Q1 2012 Gas Natural SDG SA Earnings Conference Call
May 08, 2012 AM CEST
Thomson Reuters StreetEvents Event Transcript
E D I T E D V E R S I O N
GAS.MC - Gas Natural SDG SA
Q1 2012 Gas Natural SDG SA Earnings Conference Call
May 08, 2012 / 08:00AM GMT
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Corporate Participants
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* Luis Calvo
Gas Natural SDG SA - Head of IR
* Rafael Villaseca
Gas Natural SDG SA - CEO
* Carlos Alvarez
Gas Natural SDG SA - MD, Economics and Finance
* Antonio Basolas
Gas Natural SDG SA - MD, Strategy and Development
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Conference Call Participants
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* Jose Martin-Vivas
Ahorro Corporacion - Analyst
* Manuel Palomo
Citigroup - Analyst
* Alejandro Vigil
Sigma Asset Management - Analyst
* Fernando Garcia
Espirito Santo - Analyst
* Sonia Ruiz
Bankia Bolsa - Analyst
* Alberto Gandolfi
UBS - Analyst
* Gonzalo Sanchez
BPI - Analyst
* Javier Suarez
Nomura - Analyst
* Carolina Dores
Morgan Stanley - Analyst
* Fernando Murillo
La Caixa - Analyst
* Jose Antonio Lopez
HSBC - Analyst
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Presentation
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Luis Calvo, Gas Natural SDG SA - Head of IR [1]
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Good morning. Welcome to the presentation of results of the first quarter of 2012 of Gas Natural Fenosa.
As usual, the presentation will be given by Mr. Rafael Villaseca, CEO, together with the Financial Manager, Mr. Alvarez, and Mr. Antonio Basolas, Director of Strategy and Development. After the presentation, we'll have a debate or a question and answer period for the people in the room and the people who have followed us remotely on the Internet or who want to ask questions on the telephone.
I'll pass the floor to Mr. Villaseca.
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Rafael Villaseca, Gas Natural SDG SA - CEO [2]
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Good morning, everyone. Good morning to those of you who've logged in from afar. We're going to analyze our three-monthly or quarterly results and answer your questions.
These are the six points of the presentation. I'll start with the highlights, continue with the growth of international operations, which has been really very good. We'll talk about the Spanish regulatory issues, financials and an analysis of the operations. And then we'll have a conclusion -- a series of conclusions and go to questions and answers.
If we go to highlights for the quarter, we could say -- well, we could simplify it in these four figures. Our net income after taxes, EUR407m, a growth of 5.2%. EBITDA has remained the same, EUR1,300m, in spite of the situation. Had it not been -- the situation been what it's been, it would have increased. Investments have gone down by 4.7% and the net debt has gone down by almost 8%.
We think these results are quite presentable if we bear in mind the disinvestments that we've made in the last 12 months as regards the previous year, and the impact of the Royal Decree Act 13/2012, including the first package of measures that the government introduced as regards the electric tariff deficit.
So we believe it's very acceptable, these results are very acceptable. There's been a poor performance of the electric industry in Spain. There's been a good international result, especially in Gas Natural international natural gas operations, and a continuity in the reduction of expenses, especially financial expenses.
I would like to also underline the shareholder remuneration policy which was approved by the general -- ordinary general shareholder -- the AGM, which is in line with the Strategic Plan objectives and will mean a payout of 62%. As you know, it was approved by the AGM. And a yield per dividend of 6.2%, which means that the dividend -- interim dividend paid will be EUR360m and then there'll be a scrip of EUR461m, a scrip dividend. And this was done last year and it was very successful.
If we go into one of the most notable areas, which is the growth of international operations, I would like to tell you with these charts that first of all the activities -- international activities of the Company generated 42% of our EBITDA. Not just that, but at the end of the day that 42%, our EBITDA internationally grew as regards the previous year by more than 32%, which is what we wanted.
And our policy was based on our Latin American operations, and especially all international operations on the market -- natural gas market. So this continues to have weight. International activities have a lot of weight in our mix. And it's in line with our strategy and that's one of the keys of our success.
Within international activities, I would like to highlight international gas sales, which have grown really very spectacularly, or quite spectacularly. We're one of the most important players on the liquid gas market. That is part of our strategy, has been for a long time, and we're still firmly supporting it.
In our first quarter, our sales to international customers have gone up by 44%. And it's interesting to see that they've grown very strongly in Europe, 64%, and in the rest of the world by about 34%. Our success in Europe has to do with the setting up of commercial agencies of our own, reaching out to customers, short- and medium-term strategies that are strengthening our growth in Europe.
And we have to point out here, as regards international operations, two operations that we've finalized this year. One is in the area -- in Paris, Isle de France. We've got practically half of the market that came out that was put on sale, on offer. 1,000 gigawatts hour yearly is the contract, which guarantees a significant amount -- critical masses to allow us to operate in such an important market as Paris.
The second project you know is a supply contract for two BCMs in Puerto Rico, where we have quite a significant presence with our regasification plant and our combined cycle plant and will now increase through two BCMs for the gasification of the island. That's had to do with a policy that I'll refer to later, which is a policy of flexibility in the procurement portfolio, support of logistics, expansion in new markets in activities with final customers.
And all this means that almost 30% of the gas that we sell, we sell on the international markets. So we are, and continue to be, one of the most important players in this line of business, which we're sure will continue most positively in the future.
We've also got to underline in South America that gas distribution has been positive. The EBITDA's grown by 3.5%, sales 1.7%, in spite of the fact that in some countries, due to very special reasons, the year hasn't been so good. But the new customers have grown by 4%, with a growth -- quite generalized growth throughout the area, the region, especially in Mexico, where we are approaching 5% with a star project of gasification of the capital city, Mexico. So EBITDA, as I said, EUR146m, has grown by 3.5%.
Electricity in South America, we have to point out that there's been very significant growth in like-for-like terms. Because we don't have Guatemala here; we disinvested there last year. But if we don't take that into consideration, electric sales grew by 7.5% and connection points grew by about almost 3%.
The EBITDA went up very much. Although it's true that in the previous year the EBITDA suffered the impact of an atypical and singular tax in Colombia, which hasn't been in place this year, and that is something that has to be borne in mind. And we told you about this last year; that won't happen again. That was a result of this tax peculiarity. So we got more than -- well, we got an EBITDA, as I say, which is continuing to grow and we're satisfied with it. It will continue to grow, we're sure.
If we go to the Spanish regulatory issues, we have to tell you. You all know about the Royal -- the tariff deficit problem. This Company has now for a long time been talking about this. Present government has said that they want -- they're clearly committed to act to address this problem, and I'm convinced that they're doing so and will continue to do so. And they've started up two Royal Decree initiatives, number 1 and number 13, this year.
As regards number 1, there was a temporary suspension, as you know, of financial incentives for new facilities under the Special Regime, renewables basically and co-generation, except those that were not yet registered under the pre-filings. This has a clear effect. It freezes moratorium, call it what you may, until those technologies which are very subsidized don't develop. Subsidies this year will be about EUR7.6b. But there's a problem, and that is that the positive effect will not be felt, basically, until 2014. They won't be felt in 2012 and very little in 2013.
The second package is the Royal Decree number 13. Basically, this second package includes two -- has two parts. One of them is the tariff increase by about EUR1.4b, which is being applied and has to do with the sentence passed by the high -- Supreme Court -- to comply with sentences of the Spanish Supreme Court. And then there's a reduction in costs through cuts in remuneration to transport and distribution, capacity charges and other. And then there's also -- they're expecting a series of new measures to achieve zero tariff deficit from the year 2013.
So all these measures to reduce costs are about EUR1.7b, and of which the traditional sector will be affected -- or EUR1b will be affected or will have to do with the traditional sector. The rest is money that they get back from the IDAE, International Commission for Energy. This money is distributed based on the situation of the different players, and Gas Natural will get about 13%.
It's true that the social reduction is no longer going to be applied in the same way, and that will reduce the impact that I mentioned before of all the measures taken by the government. I think that we have to say that the government is on the right track, but we think it is going to have to address the problem at a deeper level.
What's happened? You probably know, but I'll tell you. I'll give you my thoughts and then tell you what we think should happen. This is the situation. After 2011, which is practically consolidated on the basis of the figures published yesterday by the national energy commission, 2011 will close with a deficit of EUR3,900m. The limit that was established was EUR3,000m, so there's an excess of EUR900m.
These are the figures. So there is nothing new here. Initially, the deficit for 2012 is what you have on the -- in the middle column. And if -- had it not been for the measures that have been introduced, there would have been a deficit of EUR5b, which is in contrast with the objective of EUR1.5b, as the Royal Decree foresaw.
Now, after the measures that I've just described, more income, less expenses, we would be talking about this scenario, which has a peculiarity that must be mentioned, and that is that we have to see what happens with the subsidies to citizens that are called Extrapeninsular. As you know, in the Royal Decree 6 of 2009, there was a program for transfer of that to the public budget -- public subsidy for those citizens. However, it's not included in the current budget and we'll see what will happen as regards that.
Whether this is solved or not in this way will affect the year. If it turns out that the budgets don't cover that, we would still need for this year about EUR2b to adjust to the EUR1.5b target. But if not, we would have solved the problem this year. So measures could be adequate for this year as long as that issue is resolved positively. But we have to look in the problem in depth, what the tariff deficit problem is and what the definite structural solution could be.
As you've seen before, the measures that were taken have been measures that have penalized the traditional sector, which is not at all the guilty party, and it doesn't benefit either from the measures that have led to the tariff deficit. I would like to insist, and I think it's reasonable to expect, that that is what happens.
The fundamental problem with the Spanish electric system is, as you see here, that over a total cost of about EUR18.5b a year, EUR10.65b are subsidies. That means that almost 60% of the regulated costs, costs that produce the tariff deficit, are subsidies that, in themselves, there's no real reason for them to be on the bill -- on the electricity bill. And if the Spanish electric system did not have this system of subsidies, which are not present in most Spanish -- European electric systems, the cost of electricity in Spain would be among the cheapest in Europe.
But since subsidies to special regimes, solar, etc., etc., EUR1.7b Extrapeninsular sector or area, as it's called, EUR1.9b. So the special regime, photovoltaic, solar, thermal, wind, cogeneration and the rest, that's EUR7.6b. Then Extrapeninsular EUR1.9b, large consumers EUR500m, domestic coal EUR400m, social bond EUR250m.
Now, if you put all that together, you can see that to try to sort things out on the basis of the measures that -- on the basis of transport, distribution and capacity payments, it's impossible to solve this problem. I think it's indispensable to act upon the real cause of the problem, which is huge subsidies in the tariff. But that is the problem and that is what the government should look at. I'm sure they're doing so, to try and permanently give us a sustainable electric system.
What measures could they buy? Well, it's going to be necessary to look at these subsidies and do something about them, change in some way, introduce charges, levies, taxes. The electric system is not going to, and the consumers are not going to, be able to continue to finance these subsidies. That will have to be solved. And also the Extrapeninsular amounts, as they're called, that's going to have to be solved.
And then we've got the special regime expenses. And we'll have to see whether the environmental effort that the electric system is making, which is 35% of renewables, much more than the 20% that Brussels introduced, should not be carried by other players and sectors that also have to contribute to the environment -- protection of the environment and are not doing so.
It would also be important to see whether, as from now, we have a greater degree of transparency of the costs that are applied to the bill, so that the consumers know. And finally, if this is not achieved, it will be necessary to see what -- how the tariffs have to be introduced -- raised, so that all this is sorted out. But subsidies are the problem and we're going to have to face it.
If we go to financial results for the year, sales have grown by 21%, EBITDA -- the gross margin has grown by 1.3%, EBITDA 0.3%. This would be 3% if it was homogeneous in terms of the perimeter of our consolidation. And that is in a very, very difficult market -- electric market in Spain and situation, and also as a result of the impact of the measures that I've described and disinvestment.
We've got here the operating income, income before tax. Financial results have gone down because our costs -- our margin is very tight as regards debt. We've reduced the debt. So income after tax, we've got a minority interest, we've got a final amount of EUR407m, which is a growth of 5.2%.
It's very interesting to look at the EBITDA breakdown. This 0.3% would be 3% if the perimeter were comparable. And distribution business, especially electric, has gone down significantly as a result of the measures that I've described. The electric sector in Spain, which is basically the liberalized part, has had a reduction of 17%, and gas has increased very much based on the international activities, Latin America, strong growth of electricity distribution and almost all activities.
EUR1.3b EBITDA, which is 0.3%, which would be 3% had the perimeter been homogenized as regards the previous year.
In terms of investments, we've invested EUR223m in this quarter, slightly above that in the electric industry distribution. This means in Europe the electricity's EUR44m is basically Spain. There's been slightly more investment than the previous year and gas a little less. The reason is because years start up before it really goes into cruise speed.
And we're going to analyze the redistribution policy in electric distribution, based on the most recent regulations and their impact on profitability and ability to invest, which we will adjust to the new regulatory framework. In terms of gas and South America, they're more or less going as was expected.
As regards securitization of tariff deficit, these are the figures. And we can tell you that we closed the quarter with EUR1.2b (sic - see presentation) that we've still got to get as a result -- well, pending securitization. EUR367m were collected by GNF through several private placements carried out by FADE, and this includes the deficit generated this year. And we hope that the government continues to securitize and reduce this figure, based on the plans that we know about and we've been told about and we hope they continue.
As regards the ongoing debt reduction, we've reduced debt by EUR0.5b. And we're talking about 3.6 times EBITDA at this time, in spite of the fact that there's a dividend payment this quarter, which reduces our liquidity. We've got into a situation which is more or less normal, in spite of the fact that we paid out that EUR161m (sic - see presentation) in dividend. The cash flow situation is stable. And the multiplier would be 3.4 times the EBITDA had we -- if we did choose -- if we take away the tariff deficit.
We have to also say that there's a significant level of fixed rate obtained at very competitive levels and that our currency exposure is consistent with our business risk, and that our diversified financing sources have been very successful and the bank debt's gone down to 20% (sic - see presentation).
And all that, you know, with a comfortable debt maturity profile, so -- in such a way that 70% of our debt becomes due after 2015, after issuing six-year bonds -- EUR750m six-year bond issue done on January 30, 2012. All financial needs for 2012 and 2013 are already covered, and we're currently focused on 2014 and 2015.
If you want to see what our liquidity is, here you see the breakdown. We've got EUR9.1b, and that's about EUR5b in cash and EUR4.5b (sic - see presentation) in loans that are available. In addition to that, we've got an additional ability to go to capital markets, which we do when we need to. And all that places us at levels that are very healthy, we believe, with liquidity.
This strength of ours, financial strength, gives us coverage or debt hedging ratings of 24.4% and 5.9 times our financial costs, which are parameters that would justify a better rating for our Company. And we're still working on that, to get a better rating, which we think we deserve.
If we look at the operations, if we start with electricity, sales have gone up by 3% although demand of electricity has dropped in this period by 0.5%. There's been a drop of 0.5%. Generation has increased by 1 -- just over 1%, for technical reasons. So the market in general, as you see, in Spain, of course is the basic one here, is stable.
If you look at investments, they've gone up as regards the previous year, notably, but I've explained why. And I've also told you that we're going to proceed -- we're going to review our investment policy on the basis of the Royal Decree for cost reduction.
We have to say that TIEPI quality has achieved significant levels, with an improvement of 20% -- no, almost 30%, as regards the quality measured last year.
As regards distribution of gas, investments are lower, but this is a typical problem of the beginning of the year. Sales in Spain have gone up by 1%, more than last year, basically because of the domestic market the previous year had. It was warmer. It's been slightly colder this winter and it's helped us.
We continue to expand the networks. Spain is not highly gasified. It's only a 30% level of gasification so there's room for improvement, in spite of the crisis, and to continue to capture customers by trying to get the network to be as large as possible and reach all homes in the areas where we are present. We've grown almost 2%, up to 5.5m. Most connections are what we call -- that is, are people who have gas near the source of gas and now they're finally connected.
Recent regulations haven't affected our distribution of gas. Regulatory -- regulations introduced by the government as regards gas have made our temporary deficit, in which about EUR300m have -- are going to help us to solve that, definitely. And we are not concerned about that issue. We think the government has done what it should.
EBITDA went down by 3.4%, basically because of the divestiture in supply points which we carried out last year in the area of Madrid. If this wasn't so, then the EBITDA would have grown by 2%.
Now, in terms of energy, in terms of gas demand, conventional demand went up by 6.3%. And it not only rose because of the domestic temperature related reasons, but also because of our industrial customers. The performance of the gas market, both industrially and residentially, has been positive, unlike the performance of the electrical market, which consumed less gas for electrical production. And so gas demand in Spain is flat. In terms of electrical demand it's 1% lower, although generation is 1% higher, so these are flat markets.
Now, in terms of technologies, we can see that production in the Group fell by 2% because of a decrease in the Ordinary Regime and an increase in the Special Regime. In the Ordinary Regime, there's 3% for -- is related with divestitures in the combined cycles and this has taken capacity away from us, and also because we have had less rainfall and this has affected the volume of production and also our EBITDA, which fell for those two reasons, the greater thermal effect because of this problem and divestitures in Plana del Vent and Arrubal.
In terms of commercialization, well, the price increases of the pool are being passed very slowly to the final user market. And so our commercial activities are slower than normal, because the markets now reflect real prices. But we trust that this will happen eventually, and so we are maximizing our margins and we are not really fighting to get market share.
Now, in terms of the Special Regime, we have grown substantially and we would have grown more if it had rained more. In wind energy we grew by 5.3% and in the cogeneration by 3.7%. On the whole, the EBITDA for the Special Regime increased by 7.5%.
Now, in terms of the gas supply business in Spain, you can see from this graph that the retail in Spain increased by 3.4% because of industrial and residential sectors, which increased significantly, as you can see from the graph. However, the electrical market fell significantly too.
Here we had a high retail activity and our market share stands at 51%. We have gained some market share back, because it's true that in the gas market the globalization of the market and the high degree of deregulation have produced a high degree of competition. So the Spanish market is practically flat, with significant increase of the residential and industrial markets and a reduction of 15% in the electrical market.
Now, in our business model, that is sales in Spain, as we have seen, international sales had an increase of 30%, but this is related to a model that I would like to remind you of. This is an integrated model based upon flexible sourcing contracts, FOB, CIF, etc., through logistic mechanisms that go from the duct to the fleet of vessels, and all of this with a network of customers and also with combined cycles.
And this confirms a series of instruments that, with the appropriate organization, have made it possible for us to optimize our sourcing in the most appropriate markets. And this is a strategy that we have been using for quite a long time and it is yielding fruit, month after month.
In UF Gas, which we have at 50% with ENI, I'd like to tell you that sales increased by 3%. And in spite of the reduction in the sourcing from Egypt, there have been higher volumes here. And this has also been helped by the favorable situation of the gas market. And so EBITDA grew by 23%.
Of course, gas supply to liquefaction plants in Egypt have gone down, but this is because last year the first quarter was exceptionally good, as we also said last year. This year we have more normal figures, and so it is only logical that the liquefaction situation is now at the same levels as the previous year. However, the gas supply to Spain increased by 4.8%, and the situation of the world gas market made it possible for the Company to have a good result.
Now, conclusions. Well, EBITDA grew by 0.3% or 3% really, if we want to be homogeneous. Our profit grew by 5%. Our financial structure grew quite steadily so we are at EUR16.8b, and this is 15.7 -- this would be EUR15.7b if we had collected the money owed to us. Our international results are becoming the backbone of the Company.
We have approved an attractive remuneration for shareholders, with an increase of 10.7% in dividends. And this, as you have seen from the P&L, is such that financial expenses are reduced and profit increases by 5%.
So in a difficult year as 2012, we're still focused on achieving the goals of our Strategic Plan for 2012. It is not easy, but we trust that we will achieve our results, and this is what we're going to be dedicating our efforts to. So we hope we can still keep having this attractive policy for remunerating our shareholders. Thank you.
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Luis Calvo, Gas Natural SDG SA - Head of IR [3]
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So we're going to have our Q&A session. We will begin by the floor here in Madrid. So if you want to participate, please raise your hands. The first question over there. Thank you.
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Questions and Answers
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Jose Martin-Vivas, Ahorro Corporacion - Analyst [1]
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Good morning. Jose Martin-Vivas from Ahorro Corporacion. The first question has to do with gas distribution, because you mentioned that you don't expect more changes from the government in terms of the gas sector. If I'm not mistaken, this year you've got to revise your efficiencies, because it started in 2008 and now it's 2012 so some change is due. So do you think any decisions will be made in this regard, or perhaps you expect a more in-depth revision later on?
Now, in terms of the Strategic Plan, it's true that with the good results you obtained internationally it seems that the goals are easier to reach now. But I don't know whether you consider that you might be able to achieve these results with the possible adjustments that are in line in the electrical business.
Now, another question has to do with the gas commercial activities. Do you think you will be able to keep it up, to keep up the pace until the end of the Strategic Plan?
And finally, in slide 15 you mentioned the enormous weight of subsidies for the costs of the electrical sector. Do you really think that it is a possibility to reduce these subsidies, taking into account the goal that the government has to maintain legal certainty in Spain?
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Rafael Villaseca, Gas Natural SDG SA - CEO [2]
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Well, I don't really know the plans of the government in terms of whether they want to change the gas distribution system. I think that it is not really necessary. There's no problem in the gas sector presently. There used to be a problem, and this problem used to be induced by two reasons.
One of them was the large investments in basic infrastructure such as regasification tanks, etc., and transport in pipelines. And this has been resolved and the measures have been taken, and also the decrease in the consumption in the electrical system. And I think that the measures taken, plus the growth policies in distribution, should be the key to maintaining the gas system without any deficit problem at all.
Now, the gas distribution has a very important characteristic, because you pay for the volumes in the network. And since we get money for capturing customers and for keeping consumption up, when we capture more customers the system will have fewer costs, because customers contribute more than what they pay us for gas. So the more distribution there is, that is, the more we -- so of course we're not investing in distribution. We're only investing in order to capture more customers.
And when this happens, the system benefits because it has fewer costs. So the balance is lower because the money paid by the final consumer is less than what we have paid. And so the gas system is at a reasonable balance. It doesn't have a problem whereby when it does better it really does well.
Now, this doesn't happen and we understand that the system is working really well. Last year, in the midst of the real estate crisis, Gas Natural had 160,000 new customers. This is a very clear -- gives you an idea that the country needs regasification, that they can have regasification in spite of the crisis and that this can help compensate the lower volume of gas in our facilities because of the electrical problem.
Now, in terms of gas commercial activities, we are convinced that -- we're speaking about the world, not just Spain. In Spain, the market is flat. I'd like to say that we still think that the residential market will perform quite well. And the industrial market will not grow at 8%, but we don't expect major problems in the conventional Spanish market. And we also expect a stabilization in the growth of the gas used to produce electricity. This could lead us to a flat situation, which is what we expect for the rest of the year.
But in the international market, we have indications that this is a market which is booming. It's -- there's a lot of demand. There's significant supply. And therefore we have growth capacities. We are very well positioned in liquefied gas and we -- and there are many markets that are opening up. A lot of new markets are opening up in Latin America, where we are present, and lots of markets have opened up in Asia, where we are already operating, Korea, Japan, India. We want to move further in China.
So there's a lot of new markets that are opening up to Gas Natural. And this is because their trust in natural gas as fuel is full. So the gas market is really divided up into three, Asia, Europe and the United States. And globalization is relative. But it is also true that this fuel has a very positive future, because the nuclear restrictions that you already know of and the restrictions to renewable energies because of their high cost lead us to the conclusion that the most significant fuel that is easy to buy is natural gas.
And so I don't think we will encounter difficulties to have a reasonable growth policy, because there's not very many companies that are capable, technically and economically capable, of undertaking these projects.
Now, the third issue refers to cutbacks and subsidies. Well, page 15 gives you the key. So it is indispensable to resolve the problem of subsidies, which account for 60% of costs. There's two ways of resolving this. One of them is to reduce subsidies and the other way is to transfer them to something that hasn't got to do with electricity. The government will have to make a decision.
And I don't think there's a problem with legal certainty. The remuneration to the regulated business of distribution has been reduced by 12%. And there is no legal reason why you cannot do this with the renewable energies, for example, which is also a perfectly regulated business.
And then we're not speaking about doing things or backdating things to the past. We should operate from now onwards. So, transfer, distribution, etc., have experienced these changes, so I don't see why other businesses couldn't experience them. I think it's reasonable to make sensible decisions which guarantee reasonable profit margins to all regulated businesses, which is the businesses we're working in. So I do not think that that will happen.
And the new cutbacks, when you look at page 15, you will realize that when the problem is as big as it is, to think that the traditional headings, which are very competitive, are going to resolve the problem is impossible because of the magnitude of costs, because subsidies are more than whole of the distribution and the transfer together.
And also, the traditional electrical sector in Spain is enormously efficient. If you take the figure of the electricity cost and you take away subsidies, you will see that it's one of the cheapest in Europe. But of course you can't reduce things further. But you cannot help thinking that this EUR10.6b shouldn't be here, and this is 60% of the whole picture. So we trust that this will be a part of the solution in one way or another. Doing something different wouldn't be reasonable or effective.
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Luis Calvo, Gas Natural SDG SA - Head of IR [3]
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Next question, please.
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Manuel Palomo, Citigroup - Analyst [4]
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Good morning. Manuel Palomo from Citigroup. I have several questions. The first one is you seem to be confident that you will achieve your 2012 goals. I don't know where there may be some cutbacks. But if there was cutbacks, then what measures can the Company take to still achieve those goals and produce -- and still produce dividends? So what would you do? Would you sell assets? What would you do?
And the second question is different. The question is how would you view the Company's shareholding in the next 12 months, and how are you going to manage to retain the current shareholders?
The third question has to do with the deregulated gas business, which has been quite impressive in these results, because a year ago you painted a worst-case scenario with Sonatrach but now this year we suddenly see a first quarter with EUR190m. That's very strong. Could you give us some guidance for the rest of the year?
And the last question would be related to extra pressures in the Americas. And considering Argentina, is Argentina fully provisioned?
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Rafael Villaseca, Gas Natural SDG SA - CEO [5]
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No. We never think that the -- we never thought that the deregulated business would be zero with the effect of Sonatrach, but of course we had provisioned for everything. And we knew that we never shared this view at all. A year ago, we had problems with the path and we were negotiating the future, but the path was provisioned for and we were confident that people would be sensible and therefore we would come to a reasonable agreement with Sonatrach. Sonatrach accounts for 25% to 30% of our supply. 70% is different.
So this was a problem and we had a wonderful opportunity. So the past problems were resolved and we also had found a solution for the future. And Sonatrach is a shareholder of the Company. So with that idea, we were always convinced that the gas deregulated business at the world level, also in Spain, was a very important business because natural gas is a wonderful fuel. It's efficient. It's economical.
Then especially with the discovery of non-conventional gas, well -- in which we are participating actively, well, we are very confident. There's a transaction with [Geneva] which is moving forward. It has permission from the federal authorities. So we obtained the environmental permits and we have a contract for five bcms, which is the second contract approved. And we are very happy to be present in the new -- in this new source of supply. We firmly believe in this type of fuel and it's going to bring very many opportunities.
Now in terms of expropriations, we do not think that we can contemplate that our investments in Argentina are going to be expropriated. We don't -- our investment is not provisioned, but the size of our operation in Argentina is not really weighty in our portfolio. But fortunately the tariff is not authorized -- has not yet been authorized, but we haven't had any losses. So it's not really a nightmare, but our activities are very reduced in that country because of the tariff problem. But we don't contemplate any changes, but we need to find a solution to the problems that our shareholder is facing.
Now, in terms of our shareholding structure, to the best of my knowledge, I don't think there's going to be any changes. This is something you should ask the shareholders directly.
Now, what are we going to do in order to keep them interested? Well, we will still keep growing, as you can see. In tough times, in negative times we have managed to keep growing and providing dividends to the shareholder. This has been our policy. This is our policy and we intend to keep it as it is. Of course, it's up to the shareholders to decide what they're going to do.
Well, in terms of 2012, well, we are interested in, of course, achieving our goals. The year has so far been good and we will keep working to try and achieve our goals. It's not going to be an easy year. I can't say that it's going to be easy, because it won't. But we are going to do our best to achieve our goals.
And we have no idea to do any divestitures. We want to increase our efficiency and we want to increase the weighting of our international activities. At our current operations, both in terms of cost reductions and international business opportunities, that should guarantee our compliance with our goals. And at the same time, the situation in the Spanish market that you already know, well, in terms of energy, in terms of demand, it's really flat. We are not witnessing any subsidence, at least not at present. I'm talking about the end of April.
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Luis Calvo, Gas Natural SDG SA - Head of IR [6]
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Any further questions from the floor? Yes. Go ahead, please.
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Alejandro Vigil, Sigma Asset Management - Analyst [7]
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Hello. Alejandro Vigil from Sigma Asset Management. I have two questions. One has to do with regulation in Spain. Well, since you repeated your guidance, I understand that you don't expect any taxes on hydroelectric or nuclear energy. And that's my first question.
And the second question is taking into account the adjustments in distribution, your return on capital employed will be below your capital cost. Could you comment on this? And could you also tell us whether you could go to court to ask for a more fair remuneration?
And the third question has to do with the scrip. Last year your scrip, what was it, EUR14, EUR15, but now your share value is EUR10. So are you going to buy back shares, in order to compensate for the dilutive effect of this increase?
And I want to know if this buyback will have any repercussions on the situation of Repsol. I don't understand why the fact that Repsol has 30% of your shares prevents a buyback program in Gas Natural.
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Rafael Villaseca, Gas Natural SDG SA - CEO [8]
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No. No, it doesn't prevent it at all. This is two different things. Now, at any rate, at present we don't have any buyback plan. It is true that the Company has the capacity granted to it by the Board, but we don't have any share buyback program for this or any other purpose.
Now, in terms of the adjustment in distribution, the Company is not going to invest below its capital cost because this would equal destroying value. We don't want this to happen. In spite of the cutbacks, we are talking to the ministry to try and mitigate some of the things which still have to be made specific. But we believe that these problems will be resolved, because the distribution business is very important for us, not just for us but also for the country itself. There's lots of labor involved and it wouldn't make any sense to paralyze this significant engine. And I don't think the government wants to do it either.
So the possible points to be resolved will be resolved, but of course nobody should invest below their capital cost. We will probably reconsider our investment policy to guarantee an appropriate return for these investments.
Now, in terms of regulation, we don't want -- we don't know what the government is going to resolve. I've mentioned what my opinions are. So my opinion is that there has been a negative adjustment to our interest, but this has not been a problem. And the problem will have to be resolved, because you either resolve that problem or the backlog problem will never be resolved.
Now, regardless of different things that I have mentioned, I would like to mention some very important issues. First of all, this is a deregulated business and so I don't think it is logical to impose levies where no money is made and to introduce negative regulations in areas where money is made. So we're either deregulated or not. We need to look at generation as a global thing.
And probably, at a certain point, some energies will make more money and others will make less. If it so happened that technologies that make more money were levied taxes, then the others that make less money should receive some kind of a subsidy. I am under the impression that according to European directives and the situation we have in terms of deregulation, I don't think it would be a good thing to impose levies on this type of a business. But this is my personal opinion and I don't really know what the government is going to decide.
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Luis Calvo, Gas Natural SDG SA - Head of IR [9]
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Okay. Next question, Fernando.
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Fernando Garcia, Espirito Santo - Analyst [10]
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Fernando Garcia from Espirito Santo Investment. I wanted to ask you three questions. First of all, the gains and efficiencies, are they easy to -- will they be easy to maintain throughout the year?
Now, could you give us an update on your investment for 2012, taking into account that you are going to invest less in electricity?
And third, could you give us some information about term sales in the electrical sector in Spain, because from your presentation I understood that you're less active in terms of forward sales. Is this a trend that you expect is going to change? So I would like to know, in terms of volumes and prices, what your position is.
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Rafael Villaseca, Gas Natural SDG SA - CEO [11]
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Well, in terms of your last question, in general we are very cautious with forward markets. And we're also cautious in the -- in terms of our commercial policy to final users, because this market has not yet included the increases in prices of the pool. So we're being very cautious here. We don't want to conclude contracts at 12 months because the current prices do not really include the real pool prices, because in the last few months there was a slight adjustment in the price of fuel.
Now, in terms of efficiencies -- greater efficiencies in distribution, well, not just in distribution but in our whole operation, and we have the General Manager of that business here. They already have a supplementary business plan which they introduced a few weeks back, to try and compensate for our reaction lines. We have to reconsider our investment policy so that our figures are reasonable.
The second thing, naturally, all the operations are going to try and adjust costs, not just in the case of electric distribution. All of them will do that, will continue to do that, and we've got a plan to do it.
As regards investments in 2012, we've not -- we don't know the impact. I don't know whether you've got anything you can share with us.
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Carlos Alvarez, Gas Natural SDG SA - MD, Economics and Finance [12]
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When we talk about the figure [1,600, 1,700], that's what the figures are. We haven't looked at the thing specifically, but that is more or less the amount. Those are the amounts. There's not going to be a great change in that respect.
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Luis Calvo, Gas Natural SDG SA - Head of IR [13]
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Any more questions?
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Sonia Ruiz, Bankia Bolsa - Analyst [14]
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Good morning. Sonia Ruiz from [Paribank]. Two questions, very quickly. One about trading, the guidance. Of the EUR190m positive, is there a relevant part that are spot activities that might not be repeatable? I believe that you go towards a less -- a lower level of seasonability, but I don't know what you can tell us about that.
And then CapEx, is there going to be an investment in Italy? I don't know what the regasification plants are doing, what the situation is with them in Italy.
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Rafael Villaseca, Gas Natural SDG SA - CEO [15]
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As regards the first question, our spot market activity is minimal. We want to go to final users, final customers. Final customers, sometimes you can't get to them. Because there's regulation, you can't get to them, bodies -- public bodies, etc. But our spot sales are really minimal.
Talking about contracts, usually for seasons, for one year, both if it's a customer or an institution of a country, we normally talk about one-year contracts. We're not averse to the spot market, but we're not very keen on it. We don't want to focus on the spot market. Our activity, you've seen on the graph, goes from contract to final customer. That's what we want to do. And we might make use of occasional operations, but nothing else.
Antonio?
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Antonio Basolas, Gas Natural SDG SA - MD, Strategy and Development [16]
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Well, the regasification plant in Italy, we're getting the permits, local permits. They wouldn't be big investments, even if all the permitting -- all the permits are approved.
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Luis Calvo, Gas Natural SDG SA - Head of IR [17]
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Good. Any more questions in the room? If not, there are no more, so we will go to the remote questions.
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Operator [18]
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Good morning, ladies and gentlemen. The first question comes from Mr. Alberto Gandolfi from VS (sic).
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Alberto Gandolfi, UBS - Analyst [19]
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Hello. Good morning. I've got four questions, only four. Very briefly, the first one, talking about sustainable EBITDA in the business of gas supply. Can you tell us, please, how much you're selling in Asia? And what are the contracts, 12 months, 24 months, etc.?
Secondly, generation of electricity in Spain has been very poor, but I think that that is not just justified with the drop in hydraulic production. Could you give us a guidance of what a sustainable EBITDA would be in that line of business?
Thirdly, if we're talking about international expansion, the press has spoken about potential interest of your -- of operations in India. And then there was talk about India. But could you tell us what you're thinking about in terms of the international operations expansion?
And finally, I think that the risk premium in South America's gone up. Colombia, Brazil, Chile have a very different risk profile from Bolivia or Argentina. But do you agree with this? And how do you think your investment policy might change in that region? Thank you.
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Rafael Villaseca, Gas Natural SDG SA - CEO [20]
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Well, let's look at these questions. The percentage of Asia, Carlos will tell you in a minute. Have you got the --? About 10%, less than 10%. These are seasonal contracts, one-year contracts. In that area, we're talking about 10%.
As regards generation of -- no, electricity, hydraulic production, being replaced with more fuel-intensive systems, and then there's been renewables.
As regards India, yes, we looked at India. It's an important market. We're selling gas to India. It's not the first year; we've been doing so for several years. It's a promising market. We're looking at it. We haven't made any decisions. We've never -- we haven't even put in a bid. But when an opportunity comes up, we look at it to know what that market -- how it's working and whether, behind those possibilities, there are offers that are business opportunities for us.
So there are emerging markets that are worth looking at. We've been selling gas to them for several years. We've got customers. We know how the system works. And what we want to do is to know whether the opportunities are -- there are further opportunities or not, and we'll study it.
As regards the risk premium, yes, it's not true -- it's not possible to generalize in South America. Each country is different permanently. Our strategy development department updates the costs of investing in the region and we bear those data in mind, and we readjust every year based on what happens. We're very aware of the fact that it's very -- the risk situation is different from one country to another. I think we're lucky in general to be working especially in countries where the risk premium is lower.
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Luis Calvo, Gas Natural SDG SA - Head of IR [21]
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Next question?
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Operator [22]
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The next question is from Mr. Gonzalo Sanchez from BPI.
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Gonzalo Sanchez, BPI - Analyst [23]
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Hello. Good morning. I have three questions. The first one has to do with the recovery of the social bond. From what the Supreme Court said, I understand that the social bond carried by companies in previous years had to be recovered, and I would like to ask you how that will go -- how that will be done, whether that's included in the quarterly results or will be included in the next quarter results.
As regards the cost of the debt, the second question is the cost of 4.5%, if I've understood correctly. Based on previous guidance, that was the expected cost for this year and I'd like that to be updated for the year. Do you expect a greater cost or will it be in line with the cost of the first quarter?
And then, as regards the Strategic Plan, I understand that the 2012 targets have been confirmed, but I'd like to know what you think about the aims for 2014, whether you're reviewing the plan based on new regulations in Spain, and if that is the case when we could expect an updating on the market to present the new targets. Thank you.
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Rafael Villaseca, Gas Natural SDG SA - CEO [24]
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As regards the final question, yes, we are thinking about reconsidering the 2014 Strategic Plan, not because of the -- only because of the regulatory changes, but because of the enormous changes that have taken place since 2012 on the energy markets. We think it will possibly be good to update the 2014 Strategic Plan. We haven't got a specific date, but we'd like to do it as soon as possible, update that plan and set ourselves targets that are covered or that are more in line with an in-depth analysis of the current situation, bearing in mind everything that has changed.
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Carlos Alvarez, Gas Natural SDG SA - MD, Economics and Finance [25]
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Now, as regards the other questions, the social bond is included in the quarter. It's what corresponds to those three months. And as regards the rest, we've made no decision.
And as regards the cost of the debt, I think last year at the last meeting I think we said that last year it was about 4.3%, and we said that maybe this year it would be slightly higher. Maybe I will correct that. It'll be 4.3%; that's about the level.
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Luis Calvo, Gas Natural SDG SA - Head of IR [26]
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Good. Next question, please.
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Operator [27]
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Next question, Mr. Javier Suarez from Nomura.
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Javier Suarez, Nomura - Analyst [28]
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Yes. Good morning. Thank you for accepting my questions. I have three or four. The first is as regards the gas business in general, I think that it's changed; the scenario's changed a lot for gas companies. I think that probably one year ago there were a lot of doubts as regards the role of gas. And it seems that the situation has changed as regards America especially. America seems to be more prepared to export gas.
The question is whether you've seen any -- how the Company wishes to adjust to that new reality as regards American gas and what opportunities this might offer. I think the situation's changed a lot. Russian gas is expensive, not competitive. Companies that import gas into Europe might be in a very advantageous situation. Would you agree with that? And how do you see the international scenario for Gas Natural?
And the second question has to do with the credit rating of the Company, credit rating which went down after fusing or merging with Union Fenosa. It's very low compared to other companies which are similar. Do you agree with this, rating seems to be too low? When does the Company expect to get a better rating?
And the third question is as regards the strategic agreement with Sonatrach. You announced that the company -- that you might invest jointly with an Algerian company, but we haven't heard any more from that. Could you tell us what might happen and when?
And then the final question is about the policy of scrip dividends. We've seen the Company paying out scrip dividends in the past two years. The Company -- does the Company think that the scrip dividends are part of their policy, or is this not yet -- has this not yet been decided? Thank you.
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Rafael Villaseca, Gas Natural SDG SA - CEO [29]
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Good. As regards the first question, well, yes, the appearance of Xcel Gas is a factor, very important. We're going to see how that affects the markets. Until now, really it's just affected the US market. Rest of the world, this hasn't really had to do with prices. And there's a paradox. The pricing of gas has plummeted in the US and it's increased in Europe and Asia. So we'll have to see what happens, what the export capacity of the US is, the liquid gas plants and what's behind them.
The authorization of the federal government of selling hydro-carbide, which is subject to their approval or not, there are not many plants. There are only two that have been approved. One we've dealt with. And then we'll have to see how the phenomenon of taking out resources, gas -- extraction of natural gas is handled. I think this is going to be very interesting, but this will have to go step by step. But we are in a perfect position to make use of whatever comes our way.
As regards the Sonatrach agreement, we continue to work with them. I can't tell you really yet, but we've got hypotheses as regards joint projects.
As regards the scrip dividend, this year would be the second year that we'd pay out scrip dividend. I'm not -- I wouldn't go as far as saying that that is going to be permanent. The shareholders this year have decided that it's a good thing. It's interesting. And given the good -- how well received this was last year, 98% of the people were very happy, it was worthwhile to give shareholders this opportunity. If they think -- if they agree and they like it, they'll do it, and if not they won't. But I don't know whether we're going to do it forever. It will depend. It will depend.
And the rating, Carlos?
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Carlos Alvarez, Gas Natural SDG SA - MD, Economics and Finance [30]
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Well, there's nothing new. We've declared, stated publicly several times that we weren't happy with our rating. However, we're not obsessed with it. We don't want it to change overnight necessarily, because it doesn't have a direct impact on our day-to-day business, which is better than that of many companies that have a better rating. We are going to continue to do our homework. We think we're doing things properly. And sooner rather than later, we expect to get a better rating.
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Luis Calvo, Gas Natural SDG SA - Head of IR [31]
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Good. Next question, please.
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Operator [32]
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Next question, Carolina Dores from Morgan Stanley.
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Carolina Dores, Morgan Stanley - Analyst [33]
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Good morning. I have three questions. The first has to do with international expansion. We've seen in the news that you would -- you're looking at the possibility of buying a gas distribution company in Greece.
Second is about the potential purchase of 2% of Medgaz.
And the third question, what do you expect as regards the tax situation for 2012? Thank you.
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Luis Calvo, Gas Natural SDG SA - Head of IR [34]
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Could you repeat the third question, please?
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Carolina Dores, Morgan Stanley - Analyst [35]
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What's your expectation as regards the tax for 2012? It was lower in the first quarter.
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Rafael Villaseca, Gas Natural SDG SA - CEO [36]
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Well, as regards the last question, the cost efficiency plan is foreseen for the whole year. Within the year, there are no general objectives. We've got to comply. We've got our budget. We've got a series of targets that we've got to comply with. I can't tell you whether it's going to be more in the second half than the first, but it's not a current plan. We had an efficiency plan for the beginning of the year in our budget.
A different matter is the efficiency -- supplementary efficiency plan that's now going to be applied to electric distribution as a result of the government's measures. That naturally will have greater force in the second half, because it's going to start now.
As regards Medgaz, the distributor that you mentioned, yes, we looked at the papers. We've looked at the situation. Greek -- the distribution company in Greece. The Greek, obviously, market is in a very complicated situation, so we're going to be as careful as you can imagine we should be. We haven't made any decision at all. We're just interested, and we want to get to know what the situation is exactly of what's happening on the market -- on the Greek market. We are going to be very wary.
As Medgaz -- as regards Medgaz, that's one of the projects we're looking at with Sonatrach, the possibility of doing that. We'll see what happens.
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Luis Calvo, Gas Natural SDG SA - Head of IR [37]
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Good. Next question, please.
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Operator [38]
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Next question is from Fernando Murillo from La Caixa.
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Fernando Murillo, La Caixa - Analyst [39]
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Yes. Well, it's been answered, practically everything. But could you give me the datum of the infrastructure, EBITDA datum? Thank you.
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Carlos Alvarez, Gas Natural SDG SA - MD, Economics and Finance [40]
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I think it's here, in the documentation. It's on page -- on page 18 you've got gas and infrastructures, EUR80m, EUR65m the previous year. EUR80m, EUR65m last year.
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Luis Calvo, Gas Natural SDG SA - Head of IR [41]
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Good. Any more questions?
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Operator [42]
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One final question, from Mr. Jose Antonio Lopez from HSBS (sic).
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Jose Antonio Lopez, HSBC - Analyst [43]
------------------------------
Hello. Good morning. Well, most of the questions have been answered, but I had -- I wanted to ask, what's the situation in Nicaragua, because we've spoken about Argentina but there's a copycat phenomenon going on? It was Argentina started it all and then Bolivia followed suit, and now it looks like Nicaragua are going to follow suit, maybe. We don't know. So what's going to happen? Could you tell us?
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Rafael Villaseca, Gas Natural SDG SA - CEO [44]
------------------------------
Well, that's a general consideration, I presume, about the risk. The specific question I didn't really understand.
Talking about Nicaragua, risks of contagion, well, I don't know. I don't know. The Nicaraguan government has not said anything about any measures. They could or maybe not. I don't know. We've heard nothing. And in fact we've got frequent contact with the government there, but I can't tell you anything.
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Luis Calvo, Gas Natural SDG SA - Head of IR [45]
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Good. No more questions? Except for four questions that have been sent on the Internet -- through the Internet, which have been replied to already during the session. So we can close the presentation.
I pass the floor to the CEO, Mr. Villaseca.
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Rafael Villaseca, Gas Natural SDG SA - CEO [46]
------------------------------
Well, thank you very much once again for being here, for logging in. See you in a few months, to look at the results of the first half of the year. Thank you, everybody. Thank you very much.
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Editor [47]
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Speaker statements on this transcript 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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