Q4 2011 Gas Natural Sdg SA Earnings Conference Call
Feb 21, 2012 AM CET
Thomson Reuters StreetEvents Event Transcript
E D I T E D V E R S I O N
GAS.MC - Gas Natural SDG SA
Q4 2011 Gas Natural Sdg SA Earnings Conference Call
Feb 21, 2012 / 09:00AM GMT
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Corporate Participants
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* Luis Calvo
GasNatural Fenosa SA - Head of IR
* Rafael Villaseca
GasNatural Fenosa SA - CEO
* Carlos Alvarez
GasNatural Fenosa SA - CFO
* Antonio Basolas
GasNatural Fenosa SA - MD, Strategy & Development
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Conference Call Participants
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* Pablo Cuadrado
BOFA Merrill Lynch - Analyst
* Jorge Alonso
Societe Generale - Analyst
* Manuel Palomo
Citigroup - Analyst
* Alejandro Vigil
Cygnus Asset Management - Analyst
* Fernando Garcia
Espirito Santo - Analyst
* Isidoro Del Alamo
BBVA - Analyst
* Javier Suarez
Nomura - Analyst
* Jose Javier Ruiz
Exane BNP Paribas - Analyst
* Virginia Sanz de Madrid
Deutsche Securities - Analyst
* Anna Maria Scaglia
Morgan Stanley - Analyst
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Presentation
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Luis Calvo, GasNatural Fenosa SA - Head of IR [1]
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(Interpreted). Good morning. Welcome to the presentation of results of GasNatural Fenosa for the fourth quarter of 2011 by Mr. Rafael Villaseca, our CEO, accompanied by the CFO, Mr. Carlos Alvarez, and the person responsible for development, Mr. Antonio Basolas.
After the presentation, we'll have questions and answers. We'll begin with the people in the room, and then we will continue with the people that have followed the presentation on the Internet or via telephone.
I'm going to pass the floor to our CEO, Mr. Rafael Villaseca.
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Rafael Villaseca, GasNatural Fenosa SA - CEO [2]
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(Interpreted). We need the sound, please. Thank you. We've lost the sound. I will repeat. Good morning.
We'll begin with the first highlights. Then we'll talk about a stronger capital structure that we have. Then we'll speak about Spanish electricity regulation. Then I'll talk about the consolidated results for last year, and then I will analyze the different operations. And then there will be conclusions and questions and answers.
Without any further ado, let's go to more relevant issues. We have generated net income of -- which has reflected a growth of 10.3%, up to EUR1.3m -- EUR1.3b, in spite of the fact that in 2011 we've had less surplus value than the previous year. Secondly, the EBITDA has reached the figure of EUR4.64b. That is a growth of 3.8% as compared to the previous year, in spite of disinvestments.
Thirdly, investments have decreased by 8.9% -- we'll analyze this in detail -- and have gone down to EUR1.4b, within the lines of our strategic plan. And finally, on December 31 of last year the debt figure was 9.5% less than the previous year, that is, EUR17.3b. So we are continuing with the reduction of debt that we had become committed to.
Our good result of the Company, whose profits after tax have grown by more than 10%, is due to three reasons -- activity in South America, which we'll go into later; good progress of the natural gas market in the world; and the application in 2011 of the synergies resulting from the integration between GasNatural and Fenosa. We'll talk about the three topics in detail.
Also, we have to talk about the shareholder remuneration policy and underline two relevant issues, questions. The first is an excellent stock market behavior in 2011, in spite of the volatility and difficulties of the market in our sector and our Company. Whereas the utilities -- European utilities have gone down on the stock market by 23%, GasNatural Fenosa last year grew by 15%, more than 15%, in fact. We've grown almost 40 points as compared to average European utilities.
Secondly, in terms of shareholder remuneration and in accordance with our strategic plan, we will apply a payout of 61.8%, which will be approved by the shareholders. And that will give a profitability of 6.2% per dividend. So the dividend will, all told, go up to EUR221m (sic - see presentation), which is an increase of 10.7%, in line with the increased profits.
This dividend will be paid out -- has partly been paid out last January, and will be complemented with a dividend in the form of shares -- a scrip dividend, if it's approved by the general shareholders' meeting.
We would now like to look at the main factors that affect the soundness of our financial structure, and first of all I have to talk about our debt.
As we have said now for some time since we launched the plan, the reduction of debt and the strengthening of our financial structure -- our financial discipline was a basic un-renounceable objective, and it has continued to be so in 2011. So our debt has dropped by EUR1.8b and has reached a figure of EUR17.3b.
Thanks to what? Well, basically, to our ability to reduce -- to generate positive structural cash flow. Our Company has cash flow resources which are positive. Secondly, as a result of the sale of assets, less than other years, and we've continued to sell assets that have given us significant figures to reduce the debt. Also because of the securitization and the collection of some amounts related to the electric tariff deficit, and also thanks to the scrip dividend that was subscribed by very -- practically all our shareholders. And finally, also because of the increase of capital subscribed by Sonatrach.
So this has strongly -- this has significantly strengthened our balance, so the ratio of debt to EBITDA is 3.7 times. And if the tariff debt disappeared -- we've still got about EUR1b -- it would be 3.5. All that within our strategic plan, and continues to be one of our main priorities and policies in terms of the operation of the Company.
We also have to add the proactive asset management we've developed. There's been a decrease in investments. We will see why, basically for two reasons -- the end of the combined cycle plant program in Spain and Mexico and the application of synergies.
CapEx synergies have been very significant. They've been applied to all chapters of annual recurrent investment, and they mean hundreds of millions in savings every year. But we are still investing in our regulated businesses, which especially in South America are leading to higher rates of growth within the policy of investing by maximizing our return and shortening the maturing periods.
Also, we must remember that the disinvestment plan we had was for EUR3b, and we've disinvested in this period since 2011 EUR5b, EUR2b more than those EUR3b that we'd said. We've lost EBITDA, obviously, as regards those assets, but we have complied with our growth objectives. So I think that the portfolio management has been adequate and has been in line with what we had agreed and told the markets.
And in terms of securitization of tariff deficit, we'll talk about this more in detail. We have to say that the end of 2011, last year, therefore, throughout the last -- the year, GasNatural Fenosa had collected EUR1.17m (sic - see presentation) as a result of securitization through five bond emissions and several private placements by FADE. At the end of the year, we had to securitize -- we still had to securitize EUR1.23m (sic - see presentation), which included what had been generated throughout 2011.
So far this year, the Company has collected EUR259m. So we can say that at this time the amount that is pending to collect in terms of tariff deficit is about EUR1b.
If we go back to strengthening -- the significant strengthening of our own resources, of our equity, this has been strengthened by the increase of 10.3% in our profits after taxes. And we should also remind you that the scrip dividend also strengthened this. As I said before, it was 96% of our shareholders who went positively to collect this in the form of shares. That meant about EUR400m, to which we have to add the over EUR500m from the increase of capital of Sonatrach as a result of the strategic arrangement that we subscribed with that company that provisions us, or supplies us from Algeria.
That obviously leads to an increased equity and a positive impact of about EUR1b. That -- the great success last year in terms of the scrip dividend policy has encouraged us, the Board, to propose to the GSM once again that this second part, optionally, can be also collected in shares.
Here, we have to point out that we have a debt structure that makes us feel comfortable. And the way of looking at this is looking at three figures. The first, 70% of our debt is fixed debt; by the way, very competitive. Secondly, 84% of our debt is in euros. And thirdly, our debt depends more and more on the capital markets and less on bank financing, so 53% of our debt is directly financed through the capital markets. This lack of bank intermediaries gives us a very advantageous situation and avoids the tension in traditional banking markets.
As regards the costs of funding and debt, here you can see that the cost of debt that we have, which is extraordinarily competitive, the average cost of debt in 2011 was 4.3%, and has increased only by 0.1% as regards the previous year, 2010. This average cost is lower than that of other companies in our industry that are given ratings that are better than ours even, and in spite of the fact that that 4.3% includes interests in Latin American currency which involves debt for our subsidiaries in that continent. So our debt profile is really very, very -- compares very favorably with that of our competitors.
We should say that since June 2009 our Company has issued more than EUR9b on the market capitals (sic), with an average cost of 4.2% (sic - see presentation) and an average life of more than seven years. In January this year, as we told the markets, we issued an oversubscribed, overwrote EUR750m.
And all this, the low level of our debt and our stability, have led to a situation where, at this time, the CDS of the GasNatural Fenosa debt is quoted below that of comparable -- companies with much better ratings. This is a key issue. All the solvency and financial structure and reliability of our financial position is a key goal that we will continue to pursue with energy.
If we look at the profile of maturity of our Company, this is the maturity schedule on January 1 this year. The maturity schedule is quite comfortable for us. 68% of net debt matures from 2015 onwards, and we're reasonably comfortable in this situation. Our needs -- financial needs are covered for 2012 and 2013. And it's important to point out that at the end of January we issued EUR750m in bonds on the European market. So, to the amounts that you see on the graph corresponding to 2012, we have to take away from that EUR750m.
As regards liquidity of the Company, we have a high level of liquidity and that has been recognized by the markets. We have a liquidity of EUR7.3b, which would allow us to cover -- completely cover our needs for more than 24 months. And the breakdown of this is EUR3.1b as -- in the form of cash, and the rest in loans that are available to us. And we should also add EUR6b in programs that are pending -- are going to be launched on the capital markets. That has led Standard & Poor's to give us our liquidity strong qualification. It's been qualified and rated as strong.
It's important to underline, when we talk about our position on the markets and our competitors, that it is clear that we enjoy a financial strength and a risk profile that is better than what our rating would seem today. We could talk about a lack, maybe, of homogeneity as regards other European utilities.
If we look at the coverage of net debt and the cost of liquid resources that have been generated, we see that our coverage ratios or hedging ratios are 20% and 5.5 times our financial costs, which should justify an improvement in our rating, which we hope, by the way, will occur.
And this is due to our sound credit profile, which is based on our sound business profile, a liquidity that is called strong, has been qualified -- described as strong, the fact that in 2011 we solved some problems like our conflict with Sonatrach and the evolution of wholesale markets. And I would like to insist that this policy is continuing. We're being very rigorous as regards our financial situation.
Let's now go to talk about the situation of the Spanish electricity regulations. I would like to begin to talk about the situation of the tariff deficit, which is a very significant capital problem that we know is being looked at by the current government.
It is necessary and it is good news to underline that the first quarter of this year the tolls of the -- access charges were increased by 13% for households. That happened after a reduction last year in the third and fourth quarters, a reduction which, as you know, has been invalidated provisionally by the Spanish Supreme Court.
However, unfortunately, that has led to a situation where last year the deficit, among other reasons, instead of being EUR3b will probably close at about EUR3.9b, and that in this current year, unless measures which I'm sure will be introduced by the government are introduced, might reach EUR4.2b. But we'll talk about that in a minute.
Also say that the Royal Decree Law of 1/2012, which was recently approved in January, basically will affect only those installations which will be in service beyond 2014, mainly. And therefore, it's going to be difficult for these positive measures that we agree with and we celebrate, will have an effect in 2012, 2013.
As you know, the Ministry is working, we know, very deeply and very rigorously on this issue and has requested a report from the National Commission for Energy which collected the opinion of all the involved parties to analyze measures. GasNatural Fenosa obviously worked and will continue to work to contribute ideas and collaboration to address this very significant problem. And we think, and they're not the only ones, we should talk about a reasonable increase in access charges.
We have to talk about a reduction of premiums to renewables, especially solar energy, maintaining or keeping the reasonable profitability which the Supreme Court talked about in three sentences. But it's obvious that for a sector like renewables, regulated renewable energies, the reasonable profitability criterion is not a free market criterion, as the Supreme Court said. We think that will have to be dealt with.
We also think that we should apply the measure of devoting, as from next year, the amount of the auctions of CO2, which until now have been free rights, although there have been problems in Spain. But anyway, after 2013, the auctioning off of those rights will give income to the system which should be applied to the coverage of those renewable energies.
And we think that the obligation of financing the tariff deficit is in the hands of five companies. We don't think that's reasonable, and that should be extended to cover all operators in the system.
We think that we should improve competitiveness on the retail market, and this should include measures like eliminating the [tour] that affects practically all the markets in Spain and go to a scenario as envisaged by the European Union.
The electric bill should be more transparent, with a clear explanation to customers of the breakdown of that bill. And finally, the costs for system interruptions should be reduced and made more consistent with other ways of paying for this, like, for instance, capacity guarantees.
These measures, we are sure, will have to be applied to the solution of a problem which we are sure the government is going to work on.
As I was saying, these are the figures that we might be talking about currently. The advance of -- closure of 2011, pending the final report in a couple of months from the National Commission for Energy, will be about this. The deficit will be at about EUR3.9b versus EUR3b that it should have been. And our forecast for 2012 is obviously, without including the measures that the government will certainly introduce to face this deficit, which will be about EUR4.2b, and to which the excess of the previous year should be added.
The aim of this graph is to explain to you what the costs of the system -- regulated system are that is leading to the deficit, and they're all here. Sometimes, when we debate how to solve this problem, we don't focus on the costs and the potential savings. You have it on this sheet. We've classified costs as our own and associated costs. Associated costs have to do with what has been applied to or loaded on the system, and which are a decision that should have been taken in other ways.
It's important to point out that the electric system carries about half the costs that are not costs of the system, and they are support to renewables, coal, support for capacity guarantee, system efficiency. That almost accounts for half, last year more than EUR8b. And when you look at costs, quickly, we could answer what the costs will really be that can introduce savings, significant savings. Obviously there's also the alternative of increasing the rates or the prices.
When we look at how things are going, we have to say that there will be a problem in 2012 as a result of the Special Regime by EUR1b. Whereas costs have been limited or contained to a certain extent, in accordance with the renewable energy plan that is being developed this year, 2012, we will probably have EUR1b more to pay. And that is going to cause a deficit that's going to go above EUR4b.
Also we have to point out that net payments -- capacity payments are negative. That is an income into the system. The reason is that, although significant amounts are collected to guarantee payments -- capacity payments, these amounts are then not allocated to capacity payments. They've been allocated to cover other needs of the system. And those are issues that will have to be regulated and borne in mind.
But when it comes to suggesting alternatives, I think it's very important to look at the actual costs that we have to bear in mind. And if we look at the costs, in my opinion, it's obvious that we've reached a conclusion that the tariff deficit is directly and inexcusably related to Special Regime premiums.
If we look at 2004, 2011, and therefore we compare the deficit with the impact on the electric system of the wind and solar energy programs, we see a correlation. And if in this period the deficit went up by 300% and Special Regime premiums went up by 400%, the reason is almost perfectly understandable.
And I think that if we look at the relation between the problem of the deficit -- this has to do with the increase of the subsidies to renewable energies as a way of avoiding the debate in depth and going to areas which will not give us a solution, because the problem, as you can see on this following chart, that in accordance with the recently published report by the National Commission for Energy, last year average costs of conventional energies that are sold to the pool was EUR48.52 per megawatt hour. And in the same period that this was the cost that conventional -- so-called conventional energy received. Solar energy got EUR371 per megawatt hour, photovoltaic, solar EUR392 (sic - see presentation), and finally the cheapest, wind, EUR88.
So the problem should be looked at from this point of view, by bearing in mind two things. First of all, the enormous imbalance in costs, whereas conventional does not reach EUR50, there are costs that are near EUR300 and EUR370 in renewables. And the second thing, this time the generation of EUR48.52 is stable, but the installed capacity in power is growing in photovoltaic and thermal solar energies. So unless measures are introduced, the production of cheap energy is going to be stabilized and the very expensive energy is going to grow.
In the face of this, some people say that the solution is not to reduce the costs from EUR370 and EUR292, but to reduce the cost of EUR48.52. And I think that that is frankly ironic, but especially it's wrong. It's impossible, because at some stage subsidized energy would not be eight or 10, it would be 15, 20 times, because they'll get rid of the cheaper technologies and subsidize the most expensive ones.
If we look at this graph cost -- cost graph, and we look at the volume increases, I think the situation becomes clear. And if we look at the next graph, we can compare why and know why. Why has this happened? It's happened because we have carried out -- we've developed renewable energies over and above anything that's been done in Europe, which we want to compare ourselves with.
In this graph made by the European regulator for energy, which is for 2009, the most recent one, you can see in the circles that the volume -- that's the volume of money that's devoted to renewable energies. And Spain devoted this year, 2009, EUR6.214b, the same volume that Germany, more or less, much more than other countries, of course. But Germany has twice as much as -- twice the production of Spain.
So Europe devoted EUR6.3 (sic - see presentation) per megawatt hour to renewables; Spain devoted EUR22.5, three times more. Now, if we devote three times more to renewable energies and their cost now, currently, is between six to eight times higher than conventional energies, it's absolutely obvious that energy in Spain is going to be more expensive than in Europe. There's no alternative.
We've got to think seriously whether we have not taken -- we've not overdone it with renewable energies in terms of our possibilities, because naturally the impact that this will have on competitiveness of our companies in Spain is obvious, because they're going to have to fight against an electricity which by definition, as a result of the effort that's been devoted to renewables, is much higher than the competitors. And the solution is not to reduce the conventional energy, because then we would arrive at an absurd situation.
So those are the comments I wanted to make, and I'm sure that they will be part of the discussions that are now taking place.
I would also like to make some comments about combined cycle and the capacity payments. As you can see in this chart, the load factor of cycles has come down from 66% in 2004 to 23% last year. Combined cycle plants, most of them built in the last four or five years, are operating at less than 25% of their potential. So capacity has been reduced.
And this is due not so much to a fall in the market. Obviously, the operators of the system need to be able to stand drops of 5%, 6% are the ones we've had. These are downfalls that any operator should be able to deal with. Let's not forget that combined cycle plants operate in free market conditions.
But the problem is that this downfall, this reduction, is due to the fact that energy is coming to the system which alter the free market. When the market functions, renewable energy has come along and you are forced to buy them, even if they are much more expensive. And then there's coal too, where there's an obligation to buy as well.
So the problem is not so much the fact that there's no reaction to free market conditions. It's just that the free market conditions have been altered, benefiting regulated energies which have a much higher cost.
And there's a second thing, which is that these energies, energies from combined cycle plants, are back-up for the system. And the minute the electric system goes through a dry year or years with little wind, it is essential for combined cycle to come along in order to guarantee the security of the system, because renewable energy, by definition, is not stable energy.
All of this can be seen in the next chart. All of this has been clearly established by the EU regulation, which obviously has something to do with a power guarantee. There's the obligation of having this energy ready to operate, and gas contracts, in case there's no wind, no sun or no water. Obviously adjustments need to be made, as acknowledged by our legislations, including the Spanish one.
At the end of last year the first step was taken, increasing modestly, but in a relevant way, payments from EUR20,000 to EUR26,000. This is the annual payment per megawatt of combined capacity. And a new payment for availability has been set. On top of that, the National Energy Commission has received a mandate to establish in six months a system of capacity payments that will make it possible to remunerate appropriately those who provide this service that guarantees the sustainability of the system.
Therefore, we have two problems here. Number one, displacement of combined cycles to favor much more expensive energies that do not behave in market conditions -- in free market conditions, and secondly the compulsory nature of the combined cycles to guarantee security in the system.
And now please pay attention to the development of installed capacity on the basis of the government plan. Obviously these are just interim plans. To the left you can see installed capacity in combined cycle plants by the end of 2011, compared to the capacity established by the government in 2005.
As you know, combined cycle plants and any other plant may take between four and five years to be built. Most of the facilities -- the renewable facilities we have now in combined cycle plants today were planned in the year 2005, where they were built taking into account all these factors. But as you can see, contrary to what is usually stated, installed combined cycle plants are 10% less than what was planned by the government in 2005.
Nevertheless, renewables as a whole are 22% more than those approved by the Council of Ministers in the year 2005 and presumed to be operational for 2011. And installed photovoltaic energy at the end of 2005 (sic - see presentation) was almost 1,000 times greater than what was planned by the Council of Ministers for that year. So the problem is that what you see on the right had a cost of EUR371 megawatt hour, compared to the EUR48 on the left.
So there's two things that are easy to see; first of all, why we can't make ends meet, and also because the system doesn't work.
Finally, let me make another comment about the Royal Decree Law in Spain. We believe it's great and very reasonable. We believe that's the way to go. Therefore, we're happy that this kind of initiative has been adopted. We believe that, well, the numbers are what they are and there's no choice but to do this. But we hope this Royal Decree Law will be accompanied by other measures. We propose them, but there are other utilities that make proposals as well.
So the government will need to decide what needs to be done to balance the system. We believe this Royal Decree goes in the right direction, and its impact will be felt in quantitative terms as of the year 2014. In 2012 and 2013, the impact will be moderate because we will see the implementation of thermal solar energy at a very high cost, and this couldn't be avoided with this legislation. But as I said, we welcome these new measures by the government.
Now, we talk about our P&L account for the year. Well, you've already seen the numbers. I would just like to mention briefly that our gross margin has increased by 5% and EBITDA 3.8%, even though we need to take into account two things; first of all divestments, which have led to a drop in EBITDA. We will talk about this on a year-on-year basis. And the second thing is that our profit and loss account has become increasingly international. We're increasingly focused on businesses outside of Spain.
Amortizations increased by 2%. We had less capital gains due to the sale of assets. And financial results were 8% -- 18% (sic - see presentation) lower than last year, the previous year. All of this brought us to this profit after tax, an increase of 3.1% (sic - see presentation).
If we look at the breakdown of EBITDA, you know that electricity and gas businesses in Europe increased by 5.7% and decreased by 3.2% (sic - see presentation), respectively, due mainly to divestment of distribution assets.
EBITDA in the electrical business shows a global drop of 17%. In Spain, this drop was 20%. And we also have the divestments of Arrubal and Plana del Vent. And also we see the increase in fuel prices, which is being transferred very slowly to the market. The pool has increased versus the previous year, but final markets in Spain do not reflect this increase in costs very fast.
When it comes to gas activity, we've seen an increase in EBITDA of 17%, basically because of our international business, because in Spain there's been a decrease in volume.
EBITDA in Latin America has fallen 9%, basically because of the sale of assets in Mexico and Guatemala, and also the extraordinary tax impact of taxes in Colombia.
With all of this, we come to an EBITDA which has increased almost 4% in spite of divestments made.
If we want to look at EBITDA on a comparative basis, discounting the impact of divestments in Latin America and also the divestments in generation and distribution assets in Spain in the field of gas, then EBITDA would have grown 6.5%, in spite of the fact that in the previous year conditions were unfavorable, not only market conditions but also temperatures, which had a very negative impact on residential markets here in Spain.
Let me also remind you that fuel costs have increased. We also had the tax problem in Colombia and the negative behavior of currencies in Latin America versus the euro. All of this shows that there has been a 6.5% increase in EBITDA, in non-homogeneous terms 4%, which shows that we have a very sound business model.
A very sound business model, which has been leveraged by the synergies in the profit and loss account, which have reached EUR750m, divided into -- well, EUR475m that come from the EBITDA -- P&L account yearly, and the rest comes from recurrent CapEx, maintenance, growth in the network, etc. This is very important because almost EUR500m more in our P&L account is one of our great successes. We're very proud of it and it has compensated for some of the divestments.
We've achieved our goals, the goals we set ourselves when we acquired Union Fenosa. We have almost trebled the initial amount. And even though we will never conclude with our efficiency goals, we have already met the goals that we had set ourselves for 2012. This is just one of the keys to our success last year.
Now let's look at what this means for our business, what international operations mean for our business. Last year, 40% of our EBITDA came from international transactions and operations. This is the sector where our sales have increased the most, especially in Latin America. And their contribution is very important, and this increases our potential to grow in profits and in other ways.
As you can see, we're now at this level because of the end of a combined cycle plan, both in Spain and abroad, and also because of the achievement of synergies, which requires less recurrent investment per year.
We've also maintained our investment in distribution retail business. This has had a clear impact on the quality and the improvement of our networks, especially the electrical network in Spain, the grid. Investments were made basically in regulated businesses, 75%.
Now we go into the last chapter, before we draw some conclusions, on distribution of electricity in Europe. We can see that it has dropped 1%. EBITDA EUR700m, that means an increase of 6%. In line with ministerial orders, increase in the distribution activity in Spain has been around 4%. And this, together with improved efficiencies, has allowed us and will allow us to maintain our current position, an EBITDA of EUR710m with an increase of 5.7%.
Investment effort has continued. We've grown in electrical distribution by 9%, in terms of investment. All of this has been dedicated to new demand and improvement of quality. So TIEPI has had a record of -- well, maybe you can see here, 42 minutes. So our investment effort has been recognized and acknowledged.
When it comes to gas distribution, there's been a fall in volumes in Europe, 3%, a greater drop in Spain, 7%. In Spain, basically the reasons are very clear -- a downfall in the residential market due to climate reasons, a drop in the electrical market and increase in the industrial consumption, 5% increase. Overall, because of electrical consumption, the downfall has been 7%.
I also want to say that in spite of the real estate crisis in Spain, the coming into service of new gas contracts has increased by almost 60,000. And this is the key because, contrary to what happens in electricity, in the gas distribution sector, retribution is connected to new points of supply, that is, new clients. We'll look at the importance of all this later on.
We have continued to invest, in order to grow the network and attract new customers. And that is why EBITDA is now at EUR966m, a 2% drop vis-a-vis the previous year, even though this has to do with divestment in points of supply by Gas Madrid.
Let me now say something about the gas distribution business, and I will do it using this chart to explain what you can see on the left. First of all, contrary to what happens in the electrical sector, which is much more mature, gas penetration in the Spanish market is very low. And this is how it compares against the European average. The conclusion is clear; Spain is far from having a mature gas distribution system and there's still great potential to increase the number of clients.
The proof of this is that even during the crisis in 2011 we added 160,000 clients to our business. And this is relevant, because as you can see on the right-hand side, the gas distribution business gets its retribution not so much from investment, but it depends on new points of supply.
And there's an important characteristic here. As an average, the Company receives about EUR110 per year per new customer that is connected. This is the retribution of distribution. But new clients contribute to the system EUR180 per year of revenue. So the more customers we add to the system, the more profitable the system is and the more surplus it has.
This is something that distinguishes us from the electrical business, and it's one of the keys when it comes to dealing with the problem I'm going to discuss now, the tariff deficit for gas in Spain.
In the year 2011 there's been a EUR210m shortfall, which is a modest number but it brings to an end a tradition until then, which was no deficit in the gas sector. The reason is clear. There are no imbalances in the costs. There's no structural cost problem, as is the case in the electrical sector. It's merely a shortfall in volumes. Volumes fell by 7%. And since demand volumes went down, unit prices were not high enough to cover the costs, and that's why this deficit.
Fortunately, at the beginning of this year, tariffs have increased by 4.35%. And a mechanism has been established to review these tariffs on a quarterly basis.
There are two more things we would like to discuss, which we have already communicated to the government. We hope that the Ministry will take them into account when it develops its plans. There's a need to review the gas infrastructure program, taking into account the fact that growth of the system has been slowed down due to electricity.
When it comes to residential demand, residential demand did not grow. Industrial demand did grow, and it was electrical demand that decreased total consumption. So we need to review the infrastructure plan. Maybe we shouldn't go so fast now.
And the second thing is that if there's going to be no increase in gas consumption unless some steps are taken by the government, we should increase consumption to the residential and industrial markets. One of the opportunities we have to take advantage of this wonderful gas system that Spain has is to make people consume more gas, in a country that is not very much gasified. Whenever retailers get a new client, the system not only meets those costs, but it contributes revenues to the gas system in general. Therefore, we must know that electrical deficit is transferred to this gas tariff deficit.
Combined cycle doesn't operate, so the gas system doesn't operate. When we talk about combined cycle problems, we should also take into account what happens to regasification plants and gas transmission and redistribution networks which were designed to meet a demand that is not there. So we believe one of the solutions is to increase the level of gasification of a country by attracting new customers, something that can be done and that we've already started to do.
Now, talking about demand, conventional gas demand in Spain last year, that is residential gas demand and industrial gas demand, was almost the same, quite flat, minus 0.8%. And this compares -- well, residential demand decreased much more due to climate conditions. Residential demand fell almost 20%. Nonetheless, industrial demand grew around 5%. This is a fact and that's what it is.
When it comes to electricity demand, it fell by 2% because of low temperatures and also because of the fact that there was less consumption of electricity.
Now, if we go into detail about the situation of electricity in Spain, here you have it. This is our market. And let me say that even though there was almost a 6% global decrease in Spain, we fell by only 3%, and our generation came down by 3% and demand by 2%.
If we analyze the different sources of supply, what happened to GasNatural Fenosa is similar to what happened to the rest of the country. Compared to a previous country (sic), there was a shortfall in hydro power, a notable increase in coal production due to the enactment of a Royal Decree that benefits the use of coal, and also the maintenance of the Special Regime because the year was not positive in wind terms. In general, there was an increase in generation costs due to increase in fuel costs, and in our case we have to take into account divestments in Plana del Vent and Arrubal, which explain this negative EBITDA.
As far as the gas energy -- gas market in Spain, we fell by 6% in Spain. The global shortfall was 7%. This 5.6% shortfall in our sales in the Spanish market was compensated for due to the fact that we sold more to the international market. As you can see in this chart, there was an increase of over 3% in our sales to industrial markets; a 27% drop in our sales to the residential market, although it's true that divestments explain much of this shortfall. And in electricity this drop was 13%, less than the rest of the market, but substantial nonetheless.
As you can see on the next page, we grew in our international sales by more than 30%. That is why our sales have remained stable. We would also like to say that our policy is not to do trading transactions. We try to sign long-term contracts with our clients, use our methane carrier fleet, use flexibility in liquefied natural gas contracts and expand our activities all over the world, operating in new markets, in view of the fact that the Spanish market is not doing that well.
Sales to international markets already account for one-fourth of all natural gas sales. And we hope that this will continue, at the same time that there's been an improvement in the natural gas market in the world.
Now, talking about Latin America, please allow me to show you this chart to explain exactly what's happened in Latin America. Our EBITDA fell by 9%, but there are very unique reasons for this, which I believe should be known in order to understand what's happening here.
First of all, there have been several divestments in Mexico and Guatemala, which make this figure not be comparable with previous year's figures. There's also the EUR67m (sic - see presentation) impact of non-recurring tax payments in Colombia and also the depreciation of currencies which goes against us. So that is why in the year 2010 the number was EUR1.13b and this year it's less. Sorry, it's EUR1.17 (sic - see presentation) on a half-to-half comparison basis.
But we have grown in all of our activities in Latin America, with the exception of these three unique factors that I have mentioned. So we have great hopes that we're going to grow in the gas market in Latin America, especially in Mexico City, where we have a potential growth of more than 2m clients.
And with this, let me move on to conclusions. We're happy with these results in such a difficult year. Our EBITDA has grown almost 4% in spite of a disposal of assets, which obviously have discounted from our EBITDA and which make our results a little worse than in 2010. Our net profit has grown 10.3%, and we have strengthened our financial structure by reducing our level of debt substantially.
The behavior of our stock price has been very good compared to what's happened to our competitors in European markets, and we have been able to maintain our shareholder retribution (sic) policy. So we have achieved all the goals that we set ourselves in our strategic plan for 2010 until 2014.
For the year 2011, we wanted to have an EBITDA greater than EUR5b, net profit of around EUR1.5b, a net debt between EUR15b and EUR16b and a net debt to EBITDA ratio of almost 3 times, and maintaining a good remuneration to shareholders. So we're convinced that we're going to be able to achieve our goals this year as well, which will not be easier either.
Thank you.
==============================
Questions and Answers
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Luis Calvo, GasNatural Fenosa SA - Head of IR [1]
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(Interpreted). Now we will start with a Q&A session. We will start, as I said before, with questions from the floor, from the audience present here in this auditorium. If you wish to ask a question, please raise your hand, tell us your name and the institution that you represent.
Yes, Pablo.
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Pablo Cuadrado, BOFA Merrill Lynch - Analyst [2]
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(Interpreted). Good morning. I'm Pablo from Bank of America Merrill Lynch, and I have three or four questions. The first one has to do with the scrip dividend. I believe it was quite surprising today to see the announcement of a scrip dividend, taking into account that the interim one -- well, you announced that it was going to be paid in cash. So what do you think is going to happen in the future? Do you think that you will maintain the current scrip dividend policy? Will this be a one-off thing? Because last year there was talk about all this, so I'd like to know whether in the midterm, in this business plan that you have, whether a scrip dividend will be maintained or not.
The second question has to do with -- well, could you give us an update about negotiations with Sonatrach that were announced last year? Have you had any -- do you have any news, or do you believe that in the short term something might happen in that regard?
And the last question. In the wholesale and retail business, there have been some changes in 2011. Looking at the general situation and the gas spread that has opened lately, do you think this may have an impact on your wholesale and retail business in 2012?
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Rafael Villaseca, GasNatural Fenosa SA - CEO [3]
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(Interpreted). Now, the first question. Last year, interim dividend was paid in cash and then we decided to pay the following one in scrip dividend. This year, the decision has been made based on the success we had last year. This doesn't mean that it's going to be the same next year. We just made this decision for this year. We'll see what happens in the future. This gives absolute freedom to shareholders to do what they want, so we believe it's a positive thing. It's not negative at all. Shareholders can do what they want. So this is not a policy for the future. It's just a decision for 2012.
With Sonatrach, the agreement we signed with Sonatrach contemplates the possibility of collaborating in common businesses, this one or any other. We're still looking at this possibility and many others. We haven't reached any agreements yet. But we collaborate very closely with Sonatrach to try and reach industrial agreements that will allow us to collaborate in the future.
With regard to the gas business, we're satisfied and optimistic. Despite the fact that there are a lot of variables involved, there's no doubt that it's recovered in the whole world quite a bit and also even in Spain, especially in Spain. Margins not volumes have been recovered, not volumes at all. But we believe that the gas business, gas will be a very important fuel in the next few years which will be more and more relevant, and we will have to be able to adjust to the new environment.
Contracts continue, especially in Europe but in the whole world. We'll see what happens, because renegotiations in the whole world with those -- those contracts have different margins. All operators are renegotiating these contracts. The situation of oil is atypical. We must be flexible and adapt to the new markets. GasNatural, due to its diverse portfolios, its experience and presence in different markets, we believe has the expertise and know-how, and we foresee that this situation of gas will continue in the future.
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Jorge Alonso, Societe Generale - Analyst [4]
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(Interpreted). Good morning. Jorge Alonso from Societe Generale. I've got several questions. The first one has to do with the gas market in Spain and the international markets. And gas consumption in electric plants seems to not be doing too well in the first few months of this year. What do you think the situation of the margins of gas in 2011? Will they be the same in 2012, or do you think that there'll be more competition this year? On the international market, if the increased volumes that we've seen, if you see room for this to continue to develop positively over the next few years?
And the last question has to do with the objectives for 2012, which are those in the strategic plan. Economic circumstances -- given the economic circumstances, what do you think -- I've looked at -- I've noted your objective for profit, EUR1.4b (sic - see presentation). And if we remember that the recurrent amount in 2011 will probably be EUR1.1b, bearing in mind the disinvestments, don't you think that EUR1.5b is slightly optimistic? Or are you considering disinvesting more this year? Thank you.
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Rafael Villaseca, GasNatural Fenosa SA - CEO [5]
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(Interpreted). We'll begin at the end. No, we haven't planned any divestments in this year. It would be portfolio management, no divestment policy, and initially we're going to try to maintain the goal achieved in -- established for 2012. We think that the businesses that we have will allow us to achieve that goal.
In terms of gas margins, it's obvious that in Spain this is balancing out because it's really hitting the floor. The consumption has been reduced basically due to two reasons. The temperature was very warm, relatively speaking, last year. And the second one is combined cycle plants. We don't think that the temperature will have such an influence this year, so there'll be the issue of the combined cycle plants which will be present but will be nearing the ground. But we expect a situation that is not so negative as last year.
But this in any event is not going to really influence prices very much. Spanish operators -- I'm not talking about GasNatural -- in general have learned how to -- what to do. People are driving gas to other markets. Gas is globalized in many respects, not as much as oil. It is globalized and operators, everybody is interested in -- operators and suppliers are interested in taking it to the markets where it is necessary and the countries where it is necessary, where there is demand.
So what -- it's not leading to what happened two years ago. In 2010, there was excessive pressure in the market because there was an excess of gas. But I think that that finished practically in 2010. Operators -- with gas, it's not the same flexibility but it's very similar. So that has led to a situation where margins will not be different and the prices are going to increase for the same reason that other raw materials have increased, because demand has a very strong international component. In that respect, we're convinced that the drop is going to slow down and the prices will move along the lines of international prices.
As regards the international market, we have to say two things. The general situation is that gas continues to be a fuel with a lot of future. It's difficult to think over the next five years in a structure without a very strong role for gas. The problems that some nuclear power plants have had, plus the financial or economic problems associated with massive policies of investment in renewables, lead to a situation where alternatives are going to include natural gas.
So we're convinced that the demand of gas will continue. And we also believe that the prices will even out, not only because fuel -- oil has become more reasonable in its prices in some respects, because the arrival of gas in other markets will make the situation different.
All that helps us to think that the international situation will be favorable, especially in terms of companies that have invested in the logistics needed to do that and the commercial teams that are needed to establish clients all over the world. GasNatural Fenosa has been doing this for many years and it's giving -- bearing fruit.
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Carlos Alvarez, GasNatural Fenosa SA - CFO [6]
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(Interpreted). As regards international sales in 2012, if we look at the contracts we've got in operating markets and sales in other markets like France and that, the figure of sales will be above 2011 in 2012.
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Luis Calvo, GasNatural Fenosa SA - Head of IR [7]
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(Interpreted). Good. Next question.
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Manuel Palomo, Citigroup - Analyst [8]
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(Interpreted). Good morning. Manuel Palomo from Citigroup. I had several questions. The first one is about combined cycles, spreadsheets, etc., and the strategy of GasNatural when it comes to offering those cycles to the pool. My question is whether the low load of GasNatural is due to the fact that the company is offering gas at opportunity cost prices and not the price associated with combined cycle plants.
Another question has to do more with free cash flow and net debt. In 2011, we've seen a lot of divestment in the Company. Disinvestments I think is EUR5.2b. And the net deficit of -- is about EUR600m. We've also seen a drop in CapEx and scrip dividend, which helps to un-leverage. But the debt has gone from EUR19.1b to EUR17.3b, and that is EUR1.8b. Why have those items not been reflected in the debt? Has there been any additional increase in working capital, and if that is so, why?
And my third question is about regulation on renewables. You've said that you agree with the Royal Decree, whereby the growth of renewables in the future will be reduced. But on the other hand, you talk about reducing those premiums. So my question here is whether you are suggesting that there might be a retroactive effect in terms of the premiums, and also how that combines with GasNatural continuing to invest in renewables.
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Carlos Alvarez, GasNatural Fenosa SA - CFO [9]
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(Interpreted). Yes. I'll do the second question and then -- the free cash flow, I think that you're forgetting about the tariff deficit of the year, of 2011, which makes our working capital worse.
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Jorge Alonso, Societe Generale - Analyst [10]
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(Interpreted). No, but the net, because of -- from the figures you've given us --
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Carlos Alvarez, GasNatural Fenosa SA - CFO [11]
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(Interpreted). No. EUR1.2b, EUR1,200m, and we've generated EUR1,500m. Yes, the net difference is positive, but I would say that there is a small worsening, but not of the magnitude. Working capital, there is certain delays, especially in the public sector, in collection but we're talking about EUR100m, no more.
In the rest of the picture, there's nothing strange that affects generation. You know this Company generates, irrespective of tariff deficit, EUR1b of free cash flow for next year, which is what we base ourselves on to say that debt will be at the levels of EUR15b and EUR16b. The growth factor you're talking about for the sector is 23; for us it's 37. So the rest -- it's not too bad, the difference. The rest make up 17.
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Rafael Villaseca, GasNatural Fenosa SA - CEO [12]
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(Interpreted). In our policy, naturally, we just burn gas in the combined cycle plants, when that's not profitable, ever. We never -- and whereas, if we don't have any other options, better options, we'll continue to do that. So since we have good provisioning and supply control, some of them are associated with the pool price. This allows us to work very efficiently, and that's why we have higher participation shares. We would like to have more. 37 is okay, but we'd like to have more.
But it has to do with these supply contracts and a very clear policy, whereas marginally it continues to generate profit. But we do it and we do it positively. And that is what leads us to this situation which we hope will get better when the issue of renewables clears up.
In terms of renewable energies, renewable energies are regulated businesses, very strongly regulated. They've got a subsidized price and they have no commercial risk because all the production is compulsory, has to be built necessarily. Since it's a regulated business, they're not subject to market conditions. The retroactive nature of all this, whether the rules are changed for the future, if you talk about retroactive effect as regards the past that's not going to happen, but as regards the future I think that there's no news as regards to that.
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Manuel Palomo, Citigroup - Analyst [13]
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(Interpreted). You say retroactive, that would mean giving back what you've collected.
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Rafael Villaseca, GasNatural Fenosa SA - CEO [14]
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(Interpreted). No, we're talking about what might happen in the future. The electric industry rules are changed every year, and that has been happening for many years. And the rules change and the prices of what you collect. But finally what is the -- this is a legal problem I'm not going to go into. However, the Supreme Court has now pronounced itself several times, I believe, for saying that since it's a regulated sector the government cannot allow -- or in spite of that, the government cannot allow or must contemplate that there is a profitable margin.
What it says is that as a regulated business it has to be reasonably profitable. It would be curious for a regulated risk-free business to have the same profitability as the parameters established five years ago and that other regulated businesses are subject to change every year. The feeling we get is that the criteria or perspectives are a bit elastic.
But to be more specific, I'd go back to that chart. If you want the system to tally out the situation, the most important cost in the Spanish electric system is subsidies to renewable energies which -- these subsidies have grown by EUR1b a year. Well, I don't know. It's absolutely clear. I don't see many alternatives. Basically, there are very few.
As regards retroactive nature of this, no, it would be to change the laws for the future or rules for the future. Whether that can be done or not is legal. I'm not a lawyer, but I would say something. In a regulated business, you should guarantee profitable -- reasonable profitability. That's what been said legally, but I can't tell you any more.
Why do we invest? Well, we are investing only in wind energy. The reason is very clear. Wind energy is subsidized which is almost at market levels in certain areas of the pool. We are investing reasonably, because we're convinced that those energies will soon reach a balance situation and therefore are not and will not be the cause of a dis-adjustment. And if technology moves forward just a little bit more and we -- the Spanish pool nears the level of the current European pool, we would be, if not at market levels, very near those levels. When an energy costs 400% more than the market, it's difficult to think that you can really support this in the long term.
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Luis Calvo, GasNatural Fenosa SA - Head of IR [15]
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(Interpreted). Next question, please.
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Alejandro Vigil, Cygnus Asset Management - Analyst [16]
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(Interpreted). My name is Alejandro Vigil. I would like to -- I have two or three questions. The first one is about the objectives -- 2012 objectives, which I'm surprised that you've repeated in spite of what you said before, the complicated environment. I'd like to understand your reasons.
More than EUR5b EBITDA, you see that there's an operational environment that is positive and you don't see too many risks in the electric or gas businesses, that's obvious. And then at the bottom, when you've reiterated more than EUR1.5b, means that you can see less depreciation, some extraordinary amounts that will lead you to that final amount of EUR1.5b.
Then the second question about gas. You've said that you hope it's not structural. What do you think the solution is for this deficit, bearing in mind that there's an entry plan, investment plans for investment, very expensive? Do you see any solution in terms of extending the depreciation of those assets or a change -- regulatory change in transport? What's the solution?
And then the third one is about debt, the CapEx for 2012 that you've seen and as regards acquisitions, which is more perhaps for Tony. Thank you.
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Rafael Villaseca, GasNatural Fenosa SA - CEO [17]
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(Interpreted). Well, as regards the gas tariff deficit, I've said there are several measures. One has been taken, increase of toll -- of access charges; 4.40% I think has been increased. Since the figure is relatively low, EUR200m, that more or less can be adjusted.
The second thing, and I've also about said about this, it's necessary to adjust the investment plan. In a situation like this, I think that obviously we have to review whether it is necessary for the gas system to continue to grow or not, and we would have to review all those issues. I'm convinced that this will be done, and therefore in those readjustments we will have to introduce the cruise speed. And I think that that will be done and I think it's logical.
And the third one, since the problem is volume not costs, because costs are not -- are under control, and if they're not they can be adjusted, it's a question of making up for volume, and I think that distribution can do that. Why? Because Spain is not -- the gasification level in Spain is low. Last year, we increased 160,000 new points of supply. So we can see these are not new houses; they are houses that existed and now have gas. So what we have to do is to try to increase the speed of distribution in order to add new customers, and those new customers will help infrastructures to get paid off.
And what's the distribution? Well, yes, naturally we're going to support all the mechanisms that are possible for distribution. There are several countries (sic) in Spain that do it, which are incentivated and want to do it. Because when you capture new customers, however much you increase the payment -- distribution payment, the system -- the income is greater than what goes out. So since we have operators -- not only us, we have Gas Madrid, for instance, trying to do the same -- we are convinced that this measure can also help by adding volume.
And finally, I insist that the issue of renewables, at some stage the adjustment will have to affect the situation, because if not, if we increase this exponentially, I'll leave this to the end. I don't know how to evaluate it. Something will have to happen because if not, we are in a situation where greater debate -- we talk about externalities and debate all this. We usually forget about the negative externalities of the backup to renewable energies. They're going to have to pay someone for all the investment and all the infrastructure, in addition to the cycles, in order to cover this at some stage. I have not even -- won't even consider that.
But with the first three, with moderate adjustments in the access charges, adjustments in the investment plans and we are going to work on this to promote distribution, I think we can deal with those problems.
As regards regulatory risks, we are contemplating the situation as is. We have a distribution with the ministerial decrees and orders that will then become definite. We have liberalized businesses. We have one-fourth of our business from outside. 40% of our EBITDA comes from outside of Spain. In that respect, without extraordinary amounts, we think that we can approach our goal of EUR1.5b for next year and we're working on this. Therefore, we're not altering our commitments. I don't know what extraordinary things, positively or negatively, might happen, but that's not in our plans.
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Carlos Alvarez, GasNatural Fenosa SA - CFO [18]
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(Interpreted). Yes. The sale of the Madrid customers, for instance, which I think are EUR15m, EUR20m, compared to -- as regards the results, there are no secrets. Amortization will be at around that level that I've mentioned before, and the EBITDA will be above EUR5,000m. We'll reach that profit level of around -- net profit of about 15 -- EUR1.5b, about. It might be below or above, but it will be about EUR1,500m, EUR1.5b.
As regards the CapEx for 2012 -- and then I pass the floor to Tony for him to say -- it will be at around EUR1.7b or so, depending on how things -- basically, we're talking about doing -- continuing on what we've been doing this year, focusing on regulated businesses in Europe and Latin America, because it's where we're investing. And that is the figure investment.
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Antonio Basolas, GasNatural Fenosa SA - MD, Strategy & Development [19]
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(Interpreted). As regards the CapEx, there are some investments in generation in Costa Rica. There's many hydraulic plants that belonged to Union Fenosa two years ago. And we're also looking at what opportunities for investment there would be after 2012, in the event that the macroeconomic environment gets better as regards the situation now.
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Fernando Garcia, Espirito Santo - Analyst [20]
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(Interpreted). As regards the gas deficit, the industry -- Minister for Industry in Parliament talked about a deficit of EUR350m. You've spoken about a deficit of EUR200m, and I thought that the Minister had included the increase in -- by 4% of access charges. However, bearing in mind the deficit that you calculate, what access charge increase would be required in order to cover this deficit?
Can you give us the split as per customer group combined, large industrial customers? Obviously, one of the possibilities to cover this deficit would be to increase the distribution points. But based on the figures that have been given, that would mean an increase of supply points of about 3m to cover this deficit. Is there any possibility that we increase -- that the access charges are also increased in distribution?
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Rafael Villaseca, GasNatural Fenosa SA - CEO [21]
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(Interpreted). As regards gas deficit, that EUR350m that you've quoted I haven't got, I'm not aware of. The figure we have is the one we've given you.
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Fernando Garcia, Espirito Santo - Analyst [22]
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(Interpreted). Sorry?
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Rafael Villaseca, GasNatural Fenosa SA - CEO [23]
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(Interpreted). I'm sorry, I don't know. I don't know. But this in those terms would be less than 10%. We've already gone up 4%. It would be enough to have 5% odd to -- well, it doesn't seem to me that -- if you look at the picture at the end of last year and what's gone up, I naturally think that all the measures should be taken, not just the rates, the tariffs. We have to go to a higher control of investment, so that there's not too sharp an increase, and also for the -- to increase the distribution or supply points, to increase consumption.
And I don't think that this is too complicated especially, as compared to the electric problem. The measures are relatively accessible. Easy is not the word, but anyway, can be taken.
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Isidoro Del Alamo, BBVA - Analyst [24]
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(Interpreted). Yes, hello. I'm from BBVA. I have two very quick questions. If we look at the regulatory scenario and the review that is pending, we've spoken about distribution. You say that it's true that the TIEPIs were at record levels, the distribution of electricity is quite mature. I wanted to see whether there might be any risk of a regulation review or revision in terms of distribution.
And then, on the other hand, within the visibility -- the low level of visibility, whether you have any dates for a possible potential revision of regulations in Spain.
And then, as regards the dividends, you've maintained the guidance for 2012. Is the objective of 10% growth going to be maintained for the following years?
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Rafael Villaseca, GasNatural Fenosa SA - CEO [25]
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(Interpreted). Yes, we're talking about 2010, 2014. Yes, of course, the same goes that we had at the time.
Regulation, we don't know. We're convinced that the government is working on this, which -- and there'll be changes. Distribution, electric distribution, a year ago there was an increase and now, after one year ago, it was reviewed; it was all revised. We think it's difficult. However, that was the national series of measures that were being introduced to improve the situation. Because when we talk about reasonable remuneration, that's not just for renewable energies; it should be for all businesses or sectors.
There are new electric investments to be made, smart leases, [mitten], etc. We'll need more -- continue to invest, to guarantee quality in many areas of Spain and guarantee quality in the areas that are worse off. But I think we are once again in the same situation.
Let's look at the figures that we had before, on that chart. If we destroy the distribution system, what do you think we can go down? That answers the question. The problem is not there. The problem is where it is. And however -- well, obviously there are interests. You can see that these other things are not going to solve the problem. We can adjust the amounts, yes, but that will have consequences.
Distribution has never been an extremely well treated activity. It's been the Cinderella of the electric system. It's not in a favorable position, but it is including challenges in many areas of Spain. For instance, in Galicia in Spain we have supply problems and we've got to continue to invest to avoid problems. Let us say that we want to do away with all that, which is not going to be the case.
But in theory, what will come out of that will maybe -- might solve 10% of the problem, in exchange for a series of immediate practical problems, because investment increased by 9% last year. And our colleagues, I don't know, but more or less the same. So my message is that we can have many different theories about this, but if we look at the data there's not so much to argue about.
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Luis Calvo, GasNatural Fenosa SA - Head of IR [26]
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(Interpreted). Good. There are no more questions in the room, so we will go to the questions on the telephone.
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Operator [27]
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(Interpreted). The first question will be asked by Javier Suarez of Nomura. So when you're ready.
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Javier Suarez, Nomura - Analyst [28]
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(Interpreted). Hello. Good morning to everyone. Thank you for accepting my questions. Practically, there are three. First of all, as regards the credit rating, I think that this is -- we should say that the -- I'm surprised that the credit rating is still so low of the Company, when the financial cost is competitive and there are other companies in the sector that have a higher rating with a similar situation. The question is more as regards timing. In your dialogue with the rating agencies, what do you think this situation -- what's going to happen as regards this situation?
And also, the evolution of the debt over the next few years, do you think that that will be sustained?
Second question is as regards the general scenario of the gas market. I would like a comment on the agreement that you signed in November with that American company to import field gas. I think it's a significant contract, 5 btms (sic). I would like to look at your interpretation of the evolution of the world gas market.
And also, a comment as regards the most recent news that Gazprom is reducing the gas prices in Europe.
And as regards the evolution of the business in Latin America, I've seen on slide 43 the recurrent growth of EBITDA is 4%, if we adjust for sales, the tax in Colombia and the exchange rate. But I think that that growth is slightly low. Is there any other factor that could explain this growth in Latin America, the fact that it is still a single-digit growth?
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Carlos Alvarez, GasNatural Fenosa SA - CFO [29]
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(Interpreted). The objective we set ourselves when we designed our strategic plan went until 2014. The idea was to have an A category by 2014. We continue to believe that we will achieve that goal. That's what we are working on, as you can see from the materials we've presented. And now what we have to do is convince everyone else, especially rating agencies, that we're going to achieve this goal.
We're starting conversations. I cannot tell you whether we're going to achieve this tomorrow, the day after tomorrow or in two years' time. But we hope that as a result of those conversations we'll be able to improve, so that in the year 2014 we'll have an A minus category.
Now, when it comes to debt costs, for the year 2012 we believe it's going to be similar to what we've had this year, maybe slightly higher. But this will depend very much on the evolution of the debt in Latin America, especially the actions we undertake in order to maintain this rating. We recently had an operation of EUR650m in the Eurobond market, a 5% coupon, I think. It's a very good decision from a financial point of view, because we postponed due dates by more than five years but the cost of debt goes up. If the average is this and we increase it, well --
The cost of debt we believe is going to be slightly higher in the year 2012, higher than what we had. But it will never be over 4.5%. That's what I can tell you about estimation of debt.
As far as America, well, there are climate conditions that have had an impact on demand, especially in Brazil and Colombia. And they have had -- in a normal year, profits in gas and electricity distribution might have been higher if those climate conditions had been similar to those of the previous year, and the distribution business would have grown 7% and electricity around 5%.
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Rafael Villaseca, GasNatural Fenosa SA - CEO [30]
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(Interpreted). Gas market. First of all, this has to do with non-conventional gas. Cheniere has launched two trains. We've signed an agreement of almost 5 bcms of gas. So what's our philosophy?
One comment. The gas market is globalized but not fully globalized, and they are poorly interconnected. Gas in the US has a price which in spot terms is lower than in Europe. Let's not confuse spot markets with provisioning markets, because contrary to what happens with oil, most markets are not spot. Only 10% to 15% gas markets are spot. Basic markets, especially in Europe, have to do with long-term contracts that do not go through spot markets.
Having said this, in the US, a large amount of gas has started to be sold at very low prices compared to traditional markets which cannot be exported until liquefaction plants appear which allow you to export. We want to maintain the best provisioning possible, so we've signed a contract in the long term to buy this gas in favorable conditions and to be able to dedicate it to our market.
That means that we will be right at the beginning of the gas exporting activity in the US through liquefaction plants, because there's no other way, and also with the fleet that we now have and what we might acquire in the future. In the Atlantic Basin, we want to take advantage of all provisioning and marketing possibilities.
When it comes to Gazprom, I don't know how reliable that news is. But let me make a comment. Countries -- well, the Central European market is completely different from the Spanish market. Some years ago, we were judged by the same parameters and it was a mistake. In Spain, two-thirds of gas comes by vessel, so that means it can go somewhere else. And usually, suppliers agree on profit-sharing clauses for markets that present better opportunities. So when -- in a market like the Spanish one, there's too much gas, all suppliers learn to send that surplus gas somewhere else.
When there are pipelines, you cannot do that. You cannot do it because gas either gets there or it doesn't. So surplus gas, together with the take-or-pay obligation, makes things very different from the Spanish market, where two-thirds of the gas comes by vessel. So, in a situation of depression in the market, with the impossibility of sending that gas somewhere else because it comes via pipeline, it's only natural that those countries are thinking about that possibility. But that is not the case for Spain and, as I said, we're not aware of any of those plans.
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Luis Calvo, GasNatural Fenosa SA - Head of IR [31]
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(Interpreted). Next question.
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Operator [32]
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(Interpreted). The next question will be by Jose Javier Ruiz.
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Jose Javier Ruiz, Exane BNP Paribas - Analyst [33]
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(Interpreted). I have a couple of questions for you. The first one is do you see any changes in this trend from gas to coal? I would relate this to the comments you make about load factors in combined cycle reaching a low level this year.
And secondly, when do you expect to close the gap between oil and gas?
Number three, after the agreement with Sonatrach, you said you expected EUR3b EBITDA in the retail wholesale activity, and the amount you got this year is different. What's the volatility factor? Those EUR144m, where do they come from?
And I believe that those taxes in Colombia are divided into four parts. Have we already felt all the negative impact in 2012 of taxes in Colombia?
And could you tell us how many points of supply you have in Mexico City? I just wanted to know what's the investment effort in time.
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Carlos Alvarez, GasNatural Fenosa SA - CFO [34]
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(Interpreted). When it comes to gas supply, we don't give guidance by businesses, so I don't know what you're referring to. But it's true that -- what our Managing Director said is that the main driver for the EBITDA we've had in 2011 has been growth in sales abroad, together with good margins of those sales abroad.
So the driver of growth comes from those two things. First of all, higher sales, more volumes, almost 30% more, and secondly, higher margins to the ones that you expected. And that is why EBITDA has grown so much.
In Spain, margins are more or less similar to the ones we had in 2010, and we expect them to be similar in 2012. The difference is in international markets.
When it comes to taxes in Colombia, the accounting impact is different from the cash impact. This is paid in four years. That was the case in the past and that is also the case now as of 2011. So the impact in cash, we paid one-fourth in 2011, in 2012 we'll pay another fourth, and so on and so forth. But what makes this comparable -- for this period, we accounted for the total impact. So in the P&L account of 2011, those EUR57m would correspond to the impact of the four years. In the 2012 P&L account you won't see those EUR56m nor one-fourth of those EUR56m, because the accounting impact has already been recorded in 2011.
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Rafael Villaseca, GasNatural Fenosa SA - CEO [35]
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(Interpreted). When it comes to points of supply in Mexico, 1.3m right now, in the whole of Mexico.
As for coal, the Royal Decree has already been applied, more or less with the percentage of adjustment. We believe that there won't be any more changes there and therefore the impact. Well, this is a discussion which is eternal. All operator -- well, we have formulae that relate gas prices with oil prices. When oil prices go down, suppliers every three years usually they want to change this formula. When oil goes up, the opposite happens, and that's what's happening now. Everyone is negotiating lower margins now, because of this.
So I don't know what's going to happen with oil. I do know that the usual negotiations that all operators have with suppliers will now be subject to negotiation. And that's what's probably happening, if the news about Gazprom are true.
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Luis Calvo, GasNatural Fenosa SA - Head of IR [36]
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(Interpreted). Now next question, please.
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Operator [37]
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(Interpreted). The next question comes from Virginia Sanz from Deutsche Bank.
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Virginia Sanz de Madrid, Deutsche Securities - Analyst [38]
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(Interpreted). Good morning. I have several questions. As you've said over and over again, you spoke about adverse climate conditions in 2011. I want to know whether this impact can be measured in millions of euros, and whether you're saying that in the year 2012 we're going to have normal climate conditions.
And now that you've achieved your goal in terms of synergies, do you see any possibility of identifying additional synergies which might contribute to the achievement of goals you've set yourself for 2012?
And lastly, when it comes to the debt you have for 2012, between EUR12b and EUR15b, what are the options? Are you going to securitize the pending deficit fully this year? And due to the tariffs you have, do you think there might be an additional deficit of EUR5b?
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Carlos Alvarez, GasNatural Fenosa SA - CFO [39]
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(Interpreted). I will start with your last question, about debt. I believe if there's no securitization -- there's already been securitization, so yes, as we said, we've had securitization. But if there is securitization, we'll be closer to EUR15b, and if there's no securitization we'll be at EUR12b. So that gap covers for that effect.
To come to the first question, that refers what we would have sold in the free market if it had been colder last year, well, compared to normal years -- well, this year, we think it's going to be a normal year. We don't expect 2012 to be very cold, but not as warm as 2011. So sales, especially is residential markets, should be greater.
And with the tariffs we have, we get the margins we spoke about. But this also has an impact on distribution. Distribution of gas, remuneration for the year is set in terms of new points of supply and also volumes, especially in the residential sector. And in the year 2011, we made an adjustment to the remuneration that we expected because of the impact of lower volumes.
And you saw that from a remuneration, that we expect it to be around 3%, 4% over and above that of 2010. Well, it wasn't higher than 2010, because of the adjustment. For the year 2012, remuneration is what we told you. And we expect the year to be a normal year, and therefore we expect a 5% increase compared to last year.
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Rafael Villaseca, GasNatural Fenosa SA - CEO [40]
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(Interpreted). When it comes to synergies, of course we've already concluded our basic synergies plan, which is almost EUR800b. And we've launched not synergies but an efficiency plan, a three-year plan with ambitious goals, maybe not as ambitious as in the past. But we're still convinced that there's still great potential to get huge savings and improvements in CapEx in the current year. That plan was launched several months ago, and we believe we're going to achieve all of these goals.
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Luis Calvo, GasNatural Fenosa SA - Head of IR [41]
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(Interpreted). Well, for agenda reasons, we only have time for one last question, on the phone?
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Operator [42]
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(Interpreted). There are no more questions in Spanish. Now questions in English.
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Operator [43]
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The first question comes from Anna Maria Scaglia from Morgan Stanley. Please go ahead with your question.
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Anna Maria Scaglia, Morgan Stanley - Analyst [44]
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Hi. Good morning. The first question is the following. Can you please detail what are the key areas of growth in order for you to reach the target in terms of EBITDA for next year and -- sorry, for 2012?
And second question, can you please discuss a little bit in terms of CapEx? So you are expecting an increase in CapEx in 2012. Which are the main areas? You talked about Costa Rica. Are there any other areas where you expect further CapEx increases? Thank you.
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Carlos Alvarez, GasNatural Fenosa SA - CFO [45]
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(Interpreted). Well, the EBITDA target is to continue as we are. There won't be many acquisitions, maybe a little bit in renewables. In 2011, we made some acquisitions of some wind parks already in operation, which in the year 2012 will give us an increase in EBITDA. It will give us a bit more than what we had in 2011. But the rest will continue the same, with growth of our operations.
I mentioned before that a very important driver for gas will be our business abroad, where we expect to have more sales, so we expect to grow in international markets. And the rest will be consolidation of our regulated businesses and non-regulated businesses, and that will allow us to grow. And we want to reach those EUR5b with that.
As for CapEx, I think Tony said this before, we have Costa Rica, as you said, and there's also organic investment in our distribution businesses, both in Spain and Latin America. I would mention in electricity distribution we will continue to invest, investments in meters, smart bids, etc. And also in gas we will continue with the same goals to attract new points of supply. The idea is they will require higher investments. We expect to consolidate in Mexico too.
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Luis Calvo, GasNatural Fenosa SA - Head of IR [46]
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(Interpreted). Now questions asked on the Internet that haven't been answered. There are three brief questions. What capacity of international wind capacity do you expect to add in 2012 and in which countries?
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Antonio Basolas, GasNatural Fenosa SA - MD, Strategy & Development [47]
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(Interpreted). None. Well, after the acquisitions we made recently -- oh, you mean internationally? Well, in international markets we continue to work on our project in Mexico. And the project that Union Fenosa had in Australia, we're in an advanced permitting phase and we're trying to conclude the PPAs with them. And this year we hope we'll be able to close both permitting and PPAs, and the investment will take two more years. So they will go into operation in 2014/2015.
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Luis Calvo, GasNatural Fenosa SA - Head of IR [48]
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(Interpreted). Next question from Rodriguez from Fidelity. What's the reason for the shortfall in EBITDA of about 20% in one of your businesses?
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Carlos Alvarez, GasNatural Fenosa SA - CFO [49]
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(Interpreted). Well, it's a comparison with the previous quarter. Remember, the adjustment in 2010 and the retribution of a year, so it's a comparison on a head-to-head basis of the fourth quarter of 2010/2011.
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Luis Calvo, GasNatural Fenosa SA - Head of IR [50]
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(Interpreted). Joaquin Abril asks about the cash flow/net debt ratio. Do you have any mid-term goal for that?
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Carlos Alvarez, GasNatural Fenosa SA - CFO [51]
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(Interpreted). That goal is in line with the metrics that we presented before, so that in 2014 we can have an A minus rating. So we continue to work along those lines. This is not one of the ratios that we usually publicize, but it's a consequence of everything else. We expect to consolidate our position. And depending on what the rating companies require, we may be able to get that rating in 2014.
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Luis Calvo, GasNatural Fenosa SA - Head of IR [52]
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(Interpreted). Well, no more questions. With this we conclude the Q&A session, and now I give the floor again to Mr. Villaseca, our Managing Director.
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Rafael Villaseca, GasNatural Fenosa SA - CEO [53]
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(Interpreted). Thank you very much for dedicating some time to us, and we'll meet soon to talk about the results of the first quarter of 2012. Thank you.
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Editor [54]
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Portions of this transcript that are noted Interpreted were interpreted on the conference call by an Interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.
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