEx is reduced, has gone down significantly in the first nine months of the year. I understand that this in 2011 refers especially to expansion CapEx. But you've mentioned the possibility, you've said that you might reduce the coverage by EUR200 million. The question is what does this have to do with specifically? Because I don't think that's reflected in 2011, CapEx values for 2011.

 The second question is as regards the royal decree for domestic coal, could you tell us what effect that has had on the Company this year?

 And the third question is going back to the working capital. I'd like to ask you whether in addition to the payment to Sonatrach and the increase of the tariff deficit is there any kind of deterioration associated with the macroeconomic situation in Spain. Thank you.

------------------------------
Unidentified Company Representative   [22]
------------------------------
 Well, as regards to the CapEx what we were saying about investments as an absolute value, there's a decrease as regards to the previous year. But if you look at the two most stable in terms of investment businesses, that is gas distribution in Europe and electricity distribution in Europe, in both cases the increases in investments are significant. So investment as a whole or the most stable investment is increasing. When we mentioned and said that that increase bears in mind the fact that we've had synergies in parts of those investments, that means that those increases would have been less -- sorry, higher, had we not applied synergies to those investments.

 The other chapter that we've got to bear in mind which is probably more relevant when you look at why investments are going down is that the plan for combined-cycle plant construction has finished. In Spain, Malaga, Barcelona were the last plants to be built in Spain, and then the one in Durango, Mexico are finished. So that completion leads to a situation as compared to last year the investments that we don't have this year. But that's where you see the drop in CapEx as regards to the previous year. But there's also an effect of synergies. The generation plants have benefited from those EUR200 million that have resulted from synergies in CapEx management associated with our generation infrastructures. There's been notable growth in regulated business and a decrease in the others, but that's because of the generation infrastructure reduction.

 The third question about working capital, I would say that initially the effect -- I would say that it's true that there is an element that had to do, the previous year we had -- some problems that had to do with the normal industrial business. Without being insignificant, we had a volume of accounts or pending amounts that were -- a series of pending amounts that was higher, and also there's also the weather problem or the weather situation which led to less residential consumption. But this has become stable right now, there's no negative aspect to this.

 But what has increased, and you know this, debt with the public administration has increased slightly. So -- but it's not -- if you compare one year with the other, I would say that there's nothing relevant as regards pending debt. What is relevant when you look at the analysis of the working capital has been payment to Sonatrach. That's what's affected the accounts, but that's not going to happen again because that's completed.

 As regards coal, domestic coal, the effect is clear. There is -- the domestic coal is incentivated. We've got national coal plants that have worked, operated much more energetically than last year, and that has affected the combined-cycle plants which have produced less. We have covered the gap quite well due to the flexibility of our contracts, good conditions and good placement geographically of the plants. And that has allowed us to have the level of deterioration which has been less bad than our competition. So we have worked, our combined-cycle plants have worked less hours but more than the competition and many, many more hours of operation of our coal plants which are subsidized for using domestic coal.

 Good. Let's go to the next question.

------------------------------
Operator   [23]
------------------------------
 Jose Javier Rui, Exane.

------------------------------
 Jose Javier Rui,  Exane - Analyst   [24]
------------------------------
 Good morning. Thank you for accepting my questions, I've got couple of them. First of all, could you give us the coverage ratio of production for 2012 coverage ratio?

 And the second, it seems that at the beginning of the presentation you were suggesting that you are getting closer to an increase of your debt rating. I just wanted to confirm what that was about.

 And finally, I'd like to know whether you could help me understand how you're going to reach the objectives for 2012 in terms of net profit and EBITDA because for two years you've been investing below the average value that you'd mentioned. I don't know whether you're going to announce more cost reductions. As regards to gas prices that's not benefited you too much either. So how are you going to jump ahead from 2011 to 2012? Thank you.

------------------------------
Unidentified Company Representative   [25]
------------------------------
 Well, I'll start with the last question. I don't understand what you mean when you refer to the price of gas. Gas prices are a factor that comes into play and is actually making the market grow or increase, the prices are increasing. And we were satisfied. We said the last time as regards Sonatrach that one of the key points of the, one-third of our portfolio of the contract was such that in competitive conditions we could market that gas. So there is no special problem there. We believe that the -- what -- that the data for 2012 will be achieved exactly by applying this strategic plan. We trust our synergies, those EUR200 million in CapEx, 1.8, 1.6 in consistent conditions. We expect also to be more -- in more efficient conditions to benefit from scale economies and many of the things we've done. And we hope that recovery, although very slight recovery, the markets helps us.

 The international gas markets are growing in our area tremendously, 19%. These are final customers not trading operations, so that will continue. And in the Spanish market, except for gas, for electricity, the residential market we have will go up as a result of the weather and industrial market is also on the increase. So there is not going to be many great new things next year.

 And in electricity there will be a reestablishment of the margins because the pool cost increase will transfer itself to the portfolio as we move along. So that pieces are in position so that if we continue along these lines in 2012 we'll achieve what we had foreseen, and we're committed to that.

 As regards to the other questions, the coverage ratio is about 50%. And the rating you mentioned in the short term, we spoke about this at last meeting. Next year, I think if we think about the second half of next year, we got to see our rating evolve positively, I think. Before that I don't know. We've got to continue to work internally and show the evolution of our metrics every quarter. And then we will see how the rating companies rate us. And we're talking about that by the end of next year we will probably consolidate a better situation as regard to that rating.

 Good. Next question.

------------------------------
Operator   [26]
------------------------------
 No more questions.

------------------------------
Unidentified Company Representative   [27]
------------------------------
 In English. No questions. Well then, I don't know whether there are anymore questions in the room. Good, let's see. We've got a question here. Yes.

 Just received these questions, they've come in by e-mail, some of them have been answered. There is one of James Barrow about Sonatrach asking about the Sonatrach operation, the payment.

 Well, the payment we -- when we announced the agreement the payment was made in the next few weeks. I think at the meeting in July we said about this. I think it was in the next few weeks. I can't remember whether it was end of August, beginning of September we made the payment. At that time everything was retroactive, everything went on until the end of the process, May, plus the other bills that are coming along with the new prices, so it all accumulated when we paid, when it was -- had to be paid. And all that's being liquidated. All the invoices issued by Sonatrach have been honored. And now we honor payment in accordance with whatever comes in.

 I see that the rest of the questions have already been replied to during the presentation. So if there are no questions we can finish the session. I'll pass the floor to our CEO.

------------------------------
 Rafael Villaseca,  Gas Natural Fenosa - CEO   [28]
------------------------------
 Good. I just want to thank those of you who've been here or have followed us remotely. Thank you for your interest, and see you next time for the end-of-the-year result. Thank you very much.

------------------------------
Editor   [29]
------------------------------
 Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.




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